<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934.
For the quarterly period ended June 30, 2000
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ___________ to ___________
Commission File Number: 000-31135
INSPIRE PHARMACEUTICALS, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3209022
------------------------------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4222 Emperor Boulevard, Suite 470
Durham, North Carolina 27703-8466
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (919) 941-9777
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES ___ NO X
---
Indicate the number of shares outstanding of common stock, as of the latest
practical date: 25,413,531 as of September 5, 2000.
<PAGE>
Inspire Pharmaceuticas, Inc.
(a development stage Company)
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------------------------------------
(in thousands except share data) (Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 13,759 $ 22,728
Short-term investments 3,107 -
Accounts receivable - 19
Interest receivable 72 -
Prepaid expenses 765 132
-------------------------------------------
Total current assets 17,703 22,879
Property and equipment, net 1,143 789
Other, net 1,634 1,952
-------------------------------------------
Total assets $ 20,480 $ 25,620
===========================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 263 $ 631
Accrued expenses 1,106 651
Capital leases, current portion 233 210
-------------------------------------------
Total current liabilities 1,602 1,492
Capital leases, excluding current portion 582 333
Notes payable 25 24
Deferred revenue 6,927 7,736
-------------------------------------------
Total liabilities 9,136 9,585
Commitments - -
Stockholders' equity:
Convertible preferred stock, $0.001 par value, 52,000,000 share
authorized; 28,059,666 shares issued and outstanding at June 30,
2000 and December 31, 1999 45,895 45,895
Common stock, $0.001 par value, 56,000,000 shares authorized;
2,604,134 and 2,465,857 shares issued and outstanding at June 30,
2000 and December 31, 1999, respectively 3 3
Additional paid-in capital 8,771 8,348
Deficit accumulated during the development stage (38,799) (33,286)
Deferred compensation (4,526) (4,925)
-------------------------------------------
Total stockholders' equity 11,344 16,035
-------------------------------------------
Total liabilities and stockholders' equity $ 20,480 $ 25,620
===========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
Inspire Pharmaceuticals, Inc.
(a development stage company)
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
from Inception
THREE MONTHS ENDED SIX MONTHS ENDED (October 28,
--------------------------------------------------------------- 1993) to
(in thousands, except share and per share June 30, June 30, June 30, June 30, June 30,
data) 2000 1999 2000 1999 2000
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Collaborative research agreements $ 1,155 $ 270 $ 2,309 $ 540 $ 3,773
-----------------------------------------------------------------------------------
Operating expenses:
Research and development (excludes $235,
$96, $462 and $156, respectively, of
stock based compensation) 2,923 1,049 5,240 1,851 30,580
General and administrative expenses
(excludes $170, $114, $339 and $226,
respectively, of stock based
compensation) 678 754 1,349 1,348 9,244
Stock based compensation 405 210 801 382 1,949
-----------------------------------------------------------------------------------
Total operating expenses 4,006 2,013 7,390 3,581 41,773
-----------------------------------------------------------------------------------
Operating loss (2,851) (1,743) (5,081) (3,041) (38,000)
-----------------------------------------------------------------------------------
Other income (expense), net:
Interest income 286 18 582 56 1,691
Interest expense (178) (30) (365) (62) (1,030)
Loss on disposal of property
and equipment - - - - (329)
-----------------------------------------------------------------------------------
Other income (expense), net 108 (12) 217 (6) 332
-----------------------------------------------------------------------------------
Loss before provision for income taxes (2,743) (1,755) (4,864) (3,047) (37,668)
Provision for income taxes - - 150 - 570
-----------------------------------------------------------------------------------
Net loss (2,743) (1,755) (5,014) (3,047) (38,238)
Preferred stock dividends (257) - (499) - (561)
-----------------------------------------------------------------------------------
Net loss available to common stockholders $ (3,000) $ (1,755) $ (5,513) $ (3,047) $ (38,799)
===================================================================================
Net loss per common share-basic and diluted $ (1.15) $ (0.72) $ (2.16) $ (1.30)
============================================================
Weighted average common shares
outstanding-basic and diluted 2,604,134 2,444,101 2,550,319 2,338,730
============================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
Inspire Pharmaceuticals, Inc.
(a development stage company)
Condensed Statements of Stockholders' Equity (Deficit)
For the Period December 31, 1998 to June 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Convertible Preferred
(in thousands, except share data) Stock Common Stock
-----------------------------------------------------
Number of Amount Number of Amount
Shares Shares
-----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 20,857,681 $ 24,467 2,159,082 $ 3
Issuance of common stock - - 306,775 -
Issuance of Series E convertible preferred
Stock 6,201,985 11,406 - -
Issuance of Series G convertible preferred
Stock 1,000,000 10,000 - -
Issuance of Series F warrants - - - -
Issuance of common stock warrants - - - -
Preferred stock dividends - 22 - -
Deferred compensation - - - -
Amortization of deferred compensation - - - -
Unrealized gain / (loss) on investments - - - -
Net loss - - - -
-----------------------------------------------------
Balance at December 31, 1999 28,059,666 45,895 2,465,857 3
Issuance of common stock - - 138,277 -
Preferred stock dividend - - - -
Deferred compensation - - - -
Amortization of deferred compensation - - - -
Net loss - - - -
-----------------------------------------------------
Balance at June 30, 2000 28,059,666 $ 45,895 2,604,134 $ 3
=====================================================
<CAPTION>
Deficit
Accumulated
(in thousands, except share data) Additional During the Total
Paid-In Development Deferred Stockholders'
Capital Stage Compensation Equity / (Loss)
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 $ 3,085 $ (24,291) $ (2,600) $ 664
Issuance of common stock 38 - - 38
Issuance of Series E convertible preferred
Stock - - - 11,406
Issuance of Series G convertible preferred
Stock - - - 10,000
Issuance of Series F warrants 53 - - 53
Issuance of common stock warrants 1,813 - - 1,813
Preferred stock dividends - (61) - (39)
Deferred compensation 3,359 - (3,359) -
Amortization of deferred compensation - - 1,034 1,034
Unrealized gain / (loss) on investments - - - -
Net loss - (8,934) - (8,934)
--------------------------------------------------------------------
Balance at December 31, 1999 8,348 (33,286) (4,925) 16,035
Issuance of common stock 21 - - 21
Preferred stock dividend - (499) - (499)
Deferred compensation 402 - (402) -
Amortization of deferred compensation - - 801 801
Net loss - (5,014) - (5,014)
--------------------------------------------------------------------
Balance at June 30, 2000 $ 8,771 $ (38,799) $ (4,526) $ 11,344
===================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Inspire Pharmaceuticals, Inc.
(a development stage company)
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
From Inception
SIX MONTHS ENDED (October 28,
---------------------------------------------------- 1993) to
June 30, June 30, June 30,
(in thousands) 2000 1999 2000
------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (5,014) $ (3,047) $ (38,238)
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock issued for exclusive licenses - - 144
Stock issued for consulting services - - 72
Depreciation and amortization 276 314 2,395
Amortization of stock based compensation 801 382 1,949
Amortization of debt issuance costs 320 15 414
Loss on disposal of property and equipment - - 329
Deferred revenue (809) (540) 6,927
Changes in operating assets and liabilities:
Accounts receivable 19 (64) -
Interest receivable (72) - (72)
Prepaid expenses (633) 60 (765)
Other assets (1) (19) (189)
Accounts payable (371) (13) 284
Accrued expenses 124 (336) 761
------------------------------------------------------------------
Net cash used in operating activities (5,360) (3,248) (25,989)
------------------------------------------------------------------
Cash flows from investing activities:
Purchase of investments (3,107) - (3,107)
Proceeds from sale of property and equipment - - 127
Sale of certificate of deposit - - (78)
Purchases of property and equipment (352) (72) (1,785)
------------------------------------------------------------------
Net cash used in investing activities (3,459) (72) (4,843)
------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from bridge loans - - 780
Proceeds from issuance of notes payable - - 408
Payments on notes payable - - (400)
Issuance of common stock 21 37 118
Issuance of convertible preferred stock - - 45,061
Payments on capital lease obligations (171) (226) (1,376)
------------------------------------------------------------------
Net cash (used in) provided by financing (150) (189) 44,591
activities
------------------------------------------------------------------
Increase (decrease) in cash and cash (8,969) (3,509) 13,759
equivalents
Cash and cash equivalents, beginning of period 22,728 4,138 -
------------------------------------------------------------------
Cash and cash equivalents, end of period $ 13,759 $ 629 $ 13,759
==================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Inspire Pharmaceuticals, Inc.
(a development stage company)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
-------------------------------------------------
1. Organization
Inspire Pharmaceuticals, Inc. (the "Company," "we" and "our") 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 founder's laboratories.
The Company is considered a development stage enterprise. Since inception, the
Company has devoted substantially all of its efforts towards establishing its
business and research and development programs.
2. Summary of Significant Accounting Policies
Unaudited Interim Financial Statements
The accompanying unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles and applicable
Securities and Exchange Commission regulations for interim financial
information. These financial statements are unaudited and, in the opinion of
management, include all adjustments necessary to present fairly the balance
sheets, statements of operations, and statements of cash flows for the periods
presented in accordance with generally accepted accounting principles. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the Securities and Exchange rules and
regulations. Operating results for the three and six months ended June 30, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. These financial statements and notes should be read in
conjunction with the financial statements and notes thereto for the year ended
December 31, 1999 included in the Company's Registration Statement on Form S-1,
as amended (File No. 333-31174) which was declared effective by the Securities
and Exchange Commission on August 2, 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.
6
<PAGE>
Inspire Pharmaceuticals, Inc
(a development stage company)
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Investments
The Company's investments at June 30, 2000 are primarily in short-term interest
bearing investment grade securities and certificates of deposit which are
classified as available for sale and carried at market value in accordance with
Statement of Financial Accounting Standards No. 115 "Accounting of Certain
Investments in Debt and Equity Securities." The Company's investments are
considered available for sale as these securities could potentially be sold in
response to needs for liquidity, changes in funding sources or terms. At June
30, 2000, the fair market value approximated the carrying value for these
investments.
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 $1.55 million and $112,000 for
June 30, 2000 and 1999, respectively.
Stock-based Compensation
The Company accounts for non-cash stock-based compensation in accordance with
the provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," which states that no compensation expense is
recognized for stock options or other stock-based awards that are granted to
employees with an exercise price equal to or above the estimated fair value 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 market value of the
Company's common stock at the grant date, the difference between the fair market
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 $402,000 and $754,000 related to stock option grants during the
six months ended June 30, 2000 and 1999, respectively.
Deferred compensation is amortized over the vesting period of the related stock
option, which is generally four years. The Company recognized deferred
compensation expense of $801,000 and $382,000 related to stock option grants
during the six months ended June 30, 2000 and 1999, respectively. The Company
has adopted the disclosure requirements of
7
<PAGE>
Inspire Pharmaceuticals, Inc.
(a development stage company)
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 at the date of the grant.
Revenue Recognition
Revenue is recognized under collaborative research agreements when services are
performed or when contractual obligations are met. Nonrefundable fees received
at the initiation of the collaborative agreements for which the Company has an
ongoing research and development commitment are deferred and recognized ratably
over the period of the related research and development commitment. Milestone
payments under collaboration agreements and research agreements 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, costs of outside consultants, costs of clinical trials, and
costs of sponsored research and clinical trials insurance, related to the
development of drug compounds. These costs have been charged to operating
expense as incurred. Costs associated with obtaining and maintaining patents on
the Company's drug compounds and license initiation and continuation fees,
including milestone payments by the Company to its licensors, are evaluated
based on the stage of development of the related drug compound and whether the
underlying drug compound has an alternative use. Costs of these types incurred
for drug compounds not yet approved by the United States Food and Drug
Administration ("FDA") and for which no alternative use exists are recorded as
research and development expense. In the event the drug compound has been
approved by the FDA or an alternative use exists for the drug compound, patent
costs and license costs are capitalized and amortized over the expected life of
the related drug compound. License milestone payments to the Company's licensors
are recognized when the underlying requirement is met by the Company.
Significant Customers and Credit Risk
All revenues recognized during the six months ended June 30, 2000 were from two
collaborative partners. Financial instruments which potentially subject the
Company to concentrations of credit risk consist primarily of short-term
investments. The Company primarily invests in interest-bearing investment grade
securities, notes payable and certificates of deposit. Cash deposits are all in
financial institutions in the United States.
Net Income (Loss) Per Share
The Company computes net income (loss) per common share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"). Under the provisions of SFAS 128, basic net income (loss) per common
share is computed by dividing net income (loss) available to common stockholders
by the
8
<PAGE>
Inspire Pharmaceuticals, Inc.
(a development stage company)
weighted average number of common shares outstanding. Diluted net income (loss)
available to common stockholders per common share 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 income (loss) per common share available to common
shareholders for the periods ended June 30, 2000 and 1999 does not include
16,885,673 and 13,032,484, respectively, of potential shares of common stock
equivalents, as their impact would be antidilutive.
Segment Reporting
The Company has determined that it did not have any separately reportable
operating segments as of June 30, 2000 or 1999.
Comprehensive Income (Loss)
The Company had no items of other comprehensive income (loss) during the six
months ended June 30, 2000 and 1999.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as "derivatives"), and for hedging
activities. SFAS 133, as amended by SFAS 137, 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. Capital Stock
On August 8, 2000, the Company sold 5,500,000 shares of common stock at an
initial public offering price of $12.00 per share for net proceeds of
approximately $60.1 million, net of applicable issuance costs and expenses. In
connection with the offering, all of the Company's outstanding preferred stock
converted into 16,355,224 shares of common stock. On September 5, 2000, the
underwriters purchased an additional 825,000 shares of common stock, upon their
exercise of an over-allotment option, which resulted in net proceeds of $9.2
million to the Company.
9
<PAGE>
Inspire Pharmaceuticals, Inc.
(a development stage company)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
---------------------
Three Months Ended June 30, 2000 and 1999
-----------------------------------------
Revenues
Revenues are derived from collaborative research and development agreements with
strategic partners. Revenues increased $930,000 to $1.2 million for the three
months ended June 30, 2000, compared to revenues of $270,000 for the same period
in 1999. This increase was due to revenue recognized during the three months
ended June 30, 2000 that relates to milestone payments we received from
Genentech, Inc. ("Genentech") in Decemeber 1999 and Kissei Pharmaceutical Co.,
Ltd. ("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.
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 $1.9 million to $2.9 million for the
three months ended June 30, 2000, compared to $1.0 million for the same period
in 1999. This increase in research and development expenses is the result of the
Company's continued and more extensive drug development activities in
preclinical testing, toxicology studies and clinical development, as well as
patent related activities, and the addition of research and development
personnel necessary to perform these activities. We expect to continue to devote
substantial resources to research and development. We also expect that research
and development expenses will continue to increase in the foreseeable future and
that net losses will continue as a result.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs,
facilities costs, business development costs and professional expenses, such as
legal and accounting fees. General and administrative expenses decreased $76,000
to $678,000 for the three months ended June 30, 2000, compared to $754,000 for
the three months ended June 30, 1999. This decrease is due primarily to
decreases in depreciation and travel expenses within the administration
department.
Stock Based Compensation
Stock based compensation expense consists of the amortization of deferred
compensation that relates 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 $195,000 to $405,000 for
the three months ended June 30, 2000 from $210,000 in the three months ended
June 30, 1999. This increase pertains
10
<PAGE>
Inspire Pharmaceuticals, Inc.
(a development stage company)
primarily to the amortization of deferred compensation that relates to stock
option grants made subsequent to June 30, 1999.
Other Income (Expense), Net
Other income (expense), net consists of interest income earned on cash deposits
and short-term investments, reduced by interest expense on notes payable,
capital lease obligations, gains and losses on sales of property and equipment
and amortization of debt issuance costs. Other income (expense), net increased
by $120,000 to $108,000 for the three months ended June 30, 2000, compared to
$(12,000) for the three months ended June 30, 1999. This increase was due to
higher interest income earned from higher average cash and investment balances
partially offset by increased expense on leased equipment and amortization of
debt issuance costs.
Six Months Ended June 30, 2000 and 1999
---------------------------------------
Revenues
For the six months ended June 30, 2000, revenue increased $1.8 million to $2.3
million from $540,000 for the six months ended June 30, 1999. This increase in
revenue relates to milestone payments received from Genentech in December 1999
as well as revenues recognized for milestone payments we received from Kissei in
the fourth quarter of 1999 and the first quarter of 2000. Revenue amounts are
being recognized over the period of our ongoing research and development
commitment under the collaborative research agreements with Kissei and
Genentech.
Research and Development
Research and development expenses increased $3.3 million to $5.2 million for the
six months ended June 30, 2000 from $1.9 million for the same period in 1999.
This increase is primarily due to increased contract research costs related to
preclinical testing, toxicology studies and clinical development activities,
costs related to patent activities and increased costs related to additional
personnel necessary to perform these activities. Total research and development
personnel were 27 and 17 at June 30, 2000 and 1999, respectively. The Company
expects its research and development expenses to increase in the future due to
continued expansion of product development activities, including preclinical
testing and clinical development.
General and Administrative
General and administrative expenses for the six months ended June 30, 2000
totaled $1.3 million and were relatively unchanged from $1.3 million of general
and administrative expense for the same period in 1999.
Stock Based Compensation
Stock based compensation expense increased $419,000 to $801,000 in the six
months ended June 30, 2000 from $382,000 for the same period in 1999. This
increase is
11
<PAGE>
Inspire Pharmaceuticals, Inc.
(a development stage company)
attributable to the amortization of deferred compensation related to stock
option grants made subsequent to June 30, 1999.
Other Income (Expense), Net
Other income (expense), net increased $223,000 to $217,000 for the six months
ended June 30, 2000 from $(6,000) for the same period in 1999. The increase was
due to higher interest income earned from larger average cash and investment
balances partially offset by increased expense related to leased equipment and
amortization of debt issuance costs.
Provision for Income Taxes
The provision for income taxes increased to $150,000 for the six months ended
June 30, 2000 from zero for the same period in 1999. The increase in the
provision for income taxes is attributable to withholding taxes paid on a
milestone payment received from Kissei in the first quarter of 2000. No
milestone payments were received from Kissei during the six months ended June
30, 1999.
Earnings Per Share
Historical
In the second quarter and first six months of 2000, we had net losses of $3.0
million and $5.5 million or $(1.15) and $(2.16) per common share compared to net
losses of $1.8 million and $3.0 million or $(0.72) and $(1.30) per common share
the second quarter and first six months of 1999, respectively.
Weighted average common shares outstanding for the second quarter and the first
six months of 2000 were 2,604,134 and 2,550,319, respectively, versus 2,444,101
and 2,338,730 the second quarter and first six months of 1999, respectively.
Pro forma
Pro forma represents the conversion of shares of preferred stock and accrued
dividends on such preferred stock into shares of common stock at their date of
issuance. Pro forma also reflects a 1-for-1.75 reverse-split in the shares of
common stock that took effect prior to the closing of the Company's initial
public offering on August 8, 2000.
Pro forma weighted average common shares outstanding for the second quarter and
the first six months of 2000 were 18,937,073 and 18,977,066 respectively, versus
14,362,775 and 14,257,404 the second quarter and first six months of 1999,
respectively.
Pro forma net losses per common share - basic and diluted for the second quarter
and first six months of 2000 are $(0.16) and $(0.29), respectively, versus
$(0.12) and $(0.21) for the second quarter and first six months of 1999,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company historically has financed its operations through the sale of
preferred stock, capital lease financing, and payments received for
collaborative research agreements.
12
<PAGE>
Inspire Pharmaceuticals, Inc.
(a development stage company)
From our inception (October 28, 1993) through June 30, 2000, we have raised
approximately $45.9 million in net cash proceeds from the sale of preferred
stock.
As of June 30, 2000, the Company had net working capital of approximately $16.2
million, a decrease of $5.2 million from working capital at December 31, 1999.
The decrease is principally the result of payment for research and development
costs and general and administrative expenses. At June 30, 2000, the Company's
principal source of liquidity was $13.8 million in cash and cash equivalents and
$3.1 million in investments which are short-term, interest-bearing, investment-
grade securities.
The Company will not generate revenues, other than license and milestone
payments, from the sale of its products unless and until it or its licensees
receive marketing clearance from the FDA and appropriate governmental agencies
in other countries. The Company cannot predict the timing of any potential
marketing clearance nor can assurances be given that the FDA or such agencies
will approve any of the Company's products.
IMPACT OF INFLATION
-------------------
Although it is difficult to predict the impact of inflation on costs and
revenues of the Company in connection with the Company's products, the Company
does not anticipate that inflation will materially impact its costs of operation
or the profitability of its products when marketed.
CAUTIONARY STATEMENT
--------------------
The Company operates in a highly competitive environment that involves a number
of risks, some of which are beyond the Company's control. Statements contained
in Management's Discussion and Analysis of Financial Conditions and Results of
Operations which are not historical facts are or may constitute forward looking
statements. Forward looking statements involve known and unknown risks that
could cause the Company's actual results to differ materially from expected
results. These risks are discussed in Part II, Item 5 of this report, titled
"Other Information - Risk Factors", as well as the Company's Registration
Statement on Form S-1, as amended (Registration No. 333-31174) filed with the
Securities and Exchange Commission. Although the Company believes the
expectations reflected in the forward looking statements are reasonable, it
cannot guarantee future results, levels of activity, performance or
achievements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's exposure to market risk for changes in interest rates relates to
the increase or decrease in the amount of interest income the Company can earn
on its investment portfolio and on the increase or decrease in the amount of
interest expense it must pay with respect to various outstanding debt
instruments. The Company's risk associated with fluctuating interest expense is
limited, however, to capital lease obligations. The interest rates are closely
tied to market rates and the Company's investments in interest rate sensitive
financial instruments. Under the Company's current policies, it does not use
interest rate derivative instruments to manage exposure to interest rate
changes. The
13
<PAGE>
Inspire Pharmaceuticals, Inc.
(a development stage company)
Company ensures the safety and preservation of invested principal funds by
limiting default risk, market risk and reinvestment risk. The Company reduces
default risk by investing in investment grade securities. A hypothetical 100
basis point drop in interest rates along the entire interest rate yield curve
would not significantly affect the fair value of the Company's interest
sensitive financial instruments at December 31, 1998, December 31, 1999 or June
30, 2000. Declines in interest rates over time will, however, reduce the
Company's interest income while increases in interest rates over time will
increase interest expense.
14
<PAGE>
Inspire Pharmaceuticals, Inc.
(a development stage company)
Part II: OTHER INFORMATION
---------------------------
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
(d) On August 2, 2000, the Securities and Exchange Commission declared a
Registration Statement on Form S-1, as amended (Registration No. 333-
31174) effective that registered 6,325,000 shares of our common stock.
The managing underwriters were Deutsche Bank Alex. Brown, Chase H&Q
and U.S. Bancorp Piper Jaffray. On August 8, 2000, we sold 5,500,000
shares of our common stock at an initial public offering price of
$12.00 per share, generating gross offering proceeds of $66 million.
On September 5, 2000, we sold an additional 825,000 shares of common
stock at the initial public offering price of $12.00 per share
pursuant to the exercise by the underwriters of their over-allotment
option with respect to such shares, generating additional gross
offering proceeds of $9.9 million. In connection with the offering,
the Company incurred underwriting discounts and commissions of
approximately $5.3 million and other expenses estimated to be
approximately $1.3 million. The total of such expenses is $6.6
million. All of such expenses were payable to parties other than the
Company's directors, officers or their associates; persons owning 10
percent or more of any class of equity securities of the Company; or
affiliates of the Company. The aggregate net proceeds to the Company
after deduction of the foregoing expenses were approximately $69.3
million.
The ending date of the reporting period covered by this quarterly
report preceded the effective date of the Registration Statement.
Accordingly, the information regarding the use of net proceeds
described in Item 701(f)(4)(vii) of Regulation S-K will be reported in
the Company's quarterly report on Form 10-Q for the quarter ended
September 30, 2000.
Item 5. Other Information
-----------------
Risk Factors
------------
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.
15
<PAGE>
Inspire Pharmaceuticals, Inc.
(a development stage company)
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 successful clinical trials, the products must meet the criteria
for clinical approval, or endpoints, which we establish for the product in
the clinical study.
Generally, we will establish these endpoints in consultation with the
regulatory authorities, following design guidelines on the efficacy, safety
and tolerability measures required for approval of products.
Because our existing product candidates utilize a new approach to the
treatment of respiratory and eye diseases, we may have trouble establishing
endpoints that the regulatory authorities agree sufficiently evaluate the
effectiveness of each product candidate. For this and other reasons, we
could encounter delays and increased expenses in our clinical trials if the
regulatory authorities determine that the endpoints established for a
clinical trial do not predict a clinical benefit, and the authorities will
not approve the product for marketing without further clinical trials. The
regulatory authorities could change their view on clinical trial design and
establishment of appropriate standards for efficacy, safety and
tolerability and require a change in study design, additional data or even
further clinical trials before approval of a product candidate.
After initial regulatory approval, regulatory authorities continue to
review a marketed product and its manufacturer. They may require us to
conduct long-term safety studies after approval. Discovery of previously
unknown problems through adverse event reporting may result in restrictions
on the product, including
16
<PAGE>
Inspire Pharmaceuticals, Inc.
(a development stage company)
withdrawal from the market. Additionally, we and our officers and directors
could be subject to civil and criminal penalties.
IF PHYSICIANS AND PATIENTS DO NOT ACCEPT OUR PRODUCT CANDIDATES, THEY MAY
NOT BE COMMERCIALLY SUCCESSFUL.
Even if regulatory authorities approve our product candidates, those
products may not be commercially successful. Acceptance of and demand for
our products will depend largely on the following:
. acceptance by physicians and patients of our products as safe and
effective therapies;
. reimbursement of drug and treatment costs by third-party payors;
. safety, effectiveness and pricing of alternative products; and
. prevalence and severity of side effects associated with our
products.
In addition, to achieve broad market acceptance of our product
candidates, in many cases we will need to develop, alone or with others,
convenient methods for administering product candidates. Physicians have
administered our current product candidates for the treatment or diagnosis
of respiratory disorders, INS365 Respiratory 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.
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.
17
<PAGE>
Inspire Pharmaceuticals, Inc.
(a development stage company)
OUR DEPENDENCE ON COLLABORATIVE RELATIONSHIPS MAY LEAD TO DELAYS IN PRODUCT
DEVELOPMENT AND DISPUTES OVER RIGHTS TO TECHNOLOGY.
Our business strategy depends upon the formation of research
collaborations, licensing and/or marketing arrangements. We currently have
development collaborations with three collaborators, Genentech, Kissei and
Santen Pharmaceutical Co., Ltd. ("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 product 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.
Disputes may arise in the future over the ownership of rights to any
technology developed with collaborators. These and other possible
disagreements between us and our collaborators could lead to delays in the
collaborative development or commercialization of therapeutic or diagnostic
products. Such disagreement could also result in litigation or require
arbitration to resolve.
IF WE ARE UNABLE TO CONTRACT WITH THIRD PARTIES FOR SYNTHESIS AND
MANUFACTURING OF PRODUCT CANDIDATES FOR PRECLINICAL TESTING AND CLINICAL
TRIALS AND FOR LARGE SCALE MANUFACTURING OF ANY OF OUR DRUG CANDIDATES, WE
MAY BE UNABLE TO DEVELOP OR COMMERCIALIZE PRODUCTS.
18
<PAGE>
Inspire Pharmaceuticals Inc.
(a development stage company)
We have no experience or capabilities in large scale commercial
manufacturing of any of our product candidates or any experience or
capabilities in the manufacturing of pharmaceutical products generally. We
do not generally expect to engage directly in the manufacturing of
products, but instead intend to contract with others for these services. We
have relied upon supply agreements with third parties for the manufacture
and supply or our product candidates for purposes of preclinical testing
and clinical trials. Although we have previously received preclinical and
clinical supplies of our product candidates from several suppliers, we
presently depend upon Yamasa Corporation as the sole supplier of our supply
of product candidates. If we are unable to retain third party manufacturing
on commercially acceptable terms, we may not be able to commercialize
products as planned. Our manufacturing strategy presents the following
risks:
. the manufacturing processes for most of our product candidates have
not been tested in quantities needed for commercial sales;
. delays in scale-up to commercial quantities and any change to a
manufacturer other than Yamasa Corporation could delay clinical
studies, regulatory submissions and commercialization of our products;
. manufacturers of our products are subject to the FDA's good
manufacturing practices regulations and similar foreign standards, and
we do not have control over compliance with these regulations by
third-party manufacturers;
. if we need to change to manufacturers other than Yamasa Corporation,
FDA and comparable foreign regulators would require new testing and
compliance inspections and the new manufacturers would have to be
educated in the processes necessary for the production of our product
candidates;
. without satisfactory long-term agreements with manufacturers, we will
not be able to develop or commercialize our product candidates as
planned or at all; and
. we may not have intellectual property rights, or may have to share
intellectual property rights, to any improvements in the manufacturing
processes or new manufacturing processes for our product candidates.
IF WE ARE UNABLE TO SUPPLY KISSEI AND SANTEN WITH SUFFICIENT QUANTITIES OF
MATERIALS WE MAY BREACH OUR AGREEMENTS WITH SUCH PARTIES.
We are currently a party to a development, license and supply agreement
with each of Kissei and Santen, under which we granted each a license to
develop and market INS365 Respiratory and INS365 Ophthalmic, respectively.
Generally, the agreements with Kissei and Santen will require us to supply
such partners with either sufficient quantities of materials or finished
products, as applicable, for the purpose of commercial distribution. We
will need to establish, alone or with third parties, a manufacturing
process in relation to each product. Our dependence upon third parties for
the manufacture of products may adversely affect our ability to develop and
deliver products on a timely and competitive basis.
19
<PAGE>
Inspire Pharmaceuticals Inc.
(a development stage company)
Our inability to successfully manufacture commercial products could
result in our breach of the terms of our agreements with Kissei and Santen.
Any of these factors could delay our preclinical studies, clinical trials
or commercialization of our product candidates, entail higher costs and
result in our inability to effectively sell our product candidates.
IF OUR PATENT PROTECTION IS INADEQUATE, THE DEVELOPMENT AND ANY POSSIBLE
SALES OF OUR PRODUCT CANDIDATES COULD SUFFER OR COMPETITORS COULD FORCE OUR
PRODUCTS COMPLETELY OUT OF THE MARKET.
Our business and competitive position depends on our ability to continue
to develop and protect our products and processes, proprietary methods and
technology. Except for one patent covering new chemical compounds, most of
our patents are use patents containing claims covering methods of treating
disorders and diseases by administering therapeutic chemical compounds. Use
patents, while providing adequate protection for commercial efforts in the
United States, may afford a lesser degree of protection in European and
possibly other countries due to their particular patent laws. Besides our
use patents, we have patents covering pharmaceutical formulations of these
chemical compounds. We also have patent applications covering processes for
large-scale manufacturing of these chemical compounds. Many of the chemical
compounds included in the claims of our use patents, formulation patents
and process applications were known in the scientific community prior to
our formation. None of our patents cover these previously known chemical
compounds themselves, which are in the public domain. As a result,
competitors may be able to commercialize products that use the same
chemical compounds used by us for the treatment of disorders and diseases
not covered by our use patents. In such a case, physicians, pharmacies and
wholesalers could possibly substitute these products for our products. Such
substitution would reduce any revenues received from the sale of our
products.
We believe that there may be significant litigation in the pharmaceutical
and biotechnology industry regarding patent and other intellectual property
rights. A patent does not provide the patent holder with freedom to operate
in a way that infringes the patent rights of others. While we are not aware
of any patent that we are infringing, nor have we been accused of
infringement by any other party, other companies currently have or may
acquire patent rights which we might be accused of infringing. If we must
defend a patent suit, or if we choose to initiate a suit to have a third
party patent declared invalid, we may need to make considerable
expenditures of money and management time in litigation. A judgment against
us in a patent infringement action could cause us to pay monetary damages,
require us to obtain licenses, or prevent us from manufacturing or
marketing the affected products. In addition, we may need to initiate
litigation to enforce our proprietary rights against others, or we may have
to participate in interference proceedings in the United States Patent and
Trademark Office (USTPO) to determine the priority of invention of any of
our technologies.
In general, the development of patent rights in pharmaceutical,
biopharmaceutical and biotechnology products to a degree sufficient to
support
20
<PAGE>
Inspire Pharmaceuticals Inc.
(a development stage company)
commercial efforts in these areas is typically uncertain and involves
complex legal and factual questions. For instance, while the USPTO has
recently issued guidelines addressing the requirements for demonstrating
utility for biotechnology inventions, USPTO examiners may not follow these
guidelines in examining patent applications. Such applications may have to
be appealed to the USPTO's Appeals Board for a final determination of
patentability.
IF WE FAIL TO REACH MILESTONE OR OTHER OBLIGATIONS, THE UNIVERSITY OF NORTH
CAROLINA AT CHAPEL HILL AND OTHER LICENSORS MAY TERMINATE OUR AGREEMENTS
WITH THEM.
Our current technologies, discoveries and our original patents are based
in part on two exclusive licenses and one non-exclusive license from The
University of North Carolina at Chapel Hill (UNC). Generally, if we fail to
meet milestones under the respective UNC licenses, UNC may terminate the
applicable license. In addition, it may be necessary in the future for us
to obtain additional licenses from UNC or other third parties to develop
future commercial opportunities or to avoid infringement of third party
patents. We do not know the terms on which such licenses may be available,
if at all.
Failure to license or otherwise acquire necessary technologies may reduce
or eliminate our ability to develop product candidates. Even if we acquire
all necessary licenses, if we breach any license provision, either
intentionally or unintentionally, we may lose our right to continued use of
the licensed technology.
BECAUSE WE RELY UPON TRADE SECRETS AND AGREEMENTS TO PROTECT SOME OF OUR
INTELLECTUAL PROPERTY, THERE IS A RISK THAT UNAUTHORIZED PARTIES MAY OBTAIN
AND USE INFORMATION THAT WE REGARD AS PROPRIETARY.
We rely upon the laws of trade secrets and non-disclosure agreements and
other contractual arrangements to protect our proprietary compounds,
methods, processes, formulations and other information for which we are not
seeking patent protection. We have taken security measures to protect our
proprietary technologies, processes, 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.
21
<PAGE>
Inspire Pharmaceuticals Inc.
(a development stage company)
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 $5.5 million for the six months ended June 30, 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 June 30, 2000 our accumulated deficit was approximately $38.8
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.
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
22
<PAGE>
Inspire Pharmaceuticals Inc.
(a development stage company)
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 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 our initial public offering for
significant funding in support of our development efforts. In addition, we
may seek additional funding through public or private equity offerings and
debt financings. Additional financing may not be available when needed. If
available, such financing may not be on terms favorable to us or our
stockholders. Stockholders' ownership will be diluted if we raise
additional capital by issuing equity securities. If we raise funds through
collaborations and licensing arrangements, we may have to give up rights to
our technologies or product candidates which are involved in these future
collaborations and arrangements or grant licenses on unfavorable terms. If
adequate funds are not available, we would have to scale back or terminate
research programs and product development.
WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE WITH BIOTECHNOLOGY COMPANIES AND
ESTABLISHED PHARMACEUTICAL COMPANIES.
The biotechnology and pharmaceutical industries are intensely competitive
and subject to rapid and significant technological change. Our competitors
in the United States and elsewhere are numerous and include, among others,
major multinational pharmaceutical and chemical companies, specialized
biotechnology firms and universities and other research institutions. These
competitors include Abbott, Astra Zeneca, Boehringer Ingelheim, 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
23
<PAGE>
Inspire Pharmaceuticals Inc.
(a development stage company)
partners. Acquisitions of competing companies and potential competitors by
large pharmaceutical companies or others could enhance financial, marketing
and other resources available to such competitors. As a result of academic
and government institutions becoming increasingly aware of the commercial
value of their research findings, such institutions are more likely to
enter into exclusive licensing agreements with commercial enterprises,
including our competitors, to market commercial products. Our competitors
may develop technologies and drugs that are safer, more effective or less
costly than any we are developing or which would render our technology and
future drugs obsolete and non-competitive. The products of our competitors
marketed to treat chronic bronchitis include anti-inflammatory products,
such as Azmacort(R) and Beclovent(R), bronchodilators such as Atrovent(R)
and Proventil(R), and antibiotics such as Biaxin(R) and Zithromax(R).
Pulmozyme(R), a Genentech product, and TOBI(R) from 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.
In addition, some of our competitors have greater experience than we do
in conducting preclinical and clinical trials and obtaining FDA and other
regulatory approvals. Accordingly, our competitors may succeed in obtaining
FDA or other regulatory approvals for drug candidates more rapidly than we
do. Companies that complete clinical trials, obtain required regulatory
approvals and commence commercial sale of their drugs before we do may
achieve a significant competitive advantage, including patent and FDA
marketing exclusivity rights that would delay our ability to market
products. Drugs resulting from our research and development efforts, or
from our joint efforts with our collaborative partners may not compete
successfully with competitors' existing products or products under
development.
FAILURE TO HIRE AND RETAIN KEY PERSONNEL MAY HINDER OUR PRODUCT DEVELOPMENT
PROGRAMS AND OUR BUSINESS EFFORTS.
We depend on the principal members of management and scientific staff,
including Christy L. Shaffer, Ph.D., our President, Chief Executive Officer
and director; and Gregory J. Mossinghoff, our Chief Business Officer. If
any of these people leaves us, we may have difficulty conducting our
operations. We have not entered into agreements with any of the above
principal members of our management and scientific staff that bind any of
them to a specific period of employment. 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.
OUR OPERATIONS INVOLVE A RISK OF INJURY FROM HAZARDOUS MATERIALS, WHICH
COULD BE VERY EXPENSIVE TO US.
24
<PAGE>
Inspire Pharmaceuticals Inc.
(a development stage company)
Our research and development activities involve the controlled use of
hazardous materials and chemicals. We cannot completely eliminate the risk
of accidental contamination or injury from these materials. If such an
accident were to occur, we could be held liable for any damages that result
and any such liability could exceed our resources. In addition, we are
subject to laws and regulations governing the use, storage, handling and
disposal of these materials and waste products. The costs of compliance
with these laws and regulations 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.
25
<PAGE>
Inspire Pharmaceuticals Inc.
(a development stage company)
BECAUSE OUR MANAGEMENT WILL HAVE BROAD DISCRETION OVER THE USE OF THE
PROCEEDS FROM OUR INITIAL PUBLIC OFFERING, THE PROCEEDS MAY BE USED IN WAYS
STOCKHOLDERS DO NOT DEEM TO BE ADVISABLE.
Our management will retain broad discretion as to the allocation of the
proceeds for our initial public offering, including the timing and
conditions of the use of the proceeds. Our management may allocate the
proceeds to uses that stockholders do not deem advisable. If management
spends the funds unwisely, we may not have sufficient working capital to
become profitable.
OUR EXISTING DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS HOLD
A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK AND MAY BE ABLE TO PREVENT OTHER
STOCKHOLDERS FROM INFLUENCING SIGNIFICANT CORPORATE DECISIONS.
Our directors, executive officers and current 5% stockholders and their
affiliates beneficially own approximately 59.7% of the common stock. These
stockholders, if they act together, may be able to direct the outcome of
matters requiring approval of the stockholders, including the election of
our directors and other corporate actions such as our merger with or into
another company, a sale of substantially all of our assets and amendments
to our amended and restated certificate of incorporation. The decisions of
these stockholders may conflict with our interests or those of our other
stockholders.
ANTI-TAKEOVER PROVISIONS IN OUR AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION AND BYLAWS, AND OUR RIGHT TO ISSUE PREFERRED STOCK, MAY
DISCOURAGE A THIRD PARTY FROM MAKING A TAKE-OVER OFFER THAT COULD BE
BENEFICIAL TO US AND OUR STOCKHOLDERS.
Our amended and restated certificate of incorporation and bylaws contain
provisions which could delay or prevent a third party from acquiring shares
of our common stock or replacing members of our board of directors. Our
amended and restated certificate of incorporation allows our board of
directors to issue shares of preferred stock. The Board can determine the
price, rights, preferences and privileges of those shares without any
further vote or action by the stockholders. As a result, our board of
directors could make it difficult for a third party to acquire a majority
of our outstanding voting stock.
Our amended and restated certificate of incorporation provides that the
members of the board will be divided into three classes. Each year the
terms of approximately one-third of the directors will expire. Our bylaws
will not permit our stockholders to call a special meeting of stockholders.
Under the bylaws, only our President, Chairman of the Board or a majority
of the board of directors will be able to call special meetings. The bylaws
also require that stockholders give advance notice to our Secretary of any
nominations for director or other business to be brought by stockholders at
any stockholders' meeting. These provisions may delay or prevent changes of
control or management.
26
<PAGE>
Inspire Pharmaceuticals Inc.
(a development stage company)
Further, we are subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law. Under this law, if anyone becomes an
"interested stockholder" in the company, we may not enter a "business
combination" with that person for three years without special approval.
These provisions could discourage a third party from making a take-over
offer and could delay or prevent a change of control.
OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AND YOUR INVESTMENT
IN OUR STOCK MAY DECLINE IN VALUE.
The market price of our common stock is likely to be highly volatile.
Factors that could cause volatility and could result in declines in the
market price of our common stock include among others:
. announcements made by us concerning results of our clinical trials
with INS365 Respiratory, INS365 Ophthalmic, INS316 Diagnostic and any
other product candidates;
. changes in government regulations;
. regulatory actions as a result of their therapeutic approach;
. changes in concerns of our collaborators, in particular our
collaborations with Genentech, Kissei and Santen;
. developments concerning proprietary rights including patents by us or
our competitors;
. variations in our operating results; and
. litigation.
Extreme price and volume fluctuations occur in the stock market from time
to time and that can particularly affect the prices of biotechnology
companies. These extreme fluctuations are often unrelated to the actual
performance of the affected companies. These broad market fluctuations
could result in significant declines in the market price of our common
stock.
FUTURE SALES BY OUR CURRENT STOCKHOLDERS MAY CAUSE OUR STOCK PRICE TO
DECLINE.
Sales of our common stock by our current stockholders in the public
market could cause the market price of our stock to fall. Sales may also
make it more difficult for us to sell equity securities or equity-related
securities in the future at a time and price that our management deems
acceptable, or at all. As of September 5, 2000, there were 25,413,531
shares of common stock outstanding. Of these outstanding shares of common
stock, all of the 6,325,000 shares sold in our initial public offering are
freely tradable, without restriction under the Securities Act of 1933, as
amended, unless purchased by our "affiliates." Existing stockholders, who
hold the remaining 19,088,531 shares of common stock, hold "restricted
shares" 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.
27
<PAGE>
Inspire Pharmaceuticals Inc.
(a development stage company)
Holders of 16,340,084 shares of common stock and options and warrants to
purchase 356,823 shares of common stock are 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 our initial public offering. 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.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits:
Exhibit
No. Description of Exhibit
--- ----------------------
3.1 Amended and Restated Certificate of Incorporation (Incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-1 (Registration No. 333-31174) which became effective on August 2,
2000).
3.2 Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form S-1 (Registration No. 333-
31174) which became effective on August 2, 2000).
27.1 Financial Data Schedule.
b) Reports on Form 8-K:
28
<PAGE>
Inspire Pharmaceuticals Inc.
(a development stage company)
No current reports on Form 8-K were filed during the reporting period.
29
<PAGE>
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Inspire Pharmaceuticals, Inc.
Date: September 14, 2000 By: /s/ Christy L. Shaffer
------------------- ----------------------
Christy L. Shaffer
President, Chief Executive Officer and
Director
Date: September 14, 2000 By: /s/ Gregory J. Mossinghoff
------------------- --------------------------
Gregory J. Mossinghoff
Chief Business Officer, Secretary and
Treasurer
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
--- ----------------------
3.1 Amended and Restated Certificate of Incorporation (Incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on Form
S-1 (Registration No. 333-31174) which became effective on August 2,
2000).
3.2 Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form S-1 (Registration No. 333-
31174) which became effective on August 2, 2000).
27.1 Financial Data Schedule
