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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
Commission file number 0-22332
INSITE VISION INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 94-3015807
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
965 ATLANTIC AVENUE
ALAMEDA, CA 94501
(Address of Principal Executive Offices, including Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 865-8800
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
---
The number of shares of registrant's common stock, $.01 par value,
outstanding as of September 30, 1996: 12,915,398.
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QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
September 30, 1996 and December 31, 1995....................... 3
Condensed Consolidated Statements of Operations
For the three and nine months ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 1996 and 1995.......... 5
Notes to Condensed Consolidated Financial Statements ......... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits....................................................... 16
Reports on Form 8-K............................................ 16
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PART I
ITEM 1. FINANCIAL STATEMENTS
INSITE VISION INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands, except share and per share amounts) 1996 1995
- ----------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 12,205 $ 871
Short-term investments -- 2,996
Prepaid expenses and other current assets 374 151
-------- --------
Total current assets 12,579 4,018
Property and equipment, at cost:
Laboratory and other equipment 3,891 4,151
Leasehold improvements 1,671 2,931
Furniture and fixtures 355 355
-------- --------
5,917 7,437
Accumulated depreciation 4,179 3,812
-------- --------
1,738 3,625
-------- --------
Total assets $ 14,317 $ 7,643
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 62 $ 452
Accrued liabilities 265 145
Accrued compensation and related expense 280 744
Current portion of notes payable 171 301
-------- --------
Total current liabilities 778 1,642
Accrued rent -- 62
Notes payable -- 92
Commitments
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none issued and outstanding
Common stock, $.01 par value, 30,000,000 shares authorized;
12,915,398 issued and outstanding at September 30, 1996;
9,252,136 issued and outstanding at December 31, 1995 129 93
Paid-in capital 77,103 62,651
Other -- (3)
Accumulated deficit (63,693) (56,894)
-------- --------
Stockholders' equity 13,539 5,847
-------- --------
Total liabilities and stockholders' equity $ 14,317 $ 7,643
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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INSITE VISION INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share amounts) 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
License fee $ 500 $ -- $ 500 $ --
Royalty revenues 7 13 34 50
-------- ------- -------- -------
Total 507 13 534 50
Operating expenses:
Research and development 1,293 1,963 4,060 6,577
Loss on vacated facilities -- -- 1,412 --
General and administrative 700 858 2,185 3,240
-------- ------- -------- -------
Total 1,993 2,821 7,657 9,817
-------- ------- -------- -------
Loss from operations (1,486) (2,808) (7,123) (9,767)
Interest and other income 150 77 360 398
Interest expense (9) (102) (36) (210)
-------- ------- -------- -------
Net loss $ (1,345) $(2,833) $ (6,799) $(9,579)
======== ======= ======== =======
Net loss per share $ (0.10) $ (0.31) $ (0.57) $ (1.05)
Shares used to calculate net loss per share 12,833 9,176 11,865 9,144
</TABLE>
No dividends were declared or paid during the periods
See accompanying notes to condensed consolidated financial statements.
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INSITE VISION INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
(in thousands) 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (6,799) $(9,579)
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss on vacated facilities 1,412 --
Depreciation and amortization 502 650
Deferred compensation -- 126
Changes in:
Prepaid expenses and other current assets (223) 532
Accounts payable and accrued liabilities (734) (471)
-------- -------
Net cash used in operating activities (5,842) (8,742)
INVESTING ACTIVITIES
Maturity of short-term cash investments 3,000 5,442
Purchases of property and equipment (90) (1,537)
-------- -------
Net cash provided from investing activities 2,910 3,905
FINANCING ACTIVITIES
Principal payments of notes payable (222) (1,299)
Issuance of common stock, net 14,488 92
-------- -------
Net cash provided (used) by financing activities 14,266 (1,207)
Net increase (decrease) in cash and equivalents 11,334 (6,044)
Cash and equivalents, beginning of period 871 7,314
-------- -------
Cash and equivalents, end of period $ 12,205 $ 1,270
======== =======
Supplemental disclosures:
Interest paid in cash $ 38 $ 213
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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INSITE VISION INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and pursuant to the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring accrual adjustments, considered
necessary for a fair presentation have been included. Operating results for the
three month and nine month periods ended September 30, 1996, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1996.
These financial statements and notes should be read in conjunction with
the Company's audited financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
NOTE 2 - PROPERTY AND EQUIPMENT
In July 1996, the Company and Bausch & Lomb Incorporated (B&L) announced
a strategic alliance covering the manufacture of potential InSite products, the
worldwide marketing of InSite's PilaSite(R) product candidate for glaucoma, and
a joint development program utilizing InSite's proprietary drug delivery
technology. In connection with the alliance, B&L made a $1.0 million equity
investment in the Company in August 1996, will make an additional $1.0 million
equity investment in August 1997, will provide up to $2.0 million in new product
development funding, and pay royalties to InSite on future PilaSite product
sales.
As a result of the B&L alliance, the Company ended its relationship with
its previous contract manufacturer and wrote-off its share of equipment and
leasehold improvements installed at the previous manufacturer's plant. This
resulted in a non-cash charge to the Company's results of operations of $1.4
million which is reported as a separate line item in the accompanying financial
statements. InSite's share of leasehold improvements at B&L facilities is
expected to be about $500,000.
NOTE 3 - STOCKHOLDERS' EQUITY
In January 1996, the Company received net proceeds of approximately $4.8
million from a private placement of 1,469,232 shares of its common stock and
367,308 warrants. Each warrant entitles its holder to purchase one share of the
Company's common stock for $3.25 until January 2001. Also in January 1996, the
Company received $654,000 from the exercise of options for 185,041 common
shares. In April 1996, the Company received net proceeds of approximately $7.9
million from a public offering of 1,750,000 shares of its common stock and, in
August 1996, the Company received $1.0 million from B&L for the purchase of
210,527 common shares, as described in Note 2 above.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements and notes thereto included in this Quarterly Report and in
the Company's Annual Report on Form 10-K for the year ended December 31, 1995.
Except for the historical information contained herein, the discussion
in this Quarterly Report contains certain forward-looking statements that
involve risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statements made in this
Quarterly Report should be read as being applicable to all related
forward-looking statements wherever they appear in this Quarterly Report. The
Company's actual results could differ materially from those discussed herein.
OVERVIEW
InSite Vision is developing ophthalmic pharmaceutical products based on
its proprietary DuraSite(R) eyedrop-based drug delivery technology, which is
designed to improve the safety, efficacy and medical value of existing
ophthalmic products and potentially permit the novel ophthalmic application of
drugs that are currently used or being developed for non-ophthalmic indications.
The DuraSite delivery system can be customized to deliver a wide variety of
potential drug candidates having a broad range of molecular weights and other
properties.
To date, InSite Vision has not received any revenues from the sale of
products, although it has received a small amount of royalties from the sale of
products using the Company's licensed technology. The Company has been
unprofitable since its inception and expects to continue to incur substantial
losses for at least the next several years, due to continuing research and
development efforts, including preclinical studies, clinical trials and
manufacturing of its product candidates. The Company has financed its research
and development activities and operations primarily through private and public
placement of its equity securities and, to a lesser extent, from collaborative
agreements.
In November 1995, InSite restructured its operations and reduced its
staff by approximately 50% to enable it to conserve its financial resources.
Self-funded product development was reduced substantially and the Company
discontinued plans to establish its own sales and marketing organization. The
Company is attempting, through corporate partnering and other potential business
opportunities, to recognize the value of its late-stage product candidates and
its drug delivery technology.
In May 1996, InSite entered into an agreement with CIBA Vision
Ophthalmics (CIBA Vision) whereby InSite regained full U.S. marketing rights to
InSite's PilaSite product candidate for glaucoma. In exchange, CIBA Vision
received royalty-bearing, co-exclusive U.S. marketing rights to InSite's
ToPreSite(TM) product candidate for ocular inflammation/infection. CIBA Vision
assumed all subsequent product development, clinical and regulatory
responsibility for ToPreSite. In addition, CIBA Vision received royalty-bearing,
co-exclusive U.S. marketing rights to InSite Vision's ISV-205 product candidate
for certain non-glaucoma-related indications.
During July 1996, the Company entered into agreements with Bausch & Lomb
Incorporated (B&L) which provide for:
B&L to manufacture InSite product candidates at B&L's facility in Tampa,
Florida using equipment owned by InSite, and for B&L and InSite to share
the cost of certain leasehold improvements in connection with the
installation and operation of the equipment;
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B&L to receive, for a fee of $500,000, an exclusive worldwide
royalty-bearing license to manufacture and market PilaSite;
A collaboration between the Company and B&L to develop and sell a new
DuraSite based eyedrop formulation; and
A $2 million equity investment by B&L in the Company.
As a result of these agreements, the Company elected to vacate its
co-tenancy of a clean room at another manufacturer's plant and in June 1996
wrote-off the amounts it had previously capitalized related to that facility.
This write-off resulted in a non-cash charge to the Company's results of
operations of $1.4 million which is reported as a separate line item in the
accompanying financial statements.
As of September 30, 1996, the Company's accumulated deficit was
approximately $63.7 million. There can be no assurance that InSite Vision will
achieve either significant revenues from product sales or profitable operations.
RESULTS OF OPERATIONS
Third quarter 1996 results include a $500,000 license fee from B&L for
an exclusive worldwide royalty-bearing license to manufacture and market
PilaSite. The Company earned royalty income of $7,000 and $13,000 for the
quarters ended September 30, 1996 and 1995, respectively, from sales of
AquaSite(R) by CIBA Vision. To date, the Company has not relied on royalty
revenues for funding its activities, nor has it received revenues from the sale
of products. The Company does not expect to receive significant product revenue
or royalties for several years, if at all.
Research and development expenses declined 34% in the third quarter of
1996 to $1.3 million from $2.0 million in the third quarter of 1995 with a 38%
decline to $4.1 million from $6.6 million during the nine months ended September
30, 1996 and 1995, respectively. The decreases are primarily due to reduced
personnel costs resulting from the 1995 restructuring described above and lower
expenditures for human clinical studies of the Company's product candidates. As
a result, it is presently anticipated that research and development expenses
will be lower in 1996 than in 1995.
The Company has re-prioritized its earlier stage development activities,
placing emphasis on ISV-205 for the prevention of steroid-induced glaucoma, on
ISV-611 for allergic conjunctivitis, and on ISV-120 for prevention of pterygium
recurrence. Later stage product development is expected to be conducted through
corporate partnering arrangements, if available on acceptable terms, or at all.
General and administrative expenses declined 18% during the quarter
ended September 30, 1996 to $700,000 from $858,000 during the third quarter of
1995, with a 33% decline to $2.2 million from $3.2 million during the nine
months ended September 30, 1996 and 1995, respectively. In November 1995, the
Company announced that it would not establish its own sales and marketing
organization and that it had made staff reductions in its administration and
manufacturing areas. As a result, general and administrative expenses are
expected to be lower in 1996 than in 1995.
Interest and other income was $150,000 and $77,000 for the quarters
ended September 30, 1996 and 1995, respectively. Interest earned in the future
will be dependent on the Company's funding cycles and prevailing interest rates.
Interest expense relates primarily to notes payable.
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The Company incurred net losses of $1.3 million and $2.8 million for the
three month periods ended September 30, 1996 and 1995, respectively, resulting
in net losses of $6.8 million and $9.6 million for the first nine months of 1996
and 1995, respectively. The Company expects to incur substantial additional
losses over the next several years. The losses are expected to fluctuate from
period to period based primarily on the level of product development and
clinical activities.
LIQUIDITY AND CAPITAL RESOURCES
InSite Vision has financed its operations primarily through private
placements of preferred stock totaling $32.0 million, an October 1993 public
offering of common stock which resulted in net proceeds of approximately $30.0
million, a January 1996 private placement of common stock and warrants which
raised net proceeds of $4.8 million and an April 1996 public offering which
raised net proceeds of $7.9 million. At September 30, 1996, the Company had cash
and equivalents totaling $12.2 million. It is the Company's policy to invest
these funds in highly liquid securities, such as interest bearing money market
funds, Treasury and federal agency notes and corporate debt.
For the nine months ended September 30, 1996 and 1995, expenditures for
operating activities and additions to capital equipment were $5.9 million and
$10.3 million, respectively. Of those amounts, $90,000 and $1,537,000 were for
additions to laboratory and other property and equipment in 1996 and 1995,
respectively. The Company expects to expend approximately $500,000 during the
fourth quarter of 1996 for its share of leasehold improvements at B&L's
facilities in Tampa, Florida. The timing of future expenditures will correspond
to the timing of clinical trials of potential products and additional product
development.
The Company's future capital expenditures and requirements will depend
on numerous factors, including the progress of its research and development
programs, the progress of preclinical and clinical testing, the time and costs
involved in obtaining regulatory approvals, the cost of filing, prosecuting,
defending and enforcing patent claims and other intellectual property rights,
competing technological and market developments, changes in the Company's
existing collaborative and licensing relationships, the ability of the Company
to establish additional collaborative arrangements, acquisition of new products
and technologies, the completion of commercialization activities and
arrangements, and the purchase of additional plant and equipment.
The Company anticipates no material capital expenditures to be incurred
for environmental compliance in fiscal year 1996. Based on the Company's good
environmental compliance record to date and its current compliance with
applicable environmental laws and regulations, environmental compliance is not
expected to have a material adverse effect on the Company's operations.
The Company believes that its cash and equivalents will be sufficient to
meet its operating expenses and cash requirements through 1997. The Company
expects to incur substantial additional development costs prior to reaching
profitability. As a result, InSite Vision will require substantial additional
funds and the Company may seek research funding, private or public equity
investments, and possible future collaborative agreements to meet such needs.
Even if the Company does not have an immediate need for additional cash, it may
seek access to the public equity markets if and when conditions are favorable.
There is no assurance that such additional funds will be available for the
Company to finance its operations on acceptable terms, if at all.
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RISK FACTORS
EARLY STAGE OF DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY
InSite is at an early stage of development. Only one product utilizing
the Company's DuraSite technology, an over-the-counter ("OTC") dry eye
treatment, is currently being marketed. Most of the potential products currently
under development by the Company will require significant additional research
and development, and preclinical and clinical testing, prior to submission to
regulatory authorities for marketing approval. The Company's potential products
are subject to the risks of failure inherent in the development of products
based on new technologies. These risks include the possibilities that the
Company's technology or any or all of its potential products will be found to be
unsafe, ineffective, or otherwise fail to receive necessary marketing clearance;
that the potential products, if safe and effective, will be difficult to
manufacture or market; that proprietary rights of third parties will preclude
the Company from marketing products; or that third parties will market superior,
equivalent or more cost-effective products. As a result, there can be no
assurance that the Company's research and development activities will result in
any commercially viable products.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company will require substantial additional funds to conduct the
development and testing of its potential products and to manufacture and market
any products that may be developed. As previously described in Analysis of
Liquidity and Capital Resources, the Company's future capital requirements will
depend on numerous factors, including the progress of its research and
development programs, the progress of preclinical and clinical testing, the time
and costs involved in obtaining regulatory approvals, the cost of filing,
prosecuting, defending and enforcing patent claims and other intellectual
property rights, competing technological and market developments, changes in the
Company's existing collaborative and licensing relationships, the ability of the
Company to establish corporate partnerships for the manufacture and marketing of
its potential products, and the purchase of additional capital equipment. The
Company intends to seek additional funding through public or private financings,
collaborative or other arrangements, or from other sources. There can be no
assurance that additional financing will be available from any of these sources
or, if available, that it will be available on acceptable terms. If additional
funds are raised by issuing equity securities, significant dilution to existing
stockholders may result. If adequate funds are not otherwise available, the
Company may be required to delay, scale back or eliminate one or more of its
research, discovery or development programs, or to obtain funds through entering
into arrangements with collaborators or others that may require the Company to
relinquish rights to certain of its technologies, product candidates or
products, or to cease operations.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE FINANCIAL RESULTS
The Company has incurred significant operating losses since its
inception in 1986 and it expects to continue to incur significant operating
losses for at least the next several years. The amount of net losses and the
time required by the Company to reach profitability are uncertain. The Company's
ability to achieve profitability depends upon its ability, alone or with others,
to complete successful development of its potential products, conduct clinical
trials, obtain required regulatory approvals and successfully manufacture and
market its products. There can be no assurance that the Company will ever
achieve significant revenue or achieve profitability on a sustained basis.
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DEPENDENCE ON THIRD PARTIES
In connection with its restructuring in November 1995, the Company
elected not to proceed with plans to establish a dedicated sales and marketing
organization. In order to successfully commercialize its product candidates, the
Company will be required to enter into arrangements with one or more companies
that will: provide for Phase III clinical testing, commercial scale-up and
manufacture of the Company's potential products; obtain or assist the Company in
other activities associated with obtaining regulatory approvals for its product
candidates; and market and sell the Company's products, if approved.
To date, the Company has entered into agreements with CIBA Vision for
co-exclusive rights with the Company in the United States to manufacture and
market AquaSite, MethaSite(R), ToPreSite and ISV-205 for certain
non-glaucoma-related indications. Of these, only AquaSite, an OTC product for
which regulatory approval is not required, has been marketed. In an agreement
entered into with CIBA Vision in May 1996, the Company regained full U.S.
marketing rights to the Company's PilaSite product candidate for glaucoma. In
exchange, CIBA Vision received royalty-bearing, co-exclusive U.S. marketing
rights to ToPreSite product candidate for ocular inflammation/infection. CIBA
Vision assumed all subsequent product development, clinical and regulatory
responsibility for ToPreSite. In addition, CIBA Vision received royalty-bearing,
co-exclusive U.S. marketing rights to the Company's ISV-205 product candidate
for certain non-glaucoma-related indications. CIBA Vision has no obligation to
fund the further development of MethaSite or ISV-205.
In July 1996 the Company entered into agreements with Bausch & Lomb
Incorporated (B&L) which provide for: B&L to receive an exclusive worldwide
royalty bearing license to manufacture and market PilaSite; a collaboration
between the two parties to develop and sell a new formulation of DuraSite; and
the Company to move its manufacturing equipment to B&L facilities in Tampa,
Florida and to share with B&L the cost of building a new clean room.
There can be no assurance that, even if regulatory approvals are
obtained, products will be successfully marketed, or that the Company will be
able to conclude arrangements with other companies to support the
commercialization of such products on acceptable terms, if at all.
The Company's strategy for research, development and commercialization
of certain of its products requires the Company to enter into various
arrangements with corporate and academic collaborators, licensors, licensees and
others, and is dependent on the subsequent success of these outside parties in
performing their responsibilities. For example, the Company is dependent upon
British Biotechnology plc ("British Biotech") for the supply of batimastat and
lexipafant, the active drugs incorporated into the Company's ISV-120 and ISV-611
product candidates, respectively. British Biotech is currently conducting
clinical testing of batimastat and lexipafant for non-ophthalmic indications.
Should British Biotech elect not to proceed with the development of either
product candidate, the Company may have no source of ongoing raw materials for
affected product candidates and its business may be adversely affected. In
addition, there can be no assurance that the Company's collaborators will not
take the position that they are free to compete using the Company's technology
without accounting to the Company, or will not pursue alternative technologies
or develop alternative products either on their own or in collaboration with
others, including the Company's competitors, as a means for developing
treatments for the disease or disorders targeted by these collaborative
programs.
UNCERTAINTY OF PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in large part on its ability to obtain
patents, protect trade secrets and operate without infringing upon the
proprietary rights of others. A substantial number of
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patents in the field of ophthalmology have been issued to pharmaceutical,
biotechnology and biopharmaceutical companies. Moreover, competitors may have
filed patent applications, may have been issued patents or may obtain additional
patents and proprietary rights relating to products or processes competitive
with those of the Company. There can be no assurance that the Company's patent
applications will be approved, that the Company will develop additional
proprietary products that are patentable, that any issued patents will provide
the Company with adequate protection for its inventions or will not be
challenged by others, or that the patents of others will not impair the ability
of the Company to commercialize its products. The patent position of firms in
the pharmaceutical industry generally is highly uncertain, involves complex
legal and factual questions, and has recently been the subject of much
litigation. No consistent policy has emerged from the U.S. Patent and Trademark
Office or the courts regarding the breadth of claims allowed or the degree of
protection afforded under pharmaceutical patents. There can be no assurance that
others will not independently develop similar products, duplicate any of the
Company's products or design around any patents of the Company.
A number of pharmaceutical companies and research and academic
institutions have developed technologies, filed patent applications or received
patents on various technologies that may be related to the Company's business.
Some of these technologies, applications or patents may conflict with the
Company's technologies or patent applications. Such conflicts could limit the
scope of the patents, if any, that the Company may be able to obtain or result
in the denial of the Company's patent applications. In addition, if patents that
cover the Company's activities have been or are issued to other companies, there
can be no assurance that the Company would be able to obtain licenses to these
patents, at all, or at a reasonable cost, or be able to develop or obtain
alternative technology. If the Company does not obtain such licenses, it could
encounter delays or be precluded from introducing products to the market.
Litigation may be necessary to defend against or assert claims of infringement,
to enforce patents issued to the Company or to protect trade secrets or know-how
owned by the Company, and could result in substantial cost to and diversion of
effort by, and may have a material adverse effect on, the Company. In addition,
there can be no assurance that these efforts by the Company will be successful.
The Company's competitive position is also dependent upon unpatented
trade secrets. There can be no assurance that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's trade secrets, that such trade secrets
will not be disclosed or that the Company can effectively protect its rights to
unpatented trade secrets. To the extent that the Company or its consultants or
research collaborators use intellectual property owned by others in their work
for the Company, disputes also may arise as to the rights in related or
resulting know-how and inventions.
NO COMMERCIAL MANUFACTURING EXPERIENCE
The Company has no experience in the manufacture of products for
commercial purposes. The Company has a pilot facility licensed by the State of
California to manufacture certain of its products for Phase I and Phase II
clinical trials. Contract manufacturers must adhere to regulations enforced by
the United States Food and Drug Administration ("FDA") on an ongoing basis
through its facilities inspection program. There are a limited number of Good
Manufacturing Processes contract manufacturers which are able to manufacture
products using InSite's technology. In July 1996, the Company entered into an
alliance under which B&L has agreed to manufacture Company products. If the
Company should encounter delays or difficulties in establishing and maintaining
its relationship with B&L or other qualified manufacturers to produce, package
and distribute its finished products, then clinical trials, regulatory filings,
market introduction and subsequent sales of such products would be adversely
affected.
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Contract manufacturing facilities must pass a pre-approval plant
inspection before the FDA will approve a new drug application ("NDA"). There can
be no assurance that the FDA or other regulatory agencies will approve the
process or the facilities by which any of the Company's products may be
manufactured. The Company's dependence on third parties for the manufacture of
products may adversely affect the Company's ability to develop and deliver
products on a timely and competitive basis. Should the Company be required to
manufacture products itself, the Company will be subject to the regulatory
requirements described above, to similar risks regarding delays or difficulties
encountered in manufacturing any such products and will require substantial
additional capital. There can be no assurance that the Company will be able to
manufacture any such products successfully or in a cost-effective manner. In
addition, certain of the raw materials the Company uses in formulating its
DuraSite drug delivery system are available from only one source. Any
significant interruption in the supply of these raw materials could delay the
Company's clinical trials, product development or product sales and could have a
material adverse effect on the Company's business.
GOVERNMENT REGULATION AND PRODUCT APPROVAL
FDA and comparable agencies in state and local jurisdictions and in
foreign countries impose substantial requirements upon preclinical and clinical
testing, manufacturing and marketing of pharmaceutical products. Lengthy and
detailed preclinical and clinical testing, validation of manufacturing and
quality control processes, and other costly and time-consuming procedures are
required. Satisfaction of these requirements typically takes several years and
the time needed to satisfy them may vary substantially, based on the type,
complexity and novelty of the pharmaceutical product. The effect of government
regulation may be to delay or to prevent marketing of potential products for a
considerable period of time and to impose costly procedures upon the Company's
activities. There can be no assurance that the FDA or any other regulatory
agency will grant approval for any products developed by the Company on a timely
basis, or at all. Success in preclinical or early stage clinical trials does not
assure success in later stage clinical trials. Data obtained from preclinical
and clinical activities are susceptible to varying interpretations which could
delay, limit or prevent regulatory approval. If regulatory approval of a product
is granted, such approval may impose limitations on the indicated uses for which
a product may be marketed. Further, even if regulatory approval is obtained,
later discovery of previously unknown problems with a product may result in
restrictions on the product, including withdrawal of the product from the
market. Delay in obtaining or failure to obtain regulatory approvals would have
a material adverse effect on the Company's business.
The FDA's policies may change and additional government regulations may
be promulgated which could prevent or delay regulatory approval of the Company's
potential products. Moreover, increased attention to the containment of health
care costs in the United States could result in new government regulations which
could have a material adverse effect on the Company's business. The Company is
unable to predict the likelihood of adverse governmental regulation which might
arise from future legislative or administrative action, either in the United
States or abroad. See "Risk Factors - Uncertainty of Product Pricing,
Reimbursement and Related Matters."
COMPETITION
The Company's success depends upon developing and maintaining a
competitive position in the development of products and technologies in its
areas of focus. There are many competitors of the Company in the United States
and abroad, including pharmaceutical, biotechnology and other companies with
varying resources and degrees of concentration on the ophthalmic pharmaceuticals
market. The Company's competitors may have existing products or products under
development which may be technically superior to those of the Company or which
may be less costly or more acceptable to the market. Competition from such
companies is intense and expected to increase as new products
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enter the market and new technologies become available. The Company's
competitors, many of whom have substantially greater financial, technical,
marketing and human resources than the Company, may also succeed in developing
technologies and products that are more effective, safer or more commercially
acceptable than any which have been or are being developed by the Company. The
Company's competitors may obtain cost advantages, patent protection or other
intellectual property rights that would block or limit the Company's ability to
develop its potential products, or may obtain regulatory approval for the
commercialization of their products more effectively or rapidly than the
Company. To the extent that the Company determines to manufacture and market its
products by itself, it will also compete with respect to manufacturing
efficiency and marketing capabilities, areas in which it has limited or no
experience.
MARKETING AND SALES
The Company plans to market and sell its products through arrangements
with one or more pharmaceutical companies with expertise in the ophthalmic drug
industry. There can be no assurance that the Company will be able to enter into
such arrangements on acceptable terms, if at all. If the Company is not
successful in concluding such arrangements, it may be required to establish its
own sales and marketing organization, although the Company has no experience in
sales, marketing or distribution. There can be no assurance that the Company
will be able to build such a marketing staff or sales force, or that the
Company's sales and marketing efforts will be cost-effective or successful. To
the extent the Company has entered into or enters into co-marketing,
co-promotion or other licensing arrangements for the marketing and sale of its
products, any revenues received by the Company will be dependent on the efforts
of third parties (such as CIBA Vision and B&L), and there can be no assurance
that such efforts will be successful.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on Dr. Chandrasekaran and other
principal members of its scientific and management staff, the loss of whose
services might significantly delay the achievement of planned development
objectives. Furthermore, recruiting and retaining qualified personnel will be
critical to the Company's success. There can be no assurance that the Company
will be able to continue to attract and retain such personnel necessary for the
development of the Company's business.
PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE COVERAGE
The Company's business exposes it to potential product liability risks
which are inherent in the testing, manufacturing, marketing and sale of human
therapeutic products. Product liability insurance for the pharmaceutical
industry generally is expensive. There can be no assurance that the Company's
present product liability insurance coverage is adequate. Such existing coverage
will not be adequate as the Company further develops its products, and no
assurance can be given that adequate insurance coverage against potential claims
will be available in sufficient amounts or at a reasonable cost.
UNCERTAINTY OF PRODUCT PRICING, REIMBURSEMENT AND RELATED MATTERS
The Company's business may be materially adversely affected by the
continuing efforts of governmental and third party payers to contain or reduce
the costs of health care through various means. For example, in certain foreign
markets the pricing or profitability of health care products is subject to
government control. In the United States, there have been, and the Company
expects there will continue to be, a number of federal and state proposals to
implement similar government control. While the Company cannot predict whether
any such legislative or regulatory proposals or reforms will
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be adopted, the announcement of such proposals or reforms could have a material
adverse effect on the Company's ability to raise capital or form collaborations,
and the adoption of such proposals or reforms could have a material adverse
effect on the Company.
In addition, in both the United States and elsewhere, sales of health
care products are dependent in part on the availability of reimbursement from
third party payers, such as government and private insurance plans. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and third party payers are increasingly challenging the prices charged
for medical products and services. If the Company succeeds in bringing one or
more products to the market, there can be no assurance that reimbursement from
third party payers will be available or will be sufficient to allow the Company
to sell its products on a competitive basis.
HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS
The Company's research, development and manufacturing processes involve
the controlled use of small amounts of hazardous and radioactive materials. The
Company is subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of such materials and
certain waste products. Although the Company believes that its safety procedures
for handling and disposing of such materials comply with the standards
prescribed by such laws and regulations, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of
such an accident, the Company could be held liable for any damages that result,
and any such liability could exceed the resources of the Company. Moreover, the
Company may be required to incur significant costs to comply with environmental
laws and regulations, especially to the extent that the Company determines to
manufacture its own products.
CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS
As of September 30, 1996, the Company's management and principal
stockholders in the aggregate owned beneficially approximately 24.8% of the
Company's outstanding shares of Common Stock. As a result, these stockholders,
acting together, would be able to effectively control most matters requiring
approval by the stockholders of the Company, including the election of a
majority of the directors.
VOLATILITY OF STOCK PRICE; NO DIVIDENDS
The market prices for securities of biopharmaceutical and biotechnology
companies (including the Company) have historically been highly volatile, and
the market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. Future announcements concerning the Company, its competitors or other
biopharmaceutical companies including the results of testing and clinical
trials, technological innovations or new therapeutic products, governmental
regulation, developments in patent or other proprietary rights, litigation or
public concern as to the safety of products developed by the Company or others
and general market conditions may have a significant effect on the market price
of the Common Stock. The Company has not paid any cash dividends on its Common
Stock and does not anticipate paying any dividends in the foreseeable future.
ANTI-TAKEOVER PROVISIONS
The ability of the Board of Directors of the Company to issue shares of
Preferred Stock without stockholder approval may have certain anti-takeover
effects. The Company also is subject to
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provisions of the Delaware General Corporation Law which may make certain
business combinations more difficult.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
None
b) Reports on Form 8-K
No reports on Form 8-K were filed in the quarter ended September 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INSITE VISION INCORPORATED
Dated: October 25, 1996 by: /s/ S. Kumar Chandrasekaran
-----------------------------
S. Kumar Chandrasekaran, Ph.D.
Chairman of the Board,
Chief Executive Officer
and Chief Financial Officer
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