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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, 1997
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, 1997: 13,175,504.
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QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
September 30, 1997 and December 31, 1996...................................3
Condensed Consolidated Statements of Operations
For the three and nine months ended September 30, 1997 and 1996............4
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 1997 and 1996......................5
Notes to Condensed Consolidated Financial Statements .....................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............................8
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 FINANCIAL INFORMATION
ITEM 1. Financial Statements
INSITE VISION INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30, December 31,
(in thousands, except share and per share amounts) 1997 1996
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(Unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 10,957 $ 10,518
Prepaid expenses and other current assets 157 195
-------- --------
Total current assets 11,114 $ 10,713
Property and equipment, at cost:
Laboratory and other equipment 2,794 4,416
Leasehold improvements 389 1,671
Furniture and fixtures 175 355
-------- --------
3,358 6,442
Accumulated depreciation 1,585 4,335
-------- --------
1,773 2,107
-------- --------
Total assets $ 12,887 $ 12,820
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 503 $ 562
Accrued liabilities 96 247
Accrued compensation and related expense 458 300
Current portion of notes payable -- 92
-------- --------
Total current liabilities 1,057 1,201
Commitments
Redeemable preferred stock 7,607 --
Common stockholders' equity:
Common stock, $.01 par value, 30,000,000 shares
authorized; 13,175,504 issued and outstanding at
September 30, 1997; 12,935,927 issued and
outstanding at December 31, 1996 132 129
Additional paid-in-capital 78,338 77,146
Accumulated deficit (74,247) (65,656)
-------- --------
Common stockholders' equity 4,223 11,619
-------- --------
Total liabilities, redeemable preferred stock and
stockholders' equity $ 12,887 $ 12,820
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
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INSITE VISION INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three months ended September 30, Nine Months Ended September 30,
(in thousands, except per share amounts) 1997 1996 1997 1996
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Revenue:
License fee $ -- $ 500 $ -- $ 500
Royalty revenues 11 7 40 34
-------- -------- -------- --------
Total 11 507 40 534
Operating expenses:
Research and development 1,943 1,293 5,394 4,060
Loss on vacated facilities -- -- -- 1,412
General and administrative 702 700 2,412 2,185
-------- -------- -------- --------
Total $ 2,645 $ 1,993 $ 7,806 $ 7,657
-------- -------- -------- --------
Loss from operations (2,634) (1,486) (7,766) (7,123)
Interest and other income 65 150 257 360
Interest expense (2) (9) (9) (36)
-------- -------- -------- --------
Net loss (2,571) (1,345) (7,518) (6,799)
Non-cash preferred dividends (1,073) -- (1,073) --
-------- -------- -------- --------
Net loss applicable to common stockholders $ (3,644) $ (1,345) $ (8,591) $ (6,799)
======== ======== ======== ========
Net loss per share applicable to common
stockholders $ (0.28) $ (0.10) $ (0.66) $ (0.57)
Shares used to calculate net loss
per share 13,098 12,833 12,992 11,865
No cash dividends were declared or paid
during the periods.
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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INSITE VISION INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Nine months ended September 30,
(in thousands, except per share amounts) 1997 1996
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OPERATING ACTIVITIES
Net loss $ (7,518) $ (6,799)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on vacated facilities -- 1,412
Depreciation and amortization 615 502
Changes in:
Prepaid expenses and other current assets 38 (223)
Accounts payable and accrued liabilities 448 (734)
-------- --------
Net cash used in operating activities (6,417) (5,842)
INVESTING ACTIVITIES
Maturity of short-term cash investments -- 3,000
Purchases of property and equipment (689) (90)
-------- --------
Net cash provided (used) by investing activities (689) 2,910
FINANCING ACTIVITIES
Principal payments on notes payable (92) (222)
Issuance of preferred stock, net 6,534 --
Issuance of common stock, net 1,103 14,488
-------- --------
Net cash provided by financing activities 7,545 14,266
Net increase in cash and cash equivalents 439 11,334
Cash and cash equivalents, beginning of period 10,518 871
-------- --------
Cash and cash equivalents, end of period $ 10,957 $ 12,205
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Supplemental disclosures:
Non-cash preferred dividends $ 1,073 $ --
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Interest paid in cash $ 9 $ 38
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
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INSITE VISION INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(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, 1997, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997.
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, 1996.
NOTE 2 - FIXED ASSETS
During the nine months ended September 30, 1997 the Company wrote-off
its fully depreciated assets. This resulted in a decrease in laboratory and
other equipment of $1,804,000, in leasehold improvements of $1,289,000, in
furniture and fixtures of $180,000 and in accumulated depreciation of
$3,273,000, with no change in net fixed assets.
NOTE 3 - REDEEMABLE PREFERRED STOCK
The Company has authorized 5,000,000 shares of Preferred Stock, no
shares were outstanding as of December 31, 1996. In September 1997, the Company
received net proceeds of approximately $6.5 million from a private placement of
7,000 shares of Series A Convertible Preferred Stock with a $.01 par value
("Series A Preferred"). The number of shares of Common Stock issuable upon
conversion of the Series A Preferred will be equal to the face value of each
share of Series A Preferred divided by the lower of the fixed conversion price
of $5.04 or a variable conversion price. The variable conversion price is
determined by applying a discount, which ranges from 10% if converted prior to
June 10, 1998, to 17.5% if converted on or after December 7, 1998, to closing
bid prices of the Company's Common Stock at the time of conversion. The value of
the Series A Preferred shares to be converted will also include a 6% per annum
premium which accrues from the date of issuance until the date of conversion.
Three years after issuance, any remaining unconverted preferred shares will
automatically be converted into Common Stock. As of September 30, 1997, no
shares of Common Stock have been issued as a result of conversion of Series A
Preferred. The holders of the Series A Preferred have no voting rights, except
as required by applicable Delaware law. The Company also issued a warrant for 70
shares of Series A Preferred which is subject to the same conversion terms and
premium.
For the nine months ended September 30, 1997, in accordance with SEC
Rules and Regulations, the Company reported non-cash preferred dividends of $1.1
million related to the discount at which Series A Preferred could be converted
to Common Stock including the 6% per annum premium on the Series A Preferred
stock, and the net loss per share applicable to common stockholders.
In certain circumstances the Series A Preferred Stockholders have the
right to redeem their outstanding shares. The redemption amount is equal to the
number of shares of Common Stock issuable upon conversion multiplied by the
closing bid price of the Company's Common Stock, $8.0 million as of September
30, 1997.
NOTE 4 - STOCKHOLDERS' EQUITY
In August 1997, the Company received $1.0 million from Bausch & Lomb
Incorporated (B&L) for the purchase of 205,128 shares of Common Stock in
connection with a July 1996 agreement between the Company and B&L. B&L made an
initial $1.0 million equity investment in the Company in August 1996.
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NOTE 5 - LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. The Company
does not anticipate that this change will impact its calculated loss per share
as the Company currently excludes stock options and warrants from per share
computations because their effect is antidilutive.
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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, 1996.
Except for the historical information contained herein, the discussion
in this Quarterly Report contains certain forward-looking statements, such as
statements of the Company's plans, objectives, expectations and intentions, that
involve risks and uncertainties. The cautionary statements made in this
Quarterly Report, including those set forth below under the heading "Risk
Factors," 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 Incorporated ("InSite," "InSite Vision" or the "Company")
is developing genetically-based tools for the diagnosis and prognosis of
glaucoma, ophthalmic pharmaceutical products based on its proprietary
DuraSite(R) eyedrop-based drug delivery technology, and therapeutic platforms
for the delivery of drugs to the retina.
The Company is collaborating with academic researchers to develop new
diagnostic and prognostic tools for primary congenital, juvenile and primary
open angle glaucomas. Primary congenital glaucoma is an inherited eye disorder
and is one of the leading causes of blindness and visual impairment affecting
infants. A gene-based diagnostic kit may allow early detection of the disease
before considerable irreversible damage has occurred and may improve the ability
to treat it successfully. Primary open angle glaucoma usually affects people
over the age of forty. Current glaucoma tests are generally unable to detect the
disease before substantial damage to the optic nerve has occurred. Gene-based
tests may make it possible to identify patients at risk and initiate treatment
before permanent optic nerve damage and vision loss occurs.
The DuraSite delivery system is a patented eyedrop formulation
comprising a cross-linked carboxyl-containing polymer which incorporates the
drug to be delivered to the eye. The formulation is instilled in the cul-de-sac
of the eye as a small volume eyedrop. DuraSite can be customized to deliver a
wide variety of potential drug candidates with a broad range of molecular
weights and other properties. The DuraSite formulation remains in the eye for up
to several hours during which time the active drug ingredient is gradually
released. DuraSite extends the residence time of the drug due to a combination
of mucoadhesion, surface tension and viscosity. Eyedrops delivered in the
DuraSite system contrast to conventional eyedrops which typically only last in
the eye a few minutes, thus requiring delivery of a highly concentrated burst of
drug and frequent administration to sustain therapeutic levels. The increased
residence time for DuraSite is designed to permit lower concentrations of a drug
to be administered over a longer period of time, thereby minimizing the
inconvenience of frequent dosing and reducing the potential related adverse side
effects.
The Company has also licensed a patented device for the controlled,
non-surgical delivery of ophthalmic drugs to the retina and other tissues in the
posterior (rear) chamber of the eye. The device has a needle with an adjustable
collar that limits its depth of penetration and is attached to a curved neck to
facilitate use. It is inserted above the eyeball and beneath the upper eyelid by
the ophthalmologist and reaches around the globe to the back of the eye. A
metering pump regulates the amount of drug to be delivered. The combination of
this device technology with polymer based drug platforms may permit long term
delivery of therapeutic agents to treat retinal disease.
The Company is focusing its research and development on (i) ISV-205 for
the treatment of inflammation and the prevention and treatment of glaucoma, (ii)
ISV-900 for prognosis and diagnosis of glaucoma, (iii) ISV-208, a glaucoma
treatment product which is being developed in partnership with B&L, (iv) ISV-611
for allergic conjunctivitis, (v) ISV-120 for prevention of pterygium recurrence,
and (vi) retinal drug delivery. The Company does not expect in the foreseeable
future to file a New Drug Application ("NDA") for MethaSite(TM) or PilaSite(R)
with the U.S. Food and Drug Administration, ("FDA").
Other than a small amount of royalties from the sale of products using
the Company's technology, to date InSite Vision has not received any revenues
from the sale of products. 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
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Company has financed its research and development activities and operations
primarily through private and public offerings of its equity securities and, to
a lesser extent, from collaborative agreements.
During July 1996, the Company entered into agreements with Bausch & Lomb
Incorporated (B&L) which provide, among other things, 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;
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, which was received
in August 1997 and 1996.
As a result of these agreements, the Company elected to vacate its
co-tenancy of a clean room at another supplier'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, 1997, the Company's accumulated deficit was
approximately $74 million. There can be no assurance that InSite Vision will
achieve either significant revenues from product sales or profitable operations.
RESULTS OF OPERATIONS
The Company earned royalty revenues of $11,000 and $7,000 in the third
quarter of 1997 and 1996, respectively, and $40,000 and $34,000 during the nine
months ended September 30, 1997 and 1996, respectively, from sales of
AquaSite(R) by CIBA Vision. To date, the Company has not relied on royalty
revenues to fund its activities. The Company does not expect to receive
significant product revenue or royalties for several years, if at all. The
third quarter 1996 results included a $500,000 license fee from B&L for an
exclusive worldwide royalty-bearing license to manufacture and market PilaSite.
Research and development expenses increased 50% in the third quarter of
1997 to $1.9 million from $1.3 million in the third quarter of 1996 with a 33%
increase to $5.4 million from $4.1 million during the nine months ended
September 30, 1997 and 1996, respectively. These increases were due primarily to
expenditures related to the development of ISV-208, ISV-900, acquisition of the
retinal drug delivery device, and an increase in research and development
personnel, to 37 as of September 30, 1997 from 34 as of September 30, 1996 (36
as of December 31, 1996).
General and administrative expenses increased $2,000 during the third
quarter of 1997 to $702,000 from $700,000 during the third quarter of 1996 with
a 10% increase to $2.4 million for the nine months ended September 30, 1997 from
$2.2 million in the comparable 1996 period. This increase was primarily due to
the cost of replacing outside contractors with employees in the area of
accounting and finance.
The Company incurred net losses applicable to common stockholders of
$3.6 million and $1.3 million for the three month periods ended September 30,
1997 and 1996, respectively, resulting in net losses of $8.6 million and $6.8
million for the first nine months of 1997 and 1996, respectively. These
increases in net losses during 1997 were due primarily to the non-cash preferred
dividends on the Series A Preferred Stock of $1.1 million and the increase in
research and development expenses. The Company expects to incur substantial
additional losses over the next several years. These losses are expected to
fluctuate from period to period based primarily on the level of the Company's
product development and clinical activities.
LIQUIDITY AND CAPITAL RESOURCES
Through 1995, InSite Vision financed its operations primarily through
private placements of preferred stock totaling approximately $32 million and an
October 1993 public offering of Common Stock, which resulted in net proceeds of
approximately $30 million. After 1995, the Company financed its operations
primarily through a January 1996 private placement of Common Stock and warrants
resulting in net proceeds of approximately $4.7 million and an April 1996
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public offering which raised net proceeds of approximately $8.1 million. In
accordance with a July 1996 agreement between the Company and B&L, the Company
received a total of $2.0 million from the sale of Common Stock in August 1996
and 1997. In September 1997, the Company completed a $7.0 million private
placement of 7,000 shares of convertible Series A Preferred Stock for which net
proceeds were approximately $6.5 million.
At September 30, 1997, the Company had cash and cash equivalents
totaling $11 million compared to $10.5 million as of December 31, 1996. 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, 1997 and 1996, expenditures for
operating activities and additions to capital equipment were $7.1 million and
$5.9 million, respectively. Of those amounts, $689,000 and $90,000 were for
additions to laboratory and other property and equipment in 1997 and 1996,
respectively. $645,000 of the additional expenditures in 1997 related to the
Company's portion of improvements at B&L's facilities in Tampa, Florida. During
the nine months ended September 30, 1997, the Company wrote-off its fully
depreciated assets. This resulted in a decrease in both property and equipment
and accumulated depreciation of $3.3 million, with no change in net fixed
assets.
The Company's future capital expenditures and requirements will depend
on numerous factors, including the progress of its research and development
programs and 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 businesses,
products and technologies, the completion of commercialization activities and
arrangements, and the purchase of additional property and equipment.
The Company anticipates no material capital expenditures to be incurred
for environmental compliance in fiscal year 1997. 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 cash equivalents will be
sufficient to meet its operating expenses and cash requirements until at least
October 1998. 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 private or public equity
investments, future collaborative agreements, and possibly research funding to
meet such needs. Even if the Company does not have an immediate need for
additional cash, it may seek access to the private or public equity markets if
and when it believes conditions are favorable. There is no assurance that such
additional funds will be available for the Company to finance its operations on
acceptable terms, or at all.
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.
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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. 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. Any failure by
the Company to obtain additional funding on acceptable terms, or at all, would
have a material adverse effect on the Company's business, financial condition
and results of operations. 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.
The Company believes that its existing cash and cash equivalents will be
sufficient to finance its working capital and capital expenditure requirements
through the third quarter of 1998.
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. As of September 30, 1997, the
Company's accumulated deficit was approximately $74 million. 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
profitability.
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 U.S. to manufacture and market
AquaSite, ToPreSite(TM) 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. CIBA Vision has assumed all
subsequent product development, clinical and regulatory responsibility for
ToPreSite. CIBA Vision has no obligation to fund the further development of
ISV-205.
In July 1996, the Company entered into agreements with B&L pursuant to
which: (i) B&L has agreed to manufacture InSite product candidates at B&L's
facility in Tampa, Florida using equipment owned by InSite; (ii) B&L and InSite
have agreed to collaborate to develop and sell a new DuraSite based eyedrop
formulation; and (iii) B&L agreed to make a $2 million equity investment in the
Company.
There can be no assurance that, even if regulatory approvals are
obtained, the Company's 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.
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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, licensers, 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 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 conducting clinical testing of lexipafant for
non-ophthalmic indications, but it has discontinued clinical testing of
batimastat and informed the Company that it will no longer manufacture the
product. The Company may have no source of ongoing raw materials for such
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
compensating or entering into agreements with 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 diseases 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 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 and biotechnology 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 or, even if successful, will not result in
substantial cost to the Company.
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.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
The Company may, at any time in the future, pursue acquisitions of
complementary companies, product lines, technologies or businesses. In the event
that such an acquisition does occur, there can be no assurance as to the effect
thereof on the Company's business, financial condition and operating results.
Future acquisitions by the Company may result in substantial dilution to the
Company's stockholders, the incurrance by the Company of additional debt and
amortization expenses related to goodwill, research and development and other
intangible assets, which could materially
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<PAGE> 13
adversely affect the Company's business, financial condition and results of
operations. In addition, acquisitions involve numerous risks, including
difficulties in the assimilation of the employees, operations, technologies and
products of the acquired companies, the diversion of management's attention from
other business concerns, risks of entering markets in which the Company has no
or limited direct experience and the potential loss of key employees of the
acquired company.
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. 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.
Contract manufacturers must adhere to Good Manufacturing Practices
("GMP") regulations strictly enforced by the FDA on an ongoing basis through its
facilities inspection program. Contract manufacturing facilities must pass a
pre-approval plant inspection before the FDA will approve an NDA. Certain
material manufacturing changes that occur after approval are also subject to FDA
review and clearance or approval. 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, and 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 U.S. 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 U.S. or abroad.
See "Risk Factors - Uncertainty of Product Pricing, Reimbursement and Related
Matters."
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<PAGE> 14
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 U.S. 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 enter the market
and new technologies become available. The Company's competitors, many of which
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, less expensive or otherwise 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. Competition for skilled individuals in the
biotechnology business is highly intense and there can be no assurance that the
Company will be able to continue to attract and retain personnel necessary for
the development of the Company's business. The loss of key personnel or the
failure to recruit additional personnel or to develop needed expertise could
have a material adverse effect on the Company's business, financial condition
and results of operations.
PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE COVERAGE
The Company's business exposes it to potential product liability risks
which are inherent in the development, 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 U.S., 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 be adopted, the announcement
of such proposals or reforms could have a material adverse effect on the
Company's ability to
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<PAGE> 15
raise capital or form collaborations, and the adoption of such proposals or
reforms could have a material adverse effect on the Company's business,
financial condition or results of operations.
In addition, in the U.S. 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 or profitable basis.
HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS
The Company's research, development and manufacturing processes involve
the controlled use of small amounts of radioactive and other hazardous
materials. The Company is subject to federal, state and local laws, regulations
and policies 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
manufactures its own products.
CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS
As of September 30, 1997, the Company's management and principal
stockholders in the aggregate owned beneficially approximately 23% 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 and the approval or disapproval of business
combinations.
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 EFFECT OF DELAWARE LAW AND CERTAIN CHARTER AND BYLAWS PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and
Bylaws may have the effect of making it more difficult for a third party to
acquire, or discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Company's Common Stock. The
Company's Board of Directors has the authority to issue up to 5,000,000 shares
of Preferred Stock 7,070 of which have been designated as Series A Convertible
Preferred Stock, and to determine the price, rights, preferences, privileges and
restrictions of the remaining unissued shares of Preferred Stock without any
further vote or action by the stockholders. The rights of the holders of Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. Certain provisions of Delaware law
applicable to the Company could also delay or make more difficult a merger,
tender offer or proxy contest involving the Company, including Section 203 of
the Delaware General Corporation Law, which prohibits a Delaware corporation
from engaging in any business combination with any interested stockholder for a
period of three years unless certain conditions are met.
15 of 16
<PAGE> 16
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
27 Financial Data Schedule
b) Reports on Form 8-K
No Reports on Form 8-K were filed in the quarter ended September 30,
1997.
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: November 7, 1997 by: /s/ S. Kumar Chandrasekaran
-----------------------------------------
S. Kumar Chandrasekaran, Ph.D.
Chairman of the Board
and Chief Executive Officer
(on behalf of the registrant and as Chief
Executive Officer)
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