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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 June 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 June 30, 1997: 12,951,218.
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QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 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
June 30, 1997 and December 31, 1996.................................3
Condensed Consolidated Statements of Operations
For the three and six months ended June 30, 1997 and 1996...........4
Condensed Consolidated Statements of Cash Flows
For the six months ended June 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.......................7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Shareholders ..................15
Item 6. Exhibits and Reports on Form 8-K
Exhibits ..........................................................15
Reports on Form 8-K................................................15
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSITE VISION INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 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 $ 5,539 $ 10,518
Prepaid expenses and other current assets 269 195
-------- --------
Total current assets 5,808 10,713
Property and equipment, at cost:
Laboratory and other equipment 2,812 4,416
Leasehold improvements 382 1,671
Furniture and fixtures 182 355
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3,376 6,442
Accumulated depreciation 1,400 4,335
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1,976 2,107
Other assets 41 --
-------- --------
Total assets $ 7,825 $ 12,820
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 581 $ 562
Accrued liabilities 101 247
Accrued compensation and related expense 367 300
Current portion of notes payable -- 92
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Total current liabilities 1,049 1,201
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; 12,951,218
issued and outstanding at June 30, 1997; 12,935,927 issued and
outstanding at December 31, 1996 130 129
Additional paid-in-capital 77,249 77,146
Accumulated deficit (70,603) (65,656)
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Stockholders' equity 6,776 11,619
-------- --------
Total liabilities and stockholders' equity $ 7,825 $ 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 June 30, Six Months Ended June 30,
(in thousands, except per share amounts) 1997 1996 1997 1996
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Royalty revenues $ 13 $ 12 $ 29 $ 27
Operating expenses:
Research and development 1,801 1,436 3,451 2,767
Loss on vacated facilities -- 1,412 -- 1,412
General and administrative 865 812 1,710 1,485
-------- -------- -------- --------
Total 2,666 3,660 5,161 5,664
-------- -------- -------- --------
Loss from operations (2,653) (3,648) (5,132) (5,637)
Interest and other income 82 143 192 210
Interest expense (2) (11) (7) (27)
-------- -------- -------- --------
Net loss $ (2,573) $ (3,516) $ (4,947) $ (5,454)
======== ======== ======== ========
Net loss per share $ (0.20) $ (0.29) $ (0.38) $ (0.48)
Shares used to calculate net loss per share 12,942 12,260 12,939 11,376
No 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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Six months ended June 30,
(in thousands, except per share amounts) 1997 1996
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OPERATING ACTIVITIES
Net loss $ (4,947) $ (5,454)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on vacated facilities -- 1,412
Depreciation and amortization 371 314
Changes in:
Prepaid expenses and other current assets (74) 38
Accounts payable and accrued liabilities 295 (710)
-------- --------
Net cash used in operating activities (4,355) (4,400)
INVESTING ACTIVITIES
Maturity of short-term cash investments -- 3,000
Purchases of property and equipment (536) (63)
Increase in other assets (41) --
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Net cash provided (used) by investing activities (577) 2,937
FINANCING ACTIVITIES
Principal payments on notes payable (92) (146)
Issuance of common stock, net 45 13,464
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Net cash provided (used) by financing activities (47) 13,318
Net increase (decrease) in cash and cash equivalents (4,979) 11,855
Cash and cash equivalents, beginning of period 10,518 871
-------- --------
Cash and cash equivalents, end of period $ 5,539 $ 12,726
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Supplemental disclosures:
Interest paid in cash $ 7 $ 29
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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
JUNE 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 six month periods ended June 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 quarter ended June 30, 1997 the Company wrote-off its
fully depreciated assets. This resulted in a decrease in the laboratory and
other equipment of $1,785,000, leasehold improvements of $1,289,000, furniture
and fixtures of $173,000 and accumulated depreciation of $3,247,000, with no
change in net fixed assets.
NOTE 3 - 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 is developing ophthalmic pharmaceutical products based
on its proprietary DuraSite [R] eyedrop-based drug delivery technology and on
the development of genetically based tools for the diagnosis and prognosis of
glaucoma. DuraSite technology 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 variety of potential drug candidates with a range of molecular weights
and other properties.
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 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 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;
B&L to receive, for a fee of $500,000, an exclusive worldwide
royalty-bearing license to manufacture and market PilaSite [R];
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 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 June 30, 1997, the Company's accumulated deficit was
approximately $70.6 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 $13,000 and $12,000 in the
second quarter of 1997 and 1996, respectively, and $29,000 and $27,000 during
the six months ended June 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.
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The Company has re-prioritized its earlier stage development
activities, and now focuses its research and development on (i) ISV-900 for
prognosis and diagnosis of glaucoma, (ii) ISV-208, a glaucoma treatment product
which is being developed in partnership with Bausch & Lomb Pharmaceuticals,
Inc., (iii) ISV-205 for the treatment of inflammation and the prevention of
steroid-induced glaucoma, (iv) ISV-611 for allergic conjunctivitis, and (v)
ISV-120 for prevention of pterygium recurrence. Later stage product development
is expected to be conducted through corporate partnering arrangements. However,
there can be no assurance that the Company will be able to enter into such
arrangements on acceptable terms, or at all, or that any such arrangements will
be successful.
Research and development expenses increased 25% in the second
quarter of 1997 to $1.8 million from $1.4 million in the second quarter of 1996
with a 25% increase to $3.5 million from $2.8 million during the six months
ended June 30, 1997 and 1996 respectively. This increase was due primarily to an
increase in research and development personnel, to 38 as of June 30, 1997 from
29 as of June 30, 1996 (36 as of December 31, 1996), and expenditures related to
the development of ISV-900 and ISV-208.
General and administrative expenses increased 7% during the second
quarter of 1997 to $865,000 from $812,000 during the second quarter of 1996 with
a 15% increase to $1.7 million from $1.5 million during the six months ended
June 30, 1997 and 1996, respectively. 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 of $2.6 million and $3.5 million for
the three month periods ended June 30, 1997 and 1996, respectively, resulting in
net losses of $4.9 million and $5.5 million for the first six months of 1997 and
1996, respectively. The decreases in the net losses were due primarily to the
loss on vacated facilities incurred during the second quarter of 1996. 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
InSite Vision has financed its operations primarily through private
placements of preferred stock totaling approximately $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 resulting in net proceeds of approximately $4.7 million and an
April 1996 public offering which raised net proceeds of approximately $8.1
million. At June 30, 1997, the Company had cash and cash equivalents totaling
$5.5 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 six months ended June 30, 1997 and 1996, expenditures for
operating activities and additions to capital equipment were $4.9 million and
$4.5 million, respectively. Of those amounts $536,000 and $63,000 were for
additions to laboratory and other property and equipment in 1997 and 1996,
respectively. $500,000 of the additions in 1997 related to the Company's portion
of improvements at B&L's facilities in Tampa, Florida.
During the six months ended June 30, 1997 the Company wrote-off its
fully depreciated assets. This resulted in a decrease in both property and
equipment and accumulated depreciation of $3.2 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 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.
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The Company believes that its cash and cash 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 possibly 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 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.
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.
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 June 30, 1997, the Company's
accumulated deficit was approximately $71 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
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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, MethaSite(TM), 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. Through the
Company's agreement with CIBA Vision in May 1996, the Company regained full U.S.
marketing rights to the Company's PilaSite(R) product candidate for glaucoma,
which was subsequently licensed on a worldwide basis to B&L. 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 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; B&L and InSite have
agreed to share the cost of certain leasehold improvements in connection with
the installation and operation of the equipment; (ii) B&L will receive, for a
license fee of $500,000, an exclusive worldwide royalty-bearing license to
manufacture and market PilaSite; (iii) B&L and InSite have agreed to collaborate
to develop and sell a new DuraSite based eyedrop formulation; and (iv) B&L has
agreed to make a $2 million equity investment in the Company, $1 million of
which was received by the Company in August 1996, with the remaining amount,
subject to certain conditions, due in August 1997. The Company is currently in
the process of determining whether it will file a New Drug Application ("NDA")
with the U. S. Food and Drug Administration ("FDA") for PilaSite.
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.
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
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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 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
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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."
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.
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<PAGE> 13
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 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 June 30, 1997, the Company's management and principal
stockholders in the aggregate owned beneficially approximately 17% 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.
13 of 16
<PAGE> 14
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 and to determine the price,
rights, preferences, privileges and restrictions of those shares 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.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales by existing stockholders could adversely affect
the prevailing market price of the Company's Common Stock. Except for 210,527
shares of Common Stock, the outstanding shares of the Company's Common Stock are
all freely tradable, subject to volume and other restrictions imposed by Rule
144 under the Securities Act with respect to sales by affiliates of the Company.
Sales of substantial amounts of Common Stock may have an adverse effect on the
market price of the Company's Common Stock.
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<PAGE> 15
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
On June 2, 1997, the Company held its Annual Meeting of Stockholders at which
the stockholders approved:
(1) The election of S. Kumar Chandrasekaran, Ph.D., Mitchell H. Friedlaender,
M.D., Grant H. Inman, John E. Lucas, and Anders P. Wiklund to the Board of
Directors to serve until the next annual meeting or until their successors
are elected and qualified. The following directors received the number of
votes set opposite their respective names:
For Election Withheld
S. Kumar Chandrasekaran, Ph.D. 11,002,953 377,936
Mitchell H. Friedlaender, M.D. 11,002,153 378,736
Grant H. Inman 10,997,153 383,736
John E. Lucas 10,997,053 383,836
Anders P. Wiklund 11,003,753 377,136
(2) The approval of a series of amendments to the Company's 1994 Stock Option
Plan (the "1994 Plan"), including (i) an increase in the total number of
shares of the Company's Common Stock authorized for issuance under the 1994
Plan by an additional 500,000 shares, (ii) an automatic share increase
feature pursuant to which the number of shares of Common Stock available
for issuance under the 1994 Plan will automatically increase on the first
day of January each year, beginning January 1, 1998, by 2% of the total
number of shares of Common Stock outstanding on the last day of December in
the immediately preceding year, (iii) impose a specific limitation of
850,000 shares on the maximum number of shares of the Company's Common
Stock for which any one participant may be granted stock options under the
1994 Plan and (iv) increase by an additional 33,334 shares of the Company's
Common Stock the portion of the share reserve which may be issued pursuant
to the Automatic Option Grant Program in effect under the 1994 Plan for the
non-employee directors. Such proposal received 3,774,246 votes for
approval, 1,824,154 against the approval, 124,130 votes abstained and there
were 5,658,359 Broker non-votes.
(3) The ratification of the Company's appointment of Ernst & Young LLP as the
Company's independent certified public accountants for the 1997 fiscal
year. Such proposal received 11,256,545 votes for the ratification, 109,600
against the ratification and 14,744 votes abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
10.1* 1994 Stock Option Plan (as amended and restated March 17,
1997).
10.2* Notice of Automatic Option Grant and Non-Employee Director
Option Agreement.
27 Financial Data Schedule
* Incorporated by reference to Exhibits 99.1 and 99.5, respectively, to
Registration Statement No. 333-29801.
b) Reports on Form 8-K
No Reports on Form 8-K were filed in the quarter ended June 30, 1997.
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<PAGE> 16
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: July 17, 1997 by: /s/ S. Kumar Chandrasekaran
-----------------------------
S. Kumar Chandrasekaran, Ph.D.
Chairman of the Board,
Chief Executive Officer
and Chief Financial Officer
(on behalf of the registrant and as
Chief Executive Officer and Chief
Financial Officer)
16 of 16
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