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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, 1998
Commission file number 0-22332
INSITE VISION INCORPORATED
(Exact name of registrant as specified in its charter)
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DELAWARE 94-3015807
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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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, 1998: 14,473,579.
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QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998
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, 1998 and December 31, 1997........................................3
Condensed Consolidated Statements of Operations
For the three and six months ended June 30, 1998 and 1997..................4
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 1998 and 1997............................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 Stockholders .........................15
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
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INSITE VISION INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
(in thousands, except share and per share amounts) 1998 1997
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(Unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 4,890 $ 8,660
Prepaid expenses and other current assets 156 303
-------- --------
Total current assets 5,046 8,963
Property and equipment, at cost:
Laboratory and other equipment 2,505 2,731
Leasehold improvements 323 163
Furniture and fixtures 68 390
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2,896 3,284
Accumulated depreciation 1,673 1,701
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1,223 1,583
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Total assets $ 6,269 $ 10,546
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 72 $ 109
Accrued liabilities 240 428
Accrued compensation and related expense 430 445
-------- --------
Total current liabilities 742 982
Commitments
Redeemable preferred stock, $.01 par value, 5,319 7,533
5,000,000 shares authorized; 4,357 issued and
outstanding at June 30, 1998; 6,700 issued and
outstanding at December 31, 1997; redemption value
$7,244,000 at June 30, 1998; redemption value $10,590,000
at December 31, 1997
Common stockholders' equity:
Common stock, $.01 par value, 30,000,000
shares authorized; 14,473,579 issued and
outstanding at June 30, 1998; 13,279,153 issued
and outstanding at December 31, 1997 145 133
Additional paid-in-capital 81,580 78,698
Accumulated deficit (81,517) (76,800)
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Common stockholders' equity 208 2,031
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Total liabilities, redeemable preferred stock and
common stockholders' equity $ 6,269 $ 10,546
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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) 1998 1997 1998 1997
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Royalty revenues $ 3 $ 13 $ 18 $ 29
Operating expenses:
Research and development 1,710 1,801 3,253 3,451
General and administrative 718 865 1,289 1,710
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Total operating expenses 2,428 2,666 4,542 5,161
-------- -------- -------- --------
Loss from operations (2,425) (2,653) (4,524) (5,132)
Interest and other income 83 82 182 192
Interest expense -- (2) -- (7)
-------- -------- -------- --------
Net loss (2,342) (2,573) (4,342) (4,947)
Non-cash preferred dividends (185) -- (375) --
-------- -------- -------- --------
Net loss applicable to common
stockholders $ (2,527) $ (2,573) $ (4,717) $ (4,947)
======== ======== ======== ========
Net loss per share applicable to
common stockholders $ (0.17) $ (0.20) $ (0.33) $ (0.38)
======== ======== ======== ========
Shares used to calculate net loss
per share - basic and diluted 14,465 12,942 14,438 12,939
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No cash dividends were declared or paid during the periods
See accompanying notes to condensed consolidated financial statements.
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INSITE VISION INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Six months ended June 30,
(in thousands) 1998 1997
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OPERATING ACTIVITIES
Net loss $ (4,342) $ (4,947)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 446 371
Changes in:
Prepaid expenses and other current assets 147 (74)
Accounts payable and accrued liabilities (201) 295
-------- --------
Net cash used in operating activities (3,950) (4,355)
INVESTING ACTIVITIES
Purchases of property and equipment (17) (536)
Increase in other assets -- (41)
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Net cash used in investing activities (17) (577)
FINANCING ACTIVITIES
Principal payments on notes payable -- (92)
Issuance of common stock, net 197 45
-------- --------
Net cash provided by (used in) financing activities 197 (47)
Net decrease in cash and cash equivalents (3,770) (4,979)
Cash and cash equivalents, beginning of period 8,660 10,518
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Cash and cash equivalents, end of period $ 4,890 $ 5,539
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Supplemental disclosures:
Non-cash preferred dividends $ 375 $ --
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Non-cash conversion of redeemable preferred
stock to common stock $ 2,628 $ --
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Interest paid in cash $ -- $ 7
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See accompanying notes to condensed consolidated financial statements.
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INSITE VISION INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(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 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 adjustments, considered necessary
for a fair presentation have been included. Operating results for the six month
period ended June 30, 1998, are not necessarily indicative of the results that
may be expected for any future period.
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, 1997.
NOTE 2 - COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Financial Accounting
Standards Board Statement 130, "Reporting Comprehensive Income." Statement 130
established new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net loss or stockholders' equity. Statement 130 requires unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments, which prior to adoption were reported
separately in stockholder's equity, to be included in other comprehensive
income. During the first six months of 1998 and 1997, total comprehensive income
was equal to total net loss as reported.
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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, 1997.
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 open-angle, primary congenital,
exfoliative and juvenile glaucomas. Gene-based diagnostic kits may allow early
detection of each disease before considerable irreversible damage has occurred
and may improve the ability to treat them successfully. Primary open-angle
glaucoma usually affects people over the age of forty. Primary congenital
glaucoma is an inherited eye disorder and is one of the leading causes of
blindness and visual impairment in infants. Current glaucoma tests are generally
unable to detect the diseases before substantial damage to the optic nerve has
occurred.
The Company has international and national collaborations with many
academic institutions for the identification and clinical evaluation of its
genetic markers for glaucoma. To date, the Company's academic collaborators at
the University of California, San Francisco ("UCSF") and the University of
Connecticut Health Center ("UCHC") have identified genes associated with primary
open-angle glaucoma (the most prevalent form of the disease in adults), juvenile
glaucoma and primary congenital glaucoma. A prototype diagnostic/prognostic
technology, ISV-900, which is capable of identifying multiple glaucoma genetic
markers from a single sample, has been developed and the Company is discussing
its commercialization with several potential partners. The Company has engaged
the services of PaineWebber to help it assess the strategic opportunities that
have developed from the commercialization discussions.
Subsequent to the quarter ended June 30, 1998, the Company announced
that its collaborators had identified two additional genes associated with
primary open-angle glaucoma. Additionally, the Company announced patent claim
allowances related to the composition of matter claims for antibodies to the
glaucoma-associated TIGR protein, and allowances for claims covering methods for
the diagnosis of primary congenital glaucoma using the CYP1B1 gene. The Company
is the exclusive worldwide licensee for both of these patents.
Another result of the glaucoma genetics research has been the
development of the ISV-205 product candidate. This DuraSite formulation contains
a drug that has been shown in cell and organ culture systems to inhibit the
production of a protein that appears to cause glaucoma. If it proves
efficacious, ISV-205 will be the first product which treats the cause of
glaucoma instead of its symptoms.
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. 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's ISV-014 device is designed to deliver ophthalmic drugs
to the
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retina and other tissues in the posterior (rear) chamber of the eye. Ophthalmic
researchers believe direct sustained delivery of particular drugs to the retina
could stop the progression of certain retinal diseases including macular
degeneration, cataract and diabetic retinopathy. The combination of the
Company's ISV-014 device technology with polymer-based drug platforms may permit
long term delivery of therapeutic agents to treat these retinal diseases.
The Company is principally focusing its research and development on
(i) ISV-900 for prognosis and diagnosis of glaucoma, (ii) ISV-205 for the
prevention and treatment of glaucoma and the treatment of inflammation, (iii)
retinal drug delivery, and (iv) ISV-208, a glaucoma treatment product which is
being developed in partnership with Bausch & Lomb Incorporated ("B&L").
To date, InSite Vision has not received any revenues from the sale of
products, although it has received a small amount of royalties from the sale of
products using the Company's licensed technology. The Company has been
unprofitable since its inception due to continuing research and development
efforts, including preclinical studies, clinical trials and manufacturing of its
product candidates. The Company has financed its research and development
activities and operations primarily through private and public placement of its
equity securities and, to a lesser extent, from collaborative agreements.
As of June 30, 1998, the Company's accumulated deficit was
approximately $81.5 million. There can be no assurance that InSite Vision will
ever achieve either significant revenues from product sales or profitable
operations.
RESULTS OF OPERATIONS
The Company earned royalty revenues of $3,000 and $13,000 in the
second quarter of 1998 and 1997, respectively, and $18,000 and $29,000 during
the six months ended June 30, 1998 and 1997, respectively, from sales of
AquaSite(R) by CIBA Vision. To date, the Company has not relied on royalty
revenues to fund its activities.
Research and development expenses decreased 5% in the second quarter
of 1998 to $1.7 million from $1.8 million in the second quarter of 1997, with a
6% decrease to $3.3 million from $3.5 million during the six months ended June
30, 1998 and 1997, respectively. The expenditures in the first six months of
1997 included one time payments for options to license technologies related to
ISV-900, the Company's glaucoma genetics program, and ISV-014, the retinal drug
delivery device, which were not required during the first six months of 1998.
General and administrative expenses decreased 17% during the second
quarter of 1998 to $718,000 from $865,000 during the second quarter of 1997 with
a 25% decrease to $1.3 million from $1.7 million during the six months ended
June 30, 1998 and 1997, respectively . These decreases were primarily due to
lower consulting, temporary labor and insurance costs, mainly in the area of
finance and administration. During the six months ended June 30, 1998, full time
employees replaced certain consultants and temporary personnel. This resulted in
lower consulting and temporary labor costs in both the quarter and six month
periods ended June 30, 1998 when compared to 1997. Lower insurance costs are
mainly due to a decrease in the cost of director's and officer's liability
insurance.
The Company incurred net losses applicable to common stockholders of
$2.5 million and $2.6 million during the second quarter of 1998 and 1997,
respectively, resulting in net losses of $4.7 million and $4.9 million for the
first six months of 1998 and 1997, respectively. These decreases were due
primarily to the decreases in research and development expenses and in general
and administrative expenses, partially offset by non-cash preferred dividends on
the Series A Preferred Stock of $185,000 and $375,000 for the quarter and six
month periods ended June 30, 1998, respectively. 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 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 Series A Redeemable Convertible Preferred Stock for which net proceeds
were approximately $6.5 million.
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At June 30, 1998, the Company had cash and cash equivalents totaling
$4.9 million compared to $8.7 million as of December 31, 1997. 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.
The use of cash and cash equivalents of $3.8 million and $5.0 million
in the six months ended June 30, 1998 and 1997, respectively, related primarily
to expenditures for operating activities and, in 1997, additions to capital
equipment. Of those amounts, $17,000 and $536,000 were for additions to
laboratory and other property and equipment in 1998 and 1997, respectively.
Substantially all of the 1997 additions to capital equipment related to the
Company's portion of improvements at B&L's facilities in Tampa, Florida.
During the quarter ended June 30, 1998, the Company issued stock upon
the exercise of warrants issued in the January 1996 private placement which
resulted in net cash proceeds of $162,000. The remaining proceeds from the
issuance of common stock of $35,000 and $45,000 for the six months ended June
30, 1998 and 1997, respectively, resulted from the exercise of stock options and
stock issued under the Company's employee stock purchase plan.
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 ability of the Company to establish
additional collaborative arrangements, 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, 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 1998. 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 through 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, debt financing, 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.
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
ability of the Company to establish additional corporate partnerships for the
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development, manufacture and marketing of its potential products, 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, and the purchase
of additional capital equipment. The Company intends to seek additional funding
through public or private equity or debt financings at any time it deems market
conditions to be favorable, 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 cash and cash equivalents will be
sufficient to finance its working capital and capital expenditure requirements
through 1998.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE FINANCIAL RESULTS
The Company has incurred significant operating losses since its
inception in 1986 and, as of June 30, 1998, the Company's accumulated deficit
was approximately $81.5 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
The Company has elected not to establish a dedicated sales and marketing
organization. Therefore, 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 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 assumed all subsequent product
development, clinical and regulatory responsibility for ToPreSite, but 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; B&L and InSite
agreed to share the cost of certain leasehold improvements in connection with
the installation and operation of the equipment; (ii) B&L received, for a
license fee of $500,000, an exclusive worldwide royalty-bearing license to
manufacture and market PilaSite; (iii) B&L and InSite agreed to collaborate to
develop and sell a new DuraSite based eyedrop formulation; and (iv) B&L made a
$2.0 million equity investment in the Company. In connection with this equity
investment, the Company issued an aggregate of 415,655 shares of Common Stock to
B&L. The Company has determined it will not proceed with PilaSite at this time.
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, licensors, licensees and
others, and is dependent on the diligent efforts and subsequent success of these
outside parties in performing their responsibilities. For example, the Company
is dependent upon British Biotechnology Pharmaceuticals, Inc. (British Biotech)
for the supply of
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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 ISV-120 and, in the future, may also lose its source
of supply of lexipafant for ISV-611, 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
companies, product lines, technologies or businesses that its management
believes are complementary or otherwise beneficial. 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 incurrence 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.
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<PAGE> 12
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 required to expend significant amounts of capital to install a manufacturing
capability, will be subject to the regulatory requirements described above, will
be subject 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 that 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. Moreover, the FDA has recently reduced previous restrictions on the
marketing, sale and prescription of products for indications other than those
specifically approved by the FDA. Accordingly, even if the Company receives FDA
approval of a product for certain indicated uses, the Company's competitors,
including its collaborators, could market products for such indications even if
such products have not been specifically approved for such indications. 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 that could
have a material adverse effect on the Company's business. The Company is unable
to predict the likelihood of adverse governmental regulation that 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
12 of 16
<PAGE> 13
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 companies with expertise in the ophthalmic drug or diagnostic
industries. 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 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
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<PAGE> 14
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, 1998, the Company's management and principal stockholders
in the aggregate owned beneficially approximately 20% of the Company's
outstanding shares of Common Stock. As a result, these stockholders, acting
together, may 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 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. In addition,
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. Furthermore, the Company's Board of Directors has the authority
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
Shares and of 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.
CONVERTIBLE SECURITIES; DILUTION; REDEMPTION
Sales of a substantial number of shares of Common Stock issuable upon
conversion of the Series A Convertible Preferred Stock ("Preferred Shares")
could adversely affect the market value of the Common Stock, depending upon the
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<PAGE> 15
timing of such sales, and may effect a substantial dilution of the book value
per share of Common Stock.
As of June 30, 1998, 4,357 Preferred Shares were issued and
outstanding. The actual number of shares of Common Stock issuable upon
conversion of the outstanding Preferred Shares will equal (i) the aggregate
stated value of the Preferred Shares then being converted ($1,000 per share)
plus a premium in the amount of 6% per annum accruing from September 12, 1997
through the date of conversion, divided by (ii) a conversion price equal to the
lower of $2.127 or the product of the average of the lowest closing bid prices
for the Common Stock for any five (5) trading days during the twenty-two (22)
consecutive trading day period immediately preceding the date of conversion
(subject to adjustment in accordance with the terms of the Certificate, as
defined below) multiplied by a conversion percentage equal to (A) 90% if the
conversion occurs prior to June 10, 1998, (B) 87.5% if the conversion occurs on
or after June 10, 1998 and prior to September 13, 1998, (C) 85% if the
conversion occurs on or after September 13, 1998 and prior to December 7, 1998,
or (D) 82.5% if the conversion occurs on or after December 7, 1998. For a
complete description of the relative rights, preferences, privileges, powers and
restrictions of the Preferred Shares, see the Certificate of Designations,
Preferences and Rights (the "Certificate") attached as Exhibit 4.1 to the
Registration Statement on Form S-3 filed with the Commission on September 29,
1997. Depending on market conditions at the time of conversion, the number of
shares of Common Stock issuable could increase significantly in the event of a
decrease in the trading price of the Common Stock. Purchasers of Common Stock
could therefore experience substantial dilution upon conversion of the Preferred
Shares. In addition, in the event that any holder of Preferred Shares is unable
to convert any such securities into Common Stock, any or all such holders may
cause the Company to redeem any such Preferred Shares that cannot be so
converted. In the event that the Company fails to so redeem such shares, the
holders of the Preferred Shares are entitled to additional remedies as set forth
in the Certificate.
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
On June 8, 1998, 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., John L. Mattana, 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:
<TABLE>
<CAPTION>
For Election Withheld
<S> <C> <C>
S. Kumar Chandrasekaran, Ph.D. 12,109,373 1,298,645
Mitchell H. Friedlaender, M.D. 12,105,723 1,302,295
John L. Mattana 12,081,839 1,326,179
John E. Lucas 12,096,861 1,311,157
Anders P. Wiklund 12,096,423 1,311,595
</TABLE>
(2) The approval of a series of amendments to the Company's 1994 Stock Option
Plan (the "1994 Plan"), including (i) change the date on which the annual
option grants are to be made to continuing non-employee Board members from
the date of each Annual Stockholders Meeting to the date of the first Board
meeting held in December each year, beginning with the option grants made on
December 15, 1997, (ii) increase the number of shares of Common Stock for
which option grants are to be made annually to the continuing non-employee
Board members from 5,000 shares to 10,000 shares, effective with the
December 15, 1997 option grants, (iii) except for the December 15, 1997
option grants, impose the requirement that a non-employee Board member will
be eligible to receive an annual 10,000-share option grant only if that
individual did not receive his or her initial 10,000-share option grant
within the preceding six (6) months and (iv) eliminate the provisions of the
1994 Plan which impose a 150,000-share limitation on the maximum number of
shares issuable under the Automatic Option Grant Program. Such proposal
received 10,935,921 votes for approval, 2,366,545 against the approval,
105,552 votes abstained.
(3) The ratification and approval of the Company's issuance in September 1997 of
7,000 shares of Series A Convertible Preferred Stock, par value $0.01 per
share ("Series A Stock"), to a group of five investors at a per share price
of $1,000 and the issuance of a warrant to purchase 70 shares of Series A
Stock at an exercise price of $1,000 per share to the Placement Agent for
such transaction. Such proposal received 6,458,910 votes for approval,
670,283 against approval, 123,060 votes abstained and there were 6,155,765
broker non-votes.
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<PAGE> 16
(4) The ratification of the Company's appointment of Ernst & Young LLP as the
Company's independent certified public accountants for the 1998 fiscal year.
Such proposal received 13,258,113 votes for ratification, 106,659 against
ratification and 43,246 votes abstained.
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 June 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INSITE VISION INCORPORATED
Dated: August 14, 1998 by: /s/ S. Kumar Chandrasekaran
----------------------------------
S. Kumar Chandrasekaran, Ph.D.
Chairman of the Board
and Chief Executive Officer
(on behalf of the registrant)
by: /s/ Michael D. Baer
----------------------------------
Michael D. Baer
Chief Financial Officer
(as principal financial officer of
the registrant)
16 of 16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,890
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,046
<PP&E> 2,896
<DEPRECIATION> 1,673
<TOTAL-ASSETS> 6,269
<CURRENT-LIABILITIES> 742
<BONDS> 0
0
5,319
<COMMON> 145
<OTHER-SE> 63
<TOTAL-LIABILITY-AND-EQUITY> 6,269
<SALES> 0
<TOTAL-REVENUES> 18
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,542
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,342)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,342)
<DISCONTINUED> 0
<EXTRAORDINARY> (375)
<CHANGES> 0
<NET-INCOME> (4,717)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> (0.33)
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