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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
Commission file number 0-22332
INSITE VISION INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 94-3015807
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
965 ATLANTIC AVENUE
ALAMEDA, CA 94501
(Address of Principal Executive Offices, including Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 865-8800
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
The number of shares of Registrant's common stock, $.01 par value,
outstanding as of September 30, 1998: 15,270,388.
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QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
September 30, 1998 and December 31, 1997..............................3
Condensed Consolidated Statements of Operations
For the three and nine months ended September 30, 1998 and 1997.......4
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 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 6. Exhibits and Reports on Form 8-K
Exhibits ............................................................16
Reports on Form 8-K..................................................16
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PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
INSITE VISION INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands, except share and per share amounts) 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,994 $ 8,660
Prepaid expenses and other current assets 81 303
----------------- ----------------
Total current assets 3,075 8,963
Property and equipment, at cost:
Laboratory and other equipment 2,010 2,731
Leasehold improvements 58 163
Furniture and fixtures 39 390
----------------- ----------------
2,107 3,284
Accumulated depreciation 1,030 1,701
----------------- ----------------
1,077 1,583
----------------- ----------------
Total assets $ 4,152 $ 10,546
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 428 $ 109
Accrued liabilities 213 428
Accrued compensation and related expense 525 445
----------------- ----------------
Total current liabilities 1,166 982
Commitments
Redeemable preferred stock, $.01 par value, 5,000,000 3,557 7,533
shares authorized; 2,902 shares issued and outstanding
at September 30, 1998; 6,700 shares issued and
outstanding at December 31, 1997; redemption value
$4,313,000 at September 30, 1998; redemption value
$10,590,000 at December 31, 1997
Common stockholders' equity:
Common stock, $.01 par value, 30,000,000 shares
Authorized; 15,270,388 issued and outstanding at
September 30, 1998; 13,279,153 issued and
Outstanding at December 31, 1997 153 133
Additional paid-in-capital 83,475 78,698
Accumulated deficit (84,199) (76,800)
----------------- ----------------
Common stockholders' equity (571) 2,031
----------------- ----------------
Total liabilities, redeemable preferred stock and common
stockholders' equity $ 4,152 $ 10,546
================= ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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INSITE VISION INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended September 30, Nine Months Ended September 30,
(in thousands, except per share amounts) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Royalty revenues $ 3 $ 11 $ 21 $ 40
Operating expenses:
Research and development 1,940 1,943 5,193 5,394
General and administrative 716 702 2,005 2,412
-------------- ------------- --------------- ----------------
Total operating expenses 2,656 2,645 7,198 7,806
-------------- ------------- --------------- ----------------
Loss from operations (2,653) (2,634) (7,177) (7,766)
Interest and other income 75 65 257 257
Interest expense - (2) - (9)
-------------- ------------- --------------- ----------------
Net loss (2,578) (2,571) (6,920) (7,518)
Non-cash preferred dividends (104) (1,073) (479) (1,073)
-------------- ------------- --------------- ----------------
Net loss applicable to common stockholders $ $ $ $
(2,682) (3,644) (7,399) (8,591)
============== ============= =============== ================
Net loss per share applicable to common
stockholders $ (0.18) $ (0.28) $ (0.51) $ (0.66)
============== ============= =============== ================
Shares used to calculate net loss per share -
basic and diluted 14,971 13,098 14,616 12,992
============== ============= =============== ================
</TABLE>
No cash dividends were declared or paid during the periods set forth above.
See accompanying notes to condensed consolidated financial statements.
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INSITE VISION INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
(in thousands) 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (6,920) $ (7,518)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 638 615
Changes in:
Prepaid expenses and other current assets 222 38
Accounts payable and accrued liabilities 223 448
----------------- ----------------
Net cash used in operating activities (5,837) (6,417)
INVESTING ACTIVITIES
Purchases of property and equipment (26) (689)
----------------- ----------------
Net cash used in investing activities (26) (689)
FINANCING ACTIVITIES
Principal payments on notes payable - (92)
Issuance of preferred stock, net - 6,534
Issuance of common stock, net 197 1,103
----------------- ----------------
Net cash provided by financing activities 197 7,545
Net (decrease) increase in cash and cash equivalents (5,666) 439
Cash and cash equivalents, beginning of period 8,660 10,518
----------------- ----------------
Cash and cash equivalents, end of period $ 2,994 $ 10,957
================= ================
Supplemental disclosures:
Non-cash preferred dividends $ 479 $ 1,073
================= ================
Non-cash conversion of redeemable preferred stock
to common stock $ 4,494 $ -
================= ================
Interest paid in cash $ - $ 9
================= ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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INSITE VISION INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine month
period ended September 30, 1998, are not necessarily indicative of the results
that may be expected for any future period.
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 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 is currently
seeking additional funding through public or private equity or debt financing,
collaborative or other arrangements, and 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,
will 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 available, the Company will be required to delay, scale
back or eliminate one or more of its research, discovery or development
programs, scale back or cease operations altogether or obtain funds through
entering into arrangements with collaborators or others on disadvantageous
terms that may, among other things, require the Company to relinquish rights to
certain of its technologies, product candidates or products.
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 nine 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 may be deemed to contain 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 relevant 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 and ophthalmic pharmaceutical products based on its proprietary
DuraSite(R) eyedrop-based drug delivery technology.
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
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.
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. During the quarter ended
September 30, 1998 the Company began a Phase II trial of ISV-205. If it proves
efficacious, ISV-205 will be the first product that 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 is focusing its research and development on (i) ISV-900
for prognosis and diagnosis of glaucoma and (ii) ISV-205 for the prevention and
treatment of glaucoma and the treatment of inflammation.
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 by third parties using the Company's licensed technology. The
Company has been unprofitable since its inception due to continuing research and
development efforts, including preclinical studies,
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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 September 30, 1998, the Company's accumulated deficit was
approximately $84.2 million. There can be no assurance that InSite Vision will
ever achieve either significant revenues or profitable operations.
RESULTS OF OPERATIONS
The Company earned royalty revenues of $3,000 and $11,000 in the
third quarter of 1998 and 1997, respectively, and $21,000 and $40,000 during the
nine months ended September 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 were $1.9 million for both the
second quarter of 1998 and the second quarter of 1997, with a 4% decrease to
$5.2 million from $5.4 million during the nine months ended September 30, 1998
and 1997, respectively. The expenditures in the first nine 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, a retinal drug
delivery device, which were not required during the first nine months of 1998.
The expenditures made in the first nine months of 1998 included costs for patent
applications filed in both the United States and internationally for
technologies related to ISV-900 and ISV-014.
General and administrative expenses increased 2% during the third
quarter of 1998 to $716,000 from $702,000 during the third quarter of 1997, but
decreased 17% to $2.0 million from $2.4 million during the nine months ended
September 30, 1998 and 1997, respectively. The decrease for the nine month
period was primarily due to lower consulting, temporary labor and insurance
costs, mainly in the area of finance and administration. During the nine months
ended September 30, 1998, full time employees replaced certain consultants and
temporary personnel resulting in lower consulting and temporary labor costs in
1998 when compared to 1997. The decrease in insurance costs is mainly due to a
decrease in premiums for the Company's director's and officer's liability
insurance.
The Company incurred net losses applicable to common stockholders of
$2.7 million and $3.6 million during the third quarter of 1998 and 1997,
respectively, resulting in net losses of $7.4 million and $8.6 million for the
first nine months of 1998 and 1997, respectively. The decrease for the third
quarter of 1998 compared to 1997 was due primarily to a decrease in non-cash
preferred dividends on the Series A Preferred Stock of $969,000. The decrease
for the nine month period ended September 30, 1998 compared to 1997 included
decreases in the non-cash preferred dividends on the Series A Preferred Stock of
$594,000, in general and administrative expenses and in research and development
expenses. The Company expects to incur substantial additional losses over the
next several years. These losses are expected to fluctuate from period to period
based primarily on the level of the Company's product development and clinical
activities.
LIQUIDITY AND CAPITAL RESOURCES
Through 1995, InSite Vision financed its operations primarily
through private placements of preferred stock, totaling approximately $32
million, and an October 1993 public offering of Common Stock, which resulted in
net proceeds of approximately $30 million. After 1995, the Company financed its
operations primarily through a January 1996 private placement of Common Stock
and warrants resulting in net proceeds of approximately $4.7 million and an
April 1996 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 (Series A preferred stock) for which net proceeds were approximately $6.5
million.
At September 30, 1998, the Company had cash and cash equivalents
totaling $3.0 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 $5.7 million in the nine
months ended September 30, 1998 related primarily to expenditures for operating
activities. In the nine months ended September 30, 1997, the increase in cash
and cash equivalents was primarily related to the private placement of Series A
preferred stock of $6.5 million and $1.0 million
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for the sale of common stock to B&L. These sources of cash were offset
primarily by operating activities of $6.4 million and additions to capital
equipment of $689,000. 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 nine months ended September 30, 1998, the Company issued
stock upon the exercise of warrants issued in the January 1996 private placement
that resulted in net cash proceeds of $162,000. The remaining proceeds from the
issuance of common stock of $35,000 for the nine months ended September 30, 1998
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 December
31, 1998. The Company expects to incur substantial additional development costs
prior to reaching profitability. As a result, InSite Vision needs to raise
substantial additional funds and the Company is currently seeking private or
public equity investments, future collaborative agreements, debt financing, and
possibly research funding to meet such needs. There can be no assurance that
such additional funds will be available for the Company to finance its
operations on acceptable terms, or at all. In the future, 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.
YEAR 2000
The Year 2000 ("Y2K") issue is the result of computer programs
using a two-digit format, as opposed to four digits, to indicate the year. Such
computer systems will be unable to interpret dates beyond the year 1999, which
could cause a failure or other computer errors, leading to disruptions in
operations.
The Company has implemented a program to assess its exposure from
Y2K related failures in its internal systems. The Company has determined that
the majority of the Company's significant operating and accounting systems are
year 2000 compliant. The systems that are not currently year 2000 compliant are
in the process of being upgraded or replaced. The anticipated cost of these
upgrades will be expensed as incurred and are anticipated to be less than
$50,000. There can be no assurance that costs will not exceed the Company's
estimate. While the Company does not have a comprehensive program for monitoring
whether its suppliers' and vendors' systems are year 2000 compliant, it does not
believe that non-compliance by any single source provider would have a material
impact on its operations. The Company does not expect its financial condition or
results of operations to be materially adversely affected by year 2000 issues.
RISK FACTORS
EARLY STAGE OF DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY
InSite is at an early stage of development. Only one product
utilizing the Company's DuraSite technology, an over-the-counter ("OTC") dry eye
treatment, is currently being marketed. Most of the potential products currently
under development by the Company will require significant additional research
and development, and preclinical and clinical testing, prior to submission to
regulatory authorities for marketing approval. The Company's potential products
are subject to the risks of failure inherent in the development of products
based on new technologies. These risks include the possibilities that the
Company's technology or any or all of its potential products will be found to be
unsafe, ineffective, or otherwise fail to receive necessary marketing clearance;
that the potential products, if safe and effective, will be difficult to
manufacture or market; that proprietary rights of third parties will preclude
the Company from marketing products; or that third parties will market superior,
equivalent or more cost-effective products. As a result, there can be no
assurance that the Company's research and development activities will result in
any commercially viable products.
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FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company will require substantial additional funds to conduct the
development and testing of its potential products and to manufacture and market
any products that may be developed. The Company's future capital requirements
will depend on numerous factors, including the progress of its research and
development programs, the progress of preclinical and clinical testing, the
ability of the Company to establish additional corporate partnerships for the
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 is currently seeking additional
funding through public or private equity or debt financing, collaborative or
other arrangements, and 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, will 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 available, the Company will be required to delay, scale
back or eliminate one or more of its research, discovery or development
programs, scale back or cease operations altogether or obtain funds through
entering into arrangements with collaborators or others on disadvantageous terms
that may, among other things, require the Company to relinquish rights to
certain of its technologies, product candidates or products.
The Company believes that its cash and cash equivalents will be
sufficient to finance its working capital and capital expenditure requirements
through December 31, 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 September 30, 1998, the Company's accumulated
deficit was approximately $84.2 million. The amount of net losses and the time
required by the Company to reach profitability are uncertain. The Company's
ability to achieve significant revenue or 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 North America to manufacture and
market AquaSite, ToPreSite and ISV-205 for certain non-glaucoma-related
ndications. 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(R); (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.
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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 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 and genetics 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
and genetic industries generally are highly uncertain, involve 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 and genetic 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.
11 of 16
<PAGE> 12
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.
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
12 of 16
<PAGE> 13
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 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 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.
13 of 16
<PAGE> 14
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 September 30, 1998, the Company's management and principal
stockholders in the aggregate owned beneficially approximately 19% 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.
14 of 16
<PAGE> 15
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 Redeemable Preferred Stock
("Preferred Shares") could adversely affect the market value of the Common
Stock, depending upon the timing of such sales, and may effect a substantial
dilution of the book value per share of Common Stock.
As of September 30, 1998, 2,902 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) 85% if the
conversion occurs on or after September 13, 1998 and prior to December 7, 1998,
or (B) 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 in cash 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.
In addition, in the event the Company's common stock is delisted
from the American Stock Exchange ("AMEX") any or all of the holders of the
Preferred Shares may cause the Company to redeem such shares. And, if the
Company fails to so redeem such shares, such holders are entitled to additional
rememdies as set forth in the Certificate. In view of the Company's current
financial condition, there can be no assurance that the Company's shares will
not be delisted from the AMEX.
15 of 16
<PAGE> 16
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
27 Financial Data Schedule
b) Reports on Form 8-K
No Reports on Form 8-K were filed in the quarter ended September 30,
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: November 13, 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
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