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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, 1999
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, 1999: 20,275,870.
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QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
September 30, 1999 and December 31, 1998...................................3
Condensed Consolidated Statements of Operations
For the three and nine months ended September 30, 1999 and 1998............4
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 1999 and 1998......................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
</TABLE>
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PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
INSITE VISION INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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<CAPTION>
September 30, December 31,
(in thousands, except share and per share amounts) 1999 1998
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ASSETS
Current assets:
Cash and cash equivalents $ 3,001 $ 1,037
Prepaid expenses and other current assets 409 190
-------- --------
Total current assets 3,410 1,227
Property and equipment, at cost:
Laboratory and other equipment 220 1,062
Leasehold improvements 10 49
Furniture and fixtures -- 28
-------- --------
230 1,139
Accumulated depreciation 101 280
-------- --------
129 859
-------- --------
Total assets $ 3,539 $ 2,086
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LIABILITIES, REDEEMABLE PREFERRED STOCK AND COMMON
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 85 $ 86
Accrued liabilities 677 341
Accrued compensation and related expense 539 256
-------- --------
Total current liabilities 1,301 683
Commitments
Redeemable preferred stock, $.01 par value, 5,000,000 29 1,511
shares authorized; no shares issued and outstanding
at September 30, 1999; 1,170 shares issued and
outstanding at December 31, 1998; redemption value
$1,986,000 at December 31, 1998
Common stockholders' equity (deficit):
Common stock, $.01 par value, 30,000,000 shares
authorized; 20,275,870 issued and outstanding at
September 30, 1999; 16,852,015 issued and
outstanding at December 31, 1998 203 169
Additional paid-in-capital 90,724 85,605
Accumulated deficit (88,718) (85,882)
-------- --------
Common stockholders' equity (deficit) 2,209 (108)
-------- --------
Total liabilities, redeemable preferred stock and
common stockholders' equity (deficit) $ 3,539 $ 2,086
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
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INSITE VISION INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three months ended September 30, Nine Months Ended September 30,
(in thousands, except per share amounts) 1999 1998 1999 1998
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Royalty revenues $ 2 $ 3 $ 10 $ 21
Operating expenses:
Research and development, net 189 1,940 1,140 5,193
General and administrative 550 716 1,737 2,005
-------- -------- -------- --------
Total operating expenses 739 2,656 2,877 7,198
-------- -------- -------- --------
Loss from operations (737) (2,653) (2,867) (7,177)
Interest, other income and expense 18 75 52 257
-------- -------- -------- --------
Net loss (719) (2,578) (2,815) (6,920)
Non-cash preferred dividends (1) (104) (21) (479)
-------- -------- -------- --------
Net loss applicable to common
stockholders $ (720) $ (2,682) $ (2,836) $ (7,399)
======== ======== ======== ========
Basic and diluted net loss per share
applicable to common stockholders $ (0.04) $ (0.18) $ (0.15) $ (0.51)
======== ======== ======== ========
Shares used to calculate basic and
diluted net loss per share 19,711 14,971 18,953 14,616
======== ======== ======== ========
</TABLE>
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)
<TABLE>
<CAPTION>
Nine months ended September 30,
(in thousands) 1999 1998
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OPERATING ACTIVITIES
Net loss $(2,815) $(6,920)
Adjustments to reconcile net loss to net cash used
in
Operating activities:
Depreciation and amortization 436 638
Loss on sale of property and equipment 107 --
Changes in:
Prepaid expenses and other current (219) 222
assets
Accounts payable and accrued 618 223
liabilities
------- -------
Net cash used in operating activities (1,873) (5,837)
INVESTING ACTIVITIES
Sale of property and equipment 410 --
Purchases of property and equipment (84) (26)
------- -------
Net cash provided by (used in) investing activities 326 (26)
FINANCING ACTIVITIES
Issuance of common stock 3,511 197
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Net cash provided by financing activities 3,511 197
Net increase (decrease) in cash and cash 1,964 (5,666)
equivalents
Cash and cash equivalents, beginning of period 1,037 8,660
------- -------
Cash and cash equivalents, end of period $ 3,001 $ 2,994
======= =======
Supplemental disclosures:
Non-cash preferred dividends $ 21 $ 479
======= =======
Non-cash conversion of redeemable preferred
stock to common stock $ 1,503 $ 4,494
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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INSITE VISION INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(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, 1999, 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 collaborative or other arrangements, public or private equity or
debt financing, 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, 1998.
NOTE 2 - PROPERTY AND EQUIPMENT
In July 1999, the Company executed a Termination, Release and Purchase
Agreement ("Termination Agreement") with Bausch & Lomb Pharmaceuticals, Inc.
("B&L). This agreement terminates the BetaSite Contract Manufacturing Agreement
and the PilaSite License Agreement between the Company and B&L, both dated July
18, 1996, and transfers ownership of certain equipment, currently located at the
B&L facility, to B&L. As consideration, the Company received $410,000, and
recorded a loss on sale of equipment of $107,000. During 1998, these assets had
been evaluated and were determined to be impaired under FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To
Be Disposed Of" and $87,000 of expense was recorded and included in the research
and development expense in the Consolidated Statements of Operations.
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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, 1998.
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, prognosis and
management 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, prognostic and management tools for primary congenital, juvenile and
primary open angle glaucomas. Primary congenital glaucoma is an inherited eye
disorder and is one of the leading causes of blindness and visual impairment
affecting infants. A gene-based diagnostic kit may allow early detection of the
disease before considerable irreversible damage has occurred and may improve the
ability to treat it successfully. Primary open angle glaucoma usually affects
people over the age of forty. Current glaucoma tests are generally unable to
detect the disease before substantial damage to the optic nerve has occurred.
Gene-based tests may make it possible to identify patients at risk and initiate
treatment before permanent optic nerve damage and vision loss occurs.
The Company has international and national collaborations with academic
institutions for the identification and clinical evaluation of genetic markers
for glaucoma. To date, the Company's academic collaborators at UCSF and 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 rapid, high throughput method for screening patients for
specific mutations, based on the diagnostic/prognostic technology, ISV-900, is
being developed in partnership with a certified clinical laboratory. The Company
is discussing the commercialization of the test with several potential partners.
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. In June 1999, the
Company reported positive results on its Phase II trial of ISV-205 and
anticipates that P&U, who has licensed ISV-205, will begin an additional Phase
II trial in the first quarter of 2000.
The DuraSite delivery system is a patented eyedrop formulation
comprising a cross-linked carboxyl-containing polymer, which incorporates the
drug to be delivered to the eye. The formulation is instilled in the cul-de-sac
of the eye as a small volume eyedrop. DuraSite can be customized to deliver a
wide variety of potential drug candidates with a broad range of molecular
weights and other properties. The DuraSite formulation remains in the eye for up
to several hours during which time the active drug ingredient is gradually
released. DuraSite extends the residence time of the drug due to a combination
of mucoadhesion, surface tension and viscosity. Eyedrops delivered in the
DuraSite system contrast to conventional eyedrops which typically only last in
the eye a few minutes, thus requiring delivery of a highly concentrated burst of
drug and frequent administration to sustain therapeutic levels. The increased
residence time for DuraSite is designed to permit lower concentrations of a drug
to be administered over a longer period of time, thereby minimizing the
inconvenience of frequent dosing and reducing the potential related adverse side
effects.
Recently, the Company received an additional patent allowance extending
the viscosity and ph ranges of the DuraSite system. This will allow a broader
range of compounds to be delivered by the system and extends the patent coverage
to 2016.
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The Company is focusing its research and development resources on
ISV-900 for prognosis, diagnosis and management of glaucoma and ISV-205 for the
treatment of inflammation and the prevention and treatment of glaucoma.
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.
On January 28, 1999, the Company entered into a license agreement and
stock purchase agreement pursuant to which InSite granted P&U an exclusive
worldwide license to ISV-205 for the treatment of glaucoma. The license calls
for (i) P&U to assume responsibility for the development of the product upon
completion by InSite of, among other activities, the Phase II study conducted by
the Company, (ii) P&U to reimburse InSite for certain research and development
expenses and make payments to InSite for on-going technical support, and (iii)
the payment by P&U to InSite of royalties on product sales should ISV-205 be
successfully commercialized. InSite will continue to bear responsibility for the
prosecution and maintenance of the patents subject to the license, among other
things. The transaction also provided for equity investments from P&U of $3.5
million for which they received 1,942,419 shares of common stock, with the
potential for additional equity investments based on achievement of certain
milestones.
In March 1999, the Company entered into a royalty-bearing license
agreement with Global Damon, a Korean company, to be the exclusive distributor
of AquaSite in the Republic of Korea. Concurrently, the Company entered into a
manufacturing agreement with Kukje, a Korean company, to produce the AquaSite to
be sold by Global Damon.
In August 1999, the Company entered into a license agreement with SSP
Co., Inc., a Japanese company, to be the exclusive manufacturer and distributor
of AquaSite in Japan. AquaSite is an over-the-counter product which uses the
Company's DuraSite technology and demulcents for the symptomatic treatment of
dry eye.
As of September 30, 1999, the Company's accumulated deficit was
approximately $88.7 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 $10,000 and $21,000 in the first
nine months of 1999 and 1998, respectively, from sales of AquaSite by CIBA
Vision. To date, the Company has not relied on royalty revenues to fund its
activities.
Research and development expenses, net were $189,000 and $1.9 million
for the third quarter of 1999 and 1998, respectively, and $1.1 million and $5.2
million for the nine months ended September 30, 1999 and 1998, respectively.
This decrease reflects the reimbursement of research expenses of $1.4 million in
the third quarter of 1999, and a total of $3.2 million for the nine months ended
September 30, 1999, from P&U pursuant to the Company's ISV-205 license
agreement. Additionally, the decrease reflects cost savings from the Company's
reduction in research and development personnel in the fourth quarter of 1998 to
focus research activities on ISV-205 and ISV-900.
General and administrative expenses decreased 23% during the third
quarter of 1999 to $550,000 from $716,000 during the third quarter of 1998. This
decrease was primarily due to cost savings from the Company's reduction in
general and administrative headcount and lower legal costs. General and
administrative expenses decreased 13% to $1.7 million from $2.0 million for the
nine months ended September 30, 1999 and 1998, respectively. The decrease
reflected the Company's reduced general and administrative headcount and the
related costs, and lower consulting and other outside services for financial
reporting activities.
The Company incurred net losses applicable to common stockholders of
$0.7 million and $2.7 million during the third quarters of 1999 and 1998,
respectively, and $2.8 million and $7.4 million for the nine months ended
September 30, 1999 and 1998, respectively. These decreases were due primarily to
the reimbursement of research expenses by P&U and the Company's decision to
focus its resources on ISV-205 and ISV-900. 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
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on the level of the Company's product development and clinical activities and
the receipt of research and development expense reimbursements and milestone
payments, if any.
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 initial 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. In accordance with a January 1999 License Agreement and Stock Purchase
Agreement with P&U, the Company received $2.0 in February 1999, and $1.5 million
in September 1999, from the sale of Common Stock.
At September 30, 1999, the Company had cash and cash equivalents
totaling $3.0 million compared to $1.0 million as of December 31, 1998. 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 increase in cash and cash equivalents of $2.0 million in the nine
months ended September 30, 1999 related primarily to the $3.5 million received
from the issuance 1,942,419 shares of Common Stock to P&U pursuant to the
January 1999 Stock Purchase Agreement. The Company also received $410,000 from
the sale of equipment to B&L. The Company used $1.9 million for operating
activities during the nine months ended September 30, 1999, which was $3.9
million less than the $5.8 million used in the nine months ended September 30,
1998. The decrease in the use of cash for operating activities was primarily due
to $3.2 million received from P&U, under the January 1999 License Agreement, for
technical support provided on the ISV-205 project.
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 and to earn milestone payments and cost
reimbursements from its existing 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 1999. 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, in combination
with the cash the Company has received and will receive during 1999 as part of
the ISV-205 licensing transaction with P&U, will be sufficient to meet its
operating expenses and cash requirements through 1999. The Company will require
substantial additional funds prior to reaching long-term profitability and the
Company may seek future collaborative agreements, private or public equity
investments, 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.
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 system failure or other computer errors, leading to disruptions in
operations.
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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 Y2K
compliant. The Company anticipates completing the upgrade and replacement of
those systems that are not currently Y2K compliant before the end of the year.
The anticipated cost of these upgrades will be expensed as incurred and are
anticipated to be less than $25,000. However, 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 Y2K compliant, it is in the process of verifying the compliance of its
single source suppliers. The Company does not believe that non-compliance by any
single source supplier would have a material impact on its short-term
operations. The Company does not expect its financial condition or results of
operations to be materially adversely affected by Y2K issues.
RISK FACTORS
IT IS DIFFICULT TO EVALUATE OUR BUSINESS BECAUSE WE ARE IN AN EARLY STATE OF
DEVELOPMENT AND OUR TECHNOLOGY IS UNTESTED
We are in an early state of developing our business. We are currently
only receiving an insignificant amount of royalties from the sale of one of our
products, an over-the-counter, or OTC, dry eye treatment. Before regulatory
authorities will grant us marketing approval, we will need to conduct
significant additional research and development and preclinical and clinical
testing. All of our products are subject to risks that are inherent to products
based upon new technologies. These risks include the risks that our products:
- - will be found to be unsafe or ineffective;
- - will fail to receive necessary marketing clearance from regulatory
authorities;
- - even if safe and effective, will be too difficult or costly to
manufacture or market;
- - will be unmarketable due to the proprietary rights of third parties; or
- - will not be able to compete with superior, equivalent or more
cost-effective products offered by third parties.
Therefore, we cannot guarantee that our research and development activities will
result in any commercially viable products.
WE REQUIRE SIGNIFICANT FUNDING FOR OUR CAPITAL REQUIREMENTS
We will require substantial additional funding to develop and conduct
testing on our potential products. We will also require additional funding to
manufacture and market any products that we do develop. Our future capital
requirements will depend upon many factors, including:
- - our ability to earn milestone payments and expense reimbursements under
our existing collaborative arrangements;
- - the progress of our research and development programs;
- - the progress of preclinical and clinical testing;
- - our ability to establish additional corporate partnerships to develop,
manufacture and market our potential products;
- - the time and cost 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 our existing collaborative and licensing relationships; and
- - the purchase of additional capital equipment.
We are currently seeking additional funding through collaborative or
other arrangements, public or private equity or debt financing, and from other
sources. We cannot be certain that we will be able to secure additional funding
from these sources, or that such funding will be on terms acceptable to us. If
we fail to secure additional funding upon acceptable terms, our business will be
harmed.
If we raise additional funds by issuing equity securities, our
stockholders will suffer substantial dilution. However, if we cannot raise
additional funding, we may be required to further delay, scale back or eliminate
one or more of our research, discovery or development programs, or scale back or
cease operations altogether. In addition, the failure to raise additional
funding may force us to enter into agreements with third parties on terms which
are disadvantageous to us, which may, among other things, require us to
relinquish rights to our technologies, products or potential products.
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We believe our cash and cash equivalents in addition to amounts to be
received from P&U as part of the ISV-205 transaction will be sufficient to
finance our working capital and capital expenditure requirements through
December 31, 1999.
WE EXPECT TO CONTINUE TO SUFFER LOSSES
We have incurred significant operating losses since our inception in
1986. As of September 30, 1999, our accumulated deficit was approximately $88.7
million. We have not achieved profitability and we expect to continue to incur
net losses for the foreseeable future.
Our ability to achieve significant revenue or profitability depends upon
our ability, alone or with third parties, to successfully develop our potential
products, conduct clinical trials, obtain required regulatory approvals and
successfully manufacture and market our products. We cannot be certain that we
will ever achieve significant revenue or profitability.
WE RELY ON THIRD PARTIES TO DEVELOP, MARKET AND SELL OUR PRODUCTS
We have not established a dedicated sales and marketing organization.
Therefore, if we are to successfully commercialize our product candidates, we
will be required to enter into arrangements with one or more third parties that
will:
- - provide for Phase III clinical testing;
- - provide for commercial scale up and manufacture of our potential
products;
- - obtain or assist us in other activities associated with obtaining
regulatory approvals for our product candidates; and
- - market and sell our products, if they are approved.
There can be no assurance that we will be able to enter into such
arrangements on acceptable terms, if at all. If we are not successful in
concluding such arrangements, we may be required to establish our own sales and
marketing organization, although we have no experience in sales, marketing or
distribution. We cannot be certain we would be able to build such a marketing
staff or sales force, or that our sales and marketing efforts will be
cost-effective or successful.
Our strategy for research, development and commercialization of certain
of our products requires us to enter into various arrangements with corporate
and academic collaborators, licensors, licensees and others. Furthermore, we are
dependent on the diligent efforts and subsequent success of these outside
parties in performing their responsibilities.
To date, we have entered into agreements with CIBA Vision for
co-exclusive rights with us in North America 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 January 1999, we entered into a license agreement with Pharmacia &
Upjohn AB, or P&U, pursuant to which:
- - P&U will develop, manufacture, process and use ISV-205;
- - P&U will finish, market, distribute, detail and sell the products
developed from the active ingredient in ISV-205.
In July 1996, we entered into an agreement with B&L pursuant to which we
agreed to collaborate to develop and sell a new DuraSite based eyedrop
formulation.
In July 1999, we terminated our PilaSite license agreement and BetaSite
contract manufacturing agreement, and sold the equipment we owned at the B&L
facility in Tampa to B&L. See "Risk Factors -- We have no experience in
commercial manufacturing" for further discussion of the impact of this
termination.
We are dependent upon British Biotechnology Pharmaceuticals, Inc., or
British Biotech, for the supply of batimastat, the active drugs incorporated
into the Company's ISV-120 product candidate. British Biotech has discontinued
clinical testing of batimastat and informed us that it will no longer
manufacture the product. We may have no source of ongoing raw materials for
ISV-120. If this turns out to be true, our business may be harmed.
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We cannot be certain that, even if regulatory approvals are obtained,
our products will be marketed diligently or successfully by our partners, or
that we will be able to conclude arrangements with other companies to support
the commercialization of other products on acceptable terms, if at all.
In addition, we cannot be certain our collaborators will not take the
position that they are free to compete using our technology without compensating
or entering into agreements with us. Furthermore, we cannot be certain our
collaborators will not pursue alternative technologies or develop alternative
products either on their own or in collaboration with others, including our
competitors, as a means for developing treatments for the diseases or disorders
targeted by these collaborative programs.
OUR BUSINESS DEPENDS UPON OUR PROPRIETARY RIGHTS, AND THERE IS A RISK OF
INFRINGEMENT
Our success will depend in large part on our ability to obtain patents,
protect trade secrets, obtain and maintain rights to technology developed by
others, 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 ours. We cannot be certain that our
patent applications will be approved, that we will develop additional
proprietary products that are patentable, that any issued patents will provide
us with adequate protection for our inventions or will not be challenged by
others, or that the patents of others will not impair our ability to
commercialize our products. The patent positions of firms in the pharmaceutical
and genetic industries generally are highly uncertain, involve complex legal and
factual questions, and have 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. Despite our efforts to
protect our proprietary rights, we cannot be certain others will not
independently develop similar products, duplicate any of our products or design
around any of our patents or that third parties from which we have licensed or
otherwise obtained technology will not attempt to terminate or scale back our
rights.
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 our business.
Some of these technologies, applications or patents may conflict with our
technologies or patent applications. Such conflicts could limit the scope of the
patents, if any, we may be able to obtain or result in the denial of our patent
applications. In addition, if patents that cover our activities have been or are
issued to other companies, there can be no assurance that we will 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 we do not obtain such licenses, we
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 us or to protect trade secrets or
know-how owned or licensed by us. Such litigation could result in substantial
cost to and diversion of effort by the Company, all of which may harm our
business. We have also agreed to indemnify our licensees, including P&U, against
infringement claims by third parties related to our technology, which could
result in additional litigation costs and liability, which could harm our
business. In addition, we cannot be certain our efforts to protect or defend our
proprietary rights will be successful or, even if successful, will not result in
substantial cost to us.
We also depend upon unpatented trade secrets to maintain our competitive
position. We cannot be certain others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets, that such trade secrets will not be disclosed
or that we can effectively protect our rights to unpatented trade secrets. To
the extent that we or our consultants or research collaborators use intellectual
property owned by others in their work for us, disputes also may arise as to the
rights in related or resulting know-how and inventions.
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<PAGE> 13
ACQUISITIONS MAY PRESENT RISKS TO OUR BUSINESS
At some point in the future we may pursue acquisitions of companies,
product lines, technologies or businesses that our management believes are
complementary or otherwise beneficial. In the event that such an acquisition
does occur, we cannot be certain how such acquisitions will affect our business.
Future acquisitions may result in substantial dilution to our stockholders, the
incurrence of additional debt and amortization expenses related to goodwill,
research and development and other intangible assets, all of which could harm
our business. In addition, acquisitions will involve several risks for us,
including:
- - assimilating employees, operations, technologies and products from the
acquired companies with our existing employees, operation, technologies
and products;
- - diverting our management's attention from day-to-day operation of our
business;
- - entering markets in which we have no or limited direct experience; and
- - potentially losing key employees from the acquired companies.
WE HAVE NO EXPERIENCE IN COMMERCIAL MANUFACTURING AND WE RELY ON A SOLE SOURCE
FOR CERTAIN RAW MATERIALS
We have no experience manufacturing products for commercial purposes. We
have a pilot facility licensed by the State of California to manufacture certain
of our products for Phase I and Phase II clinical trials. In July 1999, we
terminated our alliance under which B&L agreed to manufacture our products.
Should we encounter delays or difficulties in establishing and maintaining a
relationship with other qualified manufacturers to produce, package and
distribute our finished products, then clinical trials, regulatory filings,
market introduction and subsequent sales of our products will be harmed.
Contract manufacturers must adhere to Good Manufacturing Practices, or
GMP, regulations which are strictly enforced by the Food and Drug Administration
("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 New Drug Application (NDA). Certain material manufacturing
changes that occur after approval are also subject to FDA review and clearance
or approval. We cannot be certain the FDA or other regulatory agencies will
approve the process or the facilities by which any of our products may be
manufactured. Our dependence on third parties for manufacture of products may
harm our ability to develop and deliver products on a timely and competitive
basis. Should we be required to manufacture products ourselves, we:
- - 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.
We cannot be certain we will be able to manufacture any products
successfully or in a cost-effective manner. In addition, certain of the raw
materials we use in formulating our DuraSite drug delivery system are available
from only one source. Any significant interruption in the supply of these raw
materials could delay our clinical trials, product development or product sales
and could harm our business.
OUR PRODUCTS ARE SUBJECT TO GOVERNMENT REGULATIONS AND 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 our activities.
We cannot be certain the FDA or any other regulatory agency will grant approval
for any products we develop 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 after we have obtained regulatory approval, 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
13 of 16
<PAGE> 14
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 we receive FDA approval of a product for certain indicated
uses, our competitors, including our 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 harm our business.
The FDA's policies may change and additional government regulations may
be promulgated which could prevent or delay regulatory approval of our potential
products. Moreover, increased attention to the containment of health care costs
in the U.S. could result in new government regulations that could harm our
business. We cannot 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 -- We face risks from the uncertainties of
pricing and other regulation".
WE COMPETE IN HIGHLY COMPETITIVE MARKETS
Our success depends upon developing and maintaining a competitive
position in the development of products and technologies in our areas of focus.
We have many competitors in the U.S. and abroad, including pharmaceutical,
biotechnology and other companies with varying resources and degrees of
concentration in the ophthalmic market. Our competitors may have existing
products or products under development which may be technically superior to ours
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. Many of our competitors have
substantially greater financial, technical, marketing, manufacturing, and human
resources. In addition, they may also succeed in developing technologies and
products that are more effective, safer, less expensive or otherwise more
commercially acceptable than any which we have or will develop. Our competitors
may obtain cost advantages, patent protection or other intellectual property
rights that would block or limit our ability to develop our potential products,
or may obtain regulatory approval for commercialization of their products more
effectively or rapidly than we will. To the extent we decide to manufacture and
market our products by ourselves, we will also compete with respect to
manufacturing efficiency and marketing capabilities, areas in which we have
limited or no experience.
WE ARE DEPENDENT UPON KEY EMPLOYEES
We are highly dependent on Dr. Chandrasekaran and other principal
members of our scientific and management staff, the loss of whose services might
significantly delay the achievement of planned development objectives.
Furthermore, recruiting and retaining qualified personnel is critical to our
success. Competition for skilled individuals in the biotechnology business is
highly intense, and we cannot be certain we will be able to continue to attract
and retain personnel necessary for the development of our business. The loss of
key personnel or the failure to recruit additional personnel or to develop
needed expertise could harm our business.
OUR INSURANCE COVERAGE MAY NOT ADEQUATELY COVER OUR POTENTIAL PRODUCT LIABILITY
EXPOSURE
We are exposed to potential product liability risks that are inherent in
the development, testing, manufacturing, marketing, and sale of human
therapeutic products. Product liability insurance for the pharmaceutical
industry is generally expensive. We cannot be certain that our present product
liability insurance coverage is adequate. Such existing coverage may not be
adequate as we further develop our products, and we cannot be certain that
adequate insurance coverage against potential claims will be available in
sufficient amounts or at a reasonable cost.
WE FACE RISKS FROM THE UNCERTAINTIES OF PRICING AND OTHER REGULATION
Our business may be harmed 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 we expect there will continue to be, a number of federal and state
proposals to implement similar government control. While we cannot predict
whether any such legislative or regulatory proposals or reforms will be adopted,
the announcement of such proposals or reforms could harm our business, including
our ability to raise capital or form collaborations. The adoption of such
proposals or reforms could further harm our business.
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> 15
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 we succeed in bringing one or more products to the market, we
cannot be certain that reimbursement from third party payers will be available
or will be sufficient to allow us to sell our products on a competitive or
profitable basis.
WE USE HAZARDOUS MATERIALS WHICH MAY POSE ENVIRONMENTAL RISKS
Our research, development and manufacturing processes involve the
controlled use of small amounts of radioactive and other hazardous materials. We
are 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 we believe that our safety procedures for
handling, and disposing of such materials comply with the standards prescribed
by laws and regulations, we cannot completely eliminate the risk of accidental
contamination or injury from these materials. In the event of such an accident,
we could be held liable for any damages that result, and any such liability
could exceed our resources. Moreover, we may be required to incur significant
costs to comply with environmental laws and regulations, especially to the
extent that we manufacture our own products.
OUR OFFICERS AND DIRECTORS WILL BE ABLE TO EXERT SIGNIFICANT CONTROL ON INSITE
As of September 30, 1999, our management and principal stockholders
together beneficially owned approximately 20% of our outstanding shares of
common stock. As a result, these stockholders, acting together, may be able to
effectively control all matters requiring approval by our stockholders,
including the election of a majority of our directors and the approval of
business combinations.
THE PRICE OF OUR COMMON STOCK MAY BE VOLATILE AND WE DO NOT ANTICIPATE PAYING
ANY CASH DIVIDENDS
The market prices for securities of biopharmaceutical and biotechnology
companies, including ours, 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 InSite, our 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 us or others and
general market conditions, may have a significant effect on the market price of
our common stock. We have not paid any cash dividends on our common stock, and
we do not anticipate paying any dividends in the foreseeable future.
WE HAVE ADOPTED CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of our 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 InSite. Such
provisions could limit the price that certain investors might be willing to pay
in the future for shares of our common stock. The 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 Redeemable Preferred Stock.
Furthermore, the 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 our
outstanding voting stock. Certain provisions of Delaware law applicable to us
could also delay or make more difficult a merger, tender offer or proxy contest
involving us, 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.
WE HAVE A WARRANT OUTSTANDING FOR CONVERTIBLE, REDEEMABLE SECURITIES THAT MAY
RESULT IN DILUTION FOR COMMON STOCKHOLDERS
Sales of shares of common stock issuable upon exercise of a warrant and
subsequent conversion of our Series A Convertible Redeemable Preferred Stock
could adversely affect the market value of the common stock, depending upon the
timing of such sales, and may effect a dilution of the book value per share of
our common stock.
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<PAGE> 16
As of September 30, 1999, a warrant for 70 shares of Series A
Convertible Redeemable Preferred Stock was issued and outstanding and may be
exercised until September 12, 2000. The actual number of shares of common stock
issuable upon conversion of the Series A Convertible Redeemable Preferred Stock
underlying such warrant will equal:
(i) the aggregate stated value of the Series A Convertible
Redeemable Preferred Stock 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 our common
stock for any 5 trading days during the 22 consecutive trading day
period immediately preceding the date of conversion, subject to
adjustment in accordance with the terms of the Certificate of
Designations, Preferences and Rights for the Series A Convertible
Redeemable Preferred Stock, multiplied by a conversion percentage equal
to 82.5%.
For a complete description of the relative rights, preferences,
privileges, powers and restrictions of the Series A Convertible Redeemable
Preferred Stock, see the Certificate of Designations, Preferences and Rights
attached as Exhibit 4.1 to our Registration Statement on Form S-3 filed with the
Securities and Exchange 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. Investors in common stock could therefore experience
substantial dilution upon conversion of the Series A Convertible Redeemable
Preferred Stock. In addition, in the event that any holder of Series A
Convertible Redeemable Preferred Stock is unable to convert any such securities
into common stock, any or all such holders may cause us to redeem in cash any
such Series A Convertible Redeemable Preferred Stock that cannot be so
converted. In the event that we fail to so redeem such shares, the holders of
the Series A Convertible Redeemable Preferred Stock are entitled to additional
remedies as set forth in the Certificate of Designations, Preferences and
Rights.
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,
1999.
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 10, 1999 by: /s/ S. Kumar Chandrasekaran
------------------------------------
S. Kumar Chandrasekaran, Ph.D.
Chairman of the Board,
Chief Executive Officer and
Chief Financial Officer
(on behalf of the registrant and as principal
financial and accounting officer)
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<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,001
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,410
<PP&E> 230
<DEPRECIATION> 101
<TOTAL-ASSETS> 3,539
<CURRENT-LIABILITIES> 1,301
<BONDS> 0
0
29
<COMMON> 203
<OTHER-SE> 2,006
<TOTAL-LIABILITY-AND-EQUITY> 3,539
<SALES> 0
<TOTAL-REVENUES> 10
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,867
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,836)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,836)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,836)
<EPS-BASIC> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
