<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1997
or,
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _____________ to _____________
COMMISSION FILE NUMBER: 0-23556
INHALE THERAPEUTIC SYSTEMS
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3134940
- ------------------------------- ---------------------------------
(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1525 INDUSTRIAL WAY
BELMONT, CALIFORNIA 94002
(Address of principal executive offices)
650-631-3100
(Registrant's telephone number, including area code)
Not applicable
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required 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. [X] Yes [ ] No
The number of outstanding shares of the registrant's Common Stock, no par
value, was 13,683,960 as of August 1, 1997.
<PAGE>
INHALE THERAPEUTIC SYSTEMS
INDEX
PART I: FINANCIAL INFORMATION PAGE
Item 1. Condensed Financial Statements - unaudited . . . . . . . . . . . .3
Condensed Balance Sheets - June 30, 1997 and December 31, 1996 . .3
Condensed Statements of Operations for the three and six month
periods ended June 30, 1997 and 1996 . . . . . . . . . . . . .4
Condensed Statements of Cash Flows for the six month period
ended June 30, 1997 and 1996. . . . . . . . . . . . . . . . . .5
Notes to Condensed Financial Statements. . . . . . . . . . . . . .6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . .7
PART II: OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . .13
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . .13
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . .13
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . .13
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . .13
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . .14
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Page 2 of 15
<PAGE>
Item 1.
INHALE THERAPEUTIC SYSTEMS
Condensed Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
(unaudited) (Note)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 33,149 $ 18,568
Short-term investments 28,020 17,741
Note receivable 5,000 -
Other current assets 1,797 1,239
--------- ---------
Total current assets 67,966 37,548
Property and equipment, net 6,701 3,770
Deposits and other assets 135 174
--------- ---------
$ 74,802 $ 41,492
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 5,160 $ 3,042
Accrued compensation 1,257 479
Deferred revenue 6,208 2,723
--------- ---------
Total current liabilities 12,625 6,244
Equipment financing obligations 162 187
Shareholders' equity:
Common stock, no par value: 30,000
shares authorized, 13,681 shares and
11,835 shares issued and outstanding at
June 30, 1997 and December 31, 1996,
respectively 94,055 62,840
Deferred compensation (7) (88)
Accumulated deficit (32,033) (27,691)
--------- ---------
Total shareholders' equity 62,015 35,061
--------- ---------
$ 74,802 $ 41,492
--------- ---------
--------- ---------
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
SEE ACCOMPANYING NOTES.
Page 3 of 15
<PAGE>
INHALE THERAPEUTIC SYSTEMS
Condensed Statements of Operations
(in thousands, except per share information)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Contract research revenue $ 3,973 $ 1,448 $ 7,150 $ 2,930
Operating costs and expenses:
Research and development 5,644 3,516 10,213 6,433
General and administrative 1,517 854 2,899 1,555
---------- ---------- ----------- ----------
Total operating costs and expenses 7,161 4,370 13,112 7,988
---------- ---------- ----------- ----------
Loss from operations (3,188) (2,922) (5,962) (5,058)
Interest income, net 890 437 1,620 672
---------- ---------- ----------- ----------
Net loss $ (2,298) $ (2,485) $ (4,342) $ (4,386)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Net loss per share $ (0.17) $ (0.22) $ (0.33) $ (0.41)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Shares used in computing net loss per share 13,648 11,387 13,263 10,769
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>
SEE ACCOMPANYING NOTES.
Page 4 of 15
<PAGE>
INHALE THERAPEUTIC SYSTEMS
Condensed Statements of Cash Flows
Increase/(Decrease) in Cash and Cash Equivalents
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-----------------------
1997 1996
-----------------------
<S> <C> <C>
Cash flows from operating activities:
Cash provided by (used in) operations $(1,733) $(4,077)
Cash flows from investing activities:
Purchases of available for sale securities, net of sales and maturities (10,266) (10,250)
Purchases of property and equipment (3,919) (955)
------- --------
Net cash provided by (used in) investing activities (14,185) (11,205)
Cash flows from financing activities:
Payments of equipment financing obligations (103) (143)
Issuance of common stock, net of issuance costs 30,602 19,542
------- --------
Net cash provided by financing activities 31,099 19,399
Net increase (decrease) in cash and cash equivalents 14,581 4,117
Cash and cash equivalents at beginning of period 18,568 3,834
------- --------
Cash and cash equivalents at end of period $33,149 $ 7,951
------- --------
------- --------
</TABLE>
SEE ACCOMPANYING NOTES.
Page 5 of 15
<PAGE>
INHALE THERAPEUTIC SYSTEMS
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 1997
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Inhale
Therapeutic Systems ("Inhale" or the "Company") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and the instructions for Form 10-Q and Article 10 of
Regulation S-X. The balance sheet as of June 30, 1997 and the related
statements of operations for the three and six month periods ended June 30,
1997 and 1996 and cash flows for the six month periods ended June 30, 1997
and 1996 are unaudited but include all adjustments (consisting of normal
recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position at such dates and the operating
results and cash flows for those periods. Although the Company believes that
the disclosures in these financial statements are adequate to make the
information presented not misleading, certain information normally included
in financial statements and related footnotes prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission (the "Commission"). The accompanying financial statements should
be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 filed with the Commission.
Results for any interim period are not necessarily indicative of results
for any other interim period or for the entire year.
2. REVENUE RECOGNITION
Contract revenue from collaborative research agreements is recorded when
earned and as the related costs are incurred. Payments received which are
related to future performance are deferred and recognized as revenue when
earned over future performance periods. In accordance with contract terms,
up-front and milestone payments from collaborative research agreements are
considered reimbursements for costs incurred under the agreements, and
accordingly, are generally recognized based on actual efforts expended over
the terms of the agreements. The Company's research revenue is derived
primarily from partners in the pharmaceutical and biotechnology industries.
All of the Company's research and development agreements are generally
cancelable by the partner without significant penalty to the partner.
Contract research revenue from two partners represented 71% of the
Company's revenue in the six month period ended June 30, 1997. Contract
revenue from two partners accounted for 87% of the Company's revenue in the
comparable period in 1996. Costs of contract research revenue approximate
such revenue and are included in research and development expenses.
3. NOTE RECEIVABLE
In April 1997 the Company provided the landlord of its facility in
Belmont, California a short term loan of $5.0 million. The loan bears
interest at 8.0%. The Company receives monthly interest payments and the
principal is due and payable at the end of the six-month loan term. In
addition, the loan is secured by a deed of trust on the facility. The loan
is recorded on the balance sheet at June 30, 1997 as a note receivable.
4. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of
shares of Common Stock outstanding. Common equivalent shares from stock
options and warrants are excluded from the computation as their effect is
antidilutive.
In February 1997, the Financial Accounting Standard Board issued
Statement No. 128, EARNINGS PER SHARE, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new
Page 6 of 15
<PAGE>
requirements for calculating basic, formerly primary, earnings per share, the
dilutive effect of stock options will be excluded. The statement is expected
to have no impact on the Company's primary or fully diluted earnings per
share for the three and six month periods ended March 31, 1997 and June 30,
1997.
5. EQUITY
In February 1997 the Company received $30.4 million in net proceeds from
a private placement of 1,800,000 shares its Common Stock to a group of
institutional investors at a price of $18 per share.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations for the three and six month periods ended June 30, 1997
and 1996 should be read in conjunction with the Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
The following discussion contains forward-looking statements that involve
risk and uncertainties. The Company's actual results could differ materially
from those discussed here. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed herein as well
as those discussed under the heading "Risk Factors" in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of
the date hereof. The Company undertakes no obligation to publicly release
the results of any revision to these forward-looking statements which may be
made to reflect events or circumstances occurring after the date hereof or to
reflect the occurrence of unanticipated events.
OVERVIEW
Since its inception in July 1990, Inhale has been engaged in the
development of a pulmonary system for the delivery of macromolecules and
other drugs for systemic and local lung applications. The Company has been
unprofitable since inception and expects to incur significant and increasing
additional operating losses over the next several years primarily due to
increasing research and development expenditures and expansion of late stage
clinical and early stage commercial manufacturing facilities. To date,
Inhale has not sold any products and does not anticipate receiving revenue
from product sales or royalties in the near future. For the period from
inception through June 30, 1997, the Company incurred a cumulative net loss
of approximately $32.0 million. The sources of working capital have been
equity financing, financing of equipment acquisitions, interest earned on
investments of cash, and revenues from short-term research and feasibility
agreements and development contracts.
Inhale typically has been compensated for research and development
expenses during initial feasibility work performed under collaborative
arrangements. Inhale's strategy is to enter into development contracts with
pharmaceutical and biotechnology corporate partners after feasibility is
demonstrated. Typically, partners that enter into collaborative agreements
will pay for research and development expenses and may make payments to
Inhale as it achieves certain key milestones. Inhale expects to receive
royalties from its partners based on revenues received from product sales,
and to receive revenue from the manufacturing of powders and the supply of
devices. In certain cases, the Company may enter into collaborative
agreements under which the Company's partners would manufacture or package
powders or supply inhalation devices, thereby potentially limiting one or
more sources of revenue for the Company. To achieve and sustain profitable
operations, the Company, alone or with others, must successfully develop,
obtain regulatory approval for, manufacture, introduce, market and sell
products utilizing its pulmonary drug delivery system. There can be no
assurance that the Company can generate sufficient product or contract
research revenue to become profitable or to sustain profitability.
Page 7 of 15
<PAGE>
RESULTS OF OPERATIONS
Revenue in the second quarter of 1997 was $3,973,000, as compared to
$1,448,000 in the second quarter of 1996, an increase of 174%. Revenues for
the six months ended June 30, 1997 were $7,150,000 as compared to $2,930,000
for the six months ended June 30, 1996, an increase of 144%. The increase in
revenue for both the three and six month periods was primarily due to the
signing of additional corporate partners in 1997 as well as the expansion of
the Company's existing collaborative agreements. Revenue for the first and
second quarter of 1997 and 1996 was comprised of reimbursed research and
development expenses and the amortization of the pro-rata portion of the
up-front signing and milestone payments based on actual efforts expended.
Costs of contract research revenue approximate such revenue and are included
in research and development expenses.
Research and development expenses increased to approximately $5,644,000
in the second quarter of 1997 from $3,516,000 in the comparable period of
1996, an increase of 61%. Research and development expenses for the six
months ended June 30, 1997 were $10,213,000 compared to $6,433,000 for the
six months ended June 30, 1996, an increase of 59%. The increase for the
three and six month periods ended June 30, 1997 is primarily attributed to
continued expansion of research activities resulting from an increase in the
number of projects, additional hiring of scientific personnel, costs
associated with the development of the Company's commercial manufacturing
facility and increased costs of laboratory supplies and consulting services.
The Company expects research, development and process development spending to
increase significantly over the next few years as the Company continues to
expand its research and development and prepares for initial commercial
manufacturing.
General and administrative expenses increased to $1,517,000 in the second
quarter of 1997 from $854,000 in the second quarter of 1996, an increase of
78%. For the six month period ended June 30, 1997 general and administrative
expenses were $2,899,000 compared to $1,555,000 in the comparable period of
1996, an increase of 86%. The increase for the three and six month periods
ended June 30, 1997 was due primarily to support of the Company's increased
research efforts including administrative staffing, business development
activities and marketing activities. General and administrative expenses are
expected to continue to increase to support increased levels of research,
development and manufacturing activities.
Net interest income increased to $890,000 in the second quarter of 1997
compared to $437,000 in the second quarter of 1996, an increase of 104%. Net
interest income increased to $1,620,000 for the six months ended June 30,
1997 compared to $672,000 for the six months ended June 30, 1996. Interest
income was earned on larger cash and investment balances held by the Company
in the three and six month periods ended June 30, 1997, compared to the same
period in 1996. The higher cash and investment balances are a result of the
Company receiving milestone and research funding payments from collaborative
partners as well as the completion of a private placement of the Company's
Common Stock in February 1997 which raised net proceeds of $30.4 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through private
placements and public offerings of its equity securities, contract research
and milestone revenues, interest income earned on its investments of cash and
financing of equipment acquisitions. On February 7, 1997 the Company
completed a private placement of its Common Stock, selling 1.8 million newly
issued shares for net proceeds of $30.4 million. At June 30, 1997, the
Company had cash, cash equivalents and short-term investments of
approximately $61.2 million.
The Company's operations used cash of $1.7 million in the six months
ended June 30, 1997, as compared to $4.1 million used in the six months ended
June 30, 1996. The decrease in cash usage from operations is due primarily to
the increase in payments received under the Company's collaborative
agreements for work to be performed in future periods. Cash used in
operations differed from the Company's net operating losses in these periods
due principally to depreciation expenses, decreases in accounts receivable
and increases in other current assets, notes receivable, accounts payable,
deferred revenue and accrued liabilities.
In the six months ended June 30, 1997 the Company purchased property and
equipment of $3.9 million as compared to $1.0 million for the same period in
1996. The increase is primarily due to the expansion of the Company's
facilities.
Page 8 of 15
<PAGE>
The Company expects its cash requirements to increase due to expected
increases in expenses related to the further research and development of its
technologies resulting from a larger number of projects, development of drug
formulations, process development for the manufacture and filling of powders
and devices, marketing and general and administrative costs. These expenses
include, but are not limited to, increases in personnel and personnel related
costs, purchases of capital equipment, inhalation device prototype
construction and facilities expansion, including the planning and building of
a late-stage clinical and early-stage commercial manufacturing facility.
The Company believes that its cash, cash equivalents and short-term
investments as of June 30, 1997 together with interest income and possible
additional equipment financing, will be sufficient to meet its operating
expense and capital expenditure requirements at least through 1998. However,
the Company's capital needs will depend on many factors, including continued
scientific progress in its research and development arrangements, progress
with pre-clinical and clinical trials, the time and costs involved in
obtaining regulatory approvals, the costs of developing and the rate of
scale-up of the Company's powder processing and packaging technologies, the
timing and cost of its late-stage clinical and early commercial production
facility, the costs involved in preparing, filing, prosecuting, maintaining
and enforcing patent claims, the need to acquire licenses to new technologies
and the status of competitive products. To satisfy its long-term needs, the
Company intends to seek additional funding, as necessary, from corporate
partners and from the sale of securities. There can be no assurance that
additional funds, if and when required, will be available to the Company on
favorable terms, if at all.
RISK FACTORS
EARLY STAGE COMPANY. Inhale is in an early stage of development. There can
be no assurance that the Company's pulmonary delivery technology will prove
to be technically feasible or commercially applicable to a range of
macromolecules and other drugs. Only four of the Company's pulmonary
delivery formulations, insulin, Interleukin-1 Receptor, salmon calcitonin and
a peptide for the treatment of osteoporosis have been subject to any human
clinical testing. Although many of the underlying drug compounds with which
the Company is working have been tested in humans by others using alternative
delivery routes, Inhale's potential products will require extensive research,
development, preclinical and clinical testing, and may involve lengthy
regulatory review. There can be no assurance that any of the Company's
potential products will prove safe and effective in clinical trials, meet
applicable regulatory standards, be capable of being produced in commercial
quantities at acceptable cost or be successfully marketed. Moreover, even if
the Company's products prove to be safe and effective and are approved for
marketing by the United States Food and Drug Administration ("FDA") and other
regulatory authorities, there can be no assurance that health care providers,
payors or patients will accept the Company's products. Any failure of the
Company to achieve technical feasibility, demonstrate safety, achieve
clinical efficacy, obtain regulatory approval or, together with partners,
successfully market products, would have a material adverse effect on the
Company.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY. The
Company has not been profitable since inception and, through June 30, 1997,
had incurred a cumulative deficit of approximately $32.0 million. The
Company expects to continue to incur substantial and increasing losses over
at least the next several years as the Company's research and development
efforts, preclinical and clinical testing activities and manufacturing
scale-up efforts expand and as the Company plans and builds its late stage
clinical and early commercial production facility. All of the Company's
potential products are in research or in the early stages of development, and
no revenues have been generated from approved product sales. The Company's
revenues to date have consisted primarily of payments under short-term
research and feasibility agreements and development contracts. To achieve
and sustain profitable operations, the Company, alone or with others, must
successfully develop, obtain regulatory approval for, manufacture, introduce,
market and sell products utilizing its pulmonary drug delivery system. There
can be no assurance that the Company can generate sufficient product or
contract research revenue to become profitable or to sustain profitability.
DEPENDENCE UPON PARTNERS. The Company currently does not possess the
resources necessary to develop, complete the FDA approval process for, or
commercialize any of its potential therapeutic products. The Company's
ability to apply its pulmonary delivery system to a broad range of drugs will
depend upon its ability to establish and maintain collaborative arrangements
since many of the drugs currently approved for sale or in clinical testing
are covered by third party patents. The Company has entered into
collaborative arrangements with
Page 9 of 15
<PAGE>
certain of its partners to fund clinical trials, assist in obtaining
regulatory approval and commercialize certain products. Inhale has also
entered into agreements with partners to test the feasibility of its
pulmonary delivery system with certain of their proprietary molecules. There
can be no assurance that the Company will be able to enter into additional
collaborations or that its feasibility agreements will lead to
collaborations. There also can be no assurance that the Company will be able
to maintain any such collaborative arrangements or feasibility agreements or
that any such collaborative arrangements or feasibility agreements will be
successful. The failure of the Company to enter into or maintain such
collaborative arrangements and feasibility agreements would have a material
adverse effect on the Company. Moreover, the inability of the Company to
enter into a collaborative arrangement with the owner of any patented drug
may preclude the Company from working with such drug.
The Company's existing partners have the rights to pursue parallel
development of other drug delivery systems which may compete with the
Company's pulmonary drug delivery system and to terminate their agreements
with the Company at any time without significant penalty. The Company
anticipates that any future partners would have similar rights. Although the
Company intends generally to formulate and manufacture powders for partners
and to supply inhalation devices for such powders, certain partners may
choose to formulate or manufacture their own powders, or to develop or supply
their own device, thereby limiting one or more potential sources of revenue
for Inhale. In addition, the Company anticipates that it may be precluded
from entering into arrangements with companies whose products compete with
products sold by its partners. The Company also will have limited or no
control over the resources that any partner may devote to the Company's
products, over partners' development efforts, including the design and
conduct of clinical trials, and over the pricing of any such products. The
pharmaceutical and biotechnology industries are consolidating, and
acquisitions by, or of, the Company's existing or potential collaborative
partners may affect the initiation or continuation of any such
collaborations. There can be no assurances that any of the Company's present
or future collaborative partners will perform their obligations as expected,
will devote sufficient resources to the development, clinical testing or
marketing of the Company's potential products or will not terminate their
agreements with the Company prematurely. Any parallel development by a
partner of alternate drug delivery systems, development by a partner rather
than by Inhale of components of the delivery system, preclusion from entering
into competitive arrangements, failure to obtain timely regulatory approvals,
premature termination of an agreement, or failure by a partner to devote
sufficient resources to the development and commercialization of the
Company's products, would have a material adverse effect on the Company.
DEPENDENCE UPON PROPRIETARY TECHNOLOGY, UNCERTAINTY OF OBTAINING LICENSES OR
DEVELOPING TECHNOLOGY. The Company's success will depend in part upon
protecting its proprietary technology from infringement, misappropriation,
duplication and discovery. The Company intends to rely principally on a
combination of patent law, trade secrets and contract law to protect its
proprietary technology in the United States and abroad. Inhale has filed
patent applications covering certain aspects of its device, powder processing
technology, and powder formulations and pulmonary route of delivery for
certain molecules, and plans to file additional patent applications. On
October 17, 1995 the United States Patent and Trademark Office ("PTO") issued
U.S. Patent No. 5,458,135 to Inhale covering the use of its device as a
method for delivering powder formulations of drugs to the lung. There can be
no assurance that any of the patents applied for by the Company will issue,
or that any patents that issue will be valid and enforceable. Even if such
patents are enforceable, the Company anticipates that any attempt to enforce
its patents could be time consuming and costly.
The patent positions of pharmaceutical, biotechnology and drug delivery
companies, including Inhale, are uncertain and involve complex legal and
factual issues. Additionally, the coverage claimed in a patent application
can be significantly reduced before the patent is issued. As a consequence,
the Company does not know whether any of its patent applications will result
in the issuance of patents or, if any patents issue, whether they will
provide significant proprietary protection or will be circumvented or
invalidated. Since patent applications in the United States are maintained in
secrecy until patents issue, and since publication of discoveries in the
scientific or patent literature often lag behind actual discoveries, the
Company cannot be certain that it was the first inventor of inventions
covered by its pending patent applications or that it was the first to file
patent applications for such inventions. Moreover, the Company may have to
participate in interference proceedings declared by the PTO to determine
priority of invention, which could result in substantial cost to the Company,
even if the eventual outcome is favorable to the Company. There can be no
assurance that the Company's patents, if issued, would be held valid by a
court of competent jurisdiction. An adverse outcome could subject the
Company to significant liabilities to third parties, require disputed rights
to be licensed from or to third parties or require the Company to cease using
the technology in dispute.
Page 10 of 15
<PAGE>
The Company is aware of numerous pending and issued United States and
foreign patent rights and other proprietary rights owned by third parties
that relate to aerosol devices and delivery, pharmaceutical formulations, dry
powder processing technology and the pulmonary route of delivery for certain
macromolecules. The Company cannot predict with any certainty which, if any,
patents and patent applications will be considered relevant to the Company's
technology by authorities in the various jurisdictions where such rights
exist, nor can the Company predict with certainty which, if any, of these
rights will or may be asserted against it by such third parties. The Company
is aware of an alternate dry powder processing technology which Inhale is not
using for its current products under development but may desire to use for
certain products in the future. The ownership of this powder processing
technology is unclear and the Company is aware that multiple parties,
including Inhale, claim patent, trade secret and other rights in the
technology. If the Company determines that this alternate powder processing
technology is relevant to the development of future products and further
determines that a license to this alternate powder processing technology is
needed, there can be no assurance that the Company will be able to obtain a
license from the relevant party or parties on commercially reasonable terms,
if at all. There can be no assurance that the Company will be able to obtain
any license to any technology that the Company determines it needs, on
reasonable terms, if at all, or that Inhale could develop or otherwise obtain
alternate technology. The failure of the Company to obtain licenses if
needed would have a material adverse effect on the Company.
Third parties from time to time have asserted and may assert that the
Company is employing technology that they believe is based on issued patents,
trade secrets or know-how of others. In addition, future patents may issue
to third parties which the Company's technology may infringe. The Company
could incur substantial costs in defending itself and its partners against
any such claims. Furthermore, parties making such claims may be able to
obtain injunctive or other equitable relief which could effectively block the
Company's ability to further develop or commercialize some or all of its
products in the United States and abroad, and could result in the award of
substantial damages. In the event of a claim of infringement, the Company and
its partners may be required to obtain one or more licenses from third
parties. There can be no assurance that the Company or its partners will be
able to obtain such licenses at a reasonable cost, if at all. Defense of any
lawsuit or failure to obtain any such license could have a material adverse
effect on the Company.
The Company's ability to develop and commercialize its technology will be
affected by the Company's or its partners' access to the drugs which are to
be formulated. Many drugs, including powder formulations of certain drugs
which are presently under development by the Company, are subject to issued
and pending United States and foreign patent rights which may be owned by
competing entities. There are issued patents and pending patent applications
relating to the pulmonary delivery of macromolecule drugs, including several
for which the Company is developing pulmonary delivery formulations.
Specifically, a patent has been granted in Europe which is directed to
aerosol formulations of serine protease inhibitors, including alpha-1
antitrypsin, for the treatment of the lung. The resulting patent situation
is highly complex, and the ability of any one company to commercialize a
particular biopharmaceutical drug is highly unpredictable. The Company
intends generally to rely on the ability of its partners to provide access to
the drugs which are to be formulated for pulmonary delivery. There can be no
assurance that the Company's partners will be able to provide access to drug
candidates for formulation for pulmonary delivery or that, if such access is
provided, the Company or its partners will not be accused of, or determined
to be, infringing a third party's rights and will not be prohibited from
working with the drug or be found liable for damages that may not be subject
to indemnification. Any such restriction on access or liability for damages
would have a material adverse effect on the Company.
The Company also will rely on trade secrets and contract law to protect
certain of its proprietary technology. There can be no assurance that any
such contract will not be breached, or that if breached, the Company will
have adequate remedies. Furthermore, there can be no assurance that any of
the Company's trade secrets will not become known or independently discovered
by third parties.
The PTO has recently adopted changes to the United States patent law
which change the term of issued patents, subject to certain transition
periods, to 20 years from the date of filing rather than 17 years from date
of issuance. Beginning in June 1995, the patent term became 20 years from the
earliest effective filing date of the underlying patent application. Such
change may reduce the effective term of protection for patents that are
pending for more than three years in the PTO. In addition, as of January
1996, all inventors who work outside of the United States are able to
establish a date of invention on the same basis as those working in the
United States. Such change could adversely affect the ability of the Company
to prevail in a priority of invention dispute with a
Page 11 of 15
<PAGE>
third party located or doing work outside of the United States. While the
Company cannot predict the effect that such changes will have on its
business, such changes could have a material adverse effect on the Company's
ability to protect its proprietary information and sustain the commercial
viability of its products. Furthermore, the possibility of extensive delays
in such process, could effectively further reduce the term during which a
marketed product could be protected by patents.
GOVERNMENT REGULATION; UNCERTAINTY OF OBTAINING REGULATORY APPROVAL. The
production and marketing of the Company's products and its ongoing research
and development activities are subject to regulation by numerous governmental
authorities in the United States and other countries. Prior to marketing a
new dosage form of any drug, including one developed for use with the
Company's pulmonary drug delivery system, whether or not such drug was
already approved for marketing in another dosage form, the product must
undergo rigorous preclinical and clinical testing and an extensive review
process mandated by the FDA and equivalent foreign authorities. These
processes generally take a number of years and require the expenditure of
substantial resources. None of the Company's proposed products has been
submitted to the FDA for marketing approval. The Company has no experience
obtaining such regulatory approval, does not have the expertise or other
resources to do so and intends to rely on its partners to fund clinical
testing and to obtain product approvals.
The time required for completing such testing and obtaining such
approvals is uncertain. Further refinement of the device prototype, further
scale-up of the powder processing system and automated powder filling and
packaging system will need to be accomplished before initiation of later
stage clinical trials. Any delay in any of these components of product
development may delay testing. In addition, delays or rejections may be
encountered based upon changes in FDA policy during the period of product
development. Similar delays may also be encountered in other countries. If
regulatory approval of a product is granted, such approval may entail
limitations on the indicated uses for which the product may be marketed, and
the marketed product, its manufacturer, and its manufacturing facilities
remain subject to continual review and periodic inspections. Later discovery
of previously unknown problems with a product, manufacturer, or facility may
result in restrictions on such product or manufacturer, including withdrawal
of the product from the market. There can be no assurance that regulatory
approval will be obtained for any products developed by the Company on a
timely basis, or at all. The failure to obtain timely regulatory approval of
its products, any product marketing limitations or a product withdrawal would
have a material adverse effect on the Company.
HIGHLY COMPETITIVE INDUSTRY; RISK OF TECHNOLOGICAL OBSOLESCENCE. The
biotechnology and pharmaceutical industries are highly competitive and
rapidly evolving and significant developments are expected to continue at a
rapid pace. The Company's success depends upon maintaining a competitive
position in the development of products and technologies for pulmonary
delivery of pharmaceutical drugs. If a competing company were to develop or
acquire rights to a better dry powder pulmonary delivery device or fine
powder processing technology, a better system for efficiently and
reproducibly delivering drugs to the deep lung, a non-invasive drug delivery
system which is more attractive for the delivery of drugs than pulmonary
delivery, or an invasive delivery system which overcomes some of the
drawbacks of current invasive systems for chronic or subchronic indications
(such as a sustained release system), the Company's business would be
materially adversely affected.
The Company is in competition with pharmaceutical, biotechnology and drug
delivery companies, hospitals, research organizations, individual scientists
and nonprofit organizations engaged in the development of alternative drug
delivery systems or new drug research and testing, as well as with entities
producing and developing injectable drugs. The Company is aware of a number
of companies currently seeking to develop new products and non-invasive
alternatives to injectable drug delivery, including oral delivery systems,
intranasal delivery systems, transdermal systems and colonic absorption
systems. Several of these companies may have or be developing dry powder
devices that could be used for pulmonary delivery. The Company is also aware
of other companies currently engaged in the development and commercialization
of pulmonary drug delivery systems and enhanced injectable drug delivery
systems. Many of these companies and entities have greater research and
development capabilities, experience, manufacturing, marketing, financial and
managerial resources than the Company and represent significant competition
for the Company. Acquisitions of competing drug delivery companies by large
pharmaceutical companies could enhance competitors' financial, marketing and
other resources. Accordingly, the Company's competitors may succeed in
developing competing technologies, obtaining FDA approval for products more
rapidly than the Company and gaining market acceptance. There can be no
assurance that developments by others will not render the Company's products
or technologies uncompetitive or obsolete.
Page 12 of 15
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities
(c) On February 7, 1997, the Company sold 1,800,000 shares of Common
Stock to several institutional investors for an aggregate offering
price of $32,400,000 pursuant to Section 4(2) of the Securities Act of
1933, as amended. Vector Securities International, Inc. acted as
placement agent in connection with the sale and was paid a fee equal
to 5.5% of the aggregate purchase price.
On June 27, 1997 the Company issued 28,165 shares of Common Stock to
Pafra Limited ("Pafra") in consideration of certain intellectual
property rights granted to the Company by Pafra pursuant to the
Assignment of the Permazyme Technology, and Related Agreements and
Goodwill, dated June 27,1997, between the Company and Pafra. The
issuance was made pursuant to Section 4(2) of the Securities Act.
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders -
(a) The Annual Meeting of Shareholders of Inhale Therapeutic Systems
was held on June 17, 1997.
(b) The matters voted upon at the meeting and the voting of
shareholders with respect thereto are as follows:
The election of Robert B. Chess, John S. Patton, Terry L. Opdendyk,
Mark J. Gabrielson, James B. Glavin and Melvin Perelman to the Board
of Directors to hold office until the next annual meeting of
shareholders and until his successor is elected and has qualified, or
until such director's earlier death, resignation or removal:
For Withheld
--- --------
Robert B. Chess 9,046,072 5,068
John S. Patton 9,046,572 4,568
Terry L. Opdendyk 9,046,572 4,568
Mark J. Gabrielson 9,046,072 5,068
James B. Glavin 9,045,472 5,668
Melvin Perelman, Ph.D. 9,031,496 19,644
Ratification of the selection of Ernst & Young, LLP as independent
auditors of the Company for its fiscal year ending December 31, 1997:
For: 9,042,456 Against: 6,726 Abstain: 1,958
Based on the voting results, each of the directors nominated was
elected and the ratification of Ernst & Young, LLP was approved.
Item 5. Other Information - None
Page 13 of 15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(#) Exhibits
The following exhibits are filed herewith or incorporated by reference
EXHIBIT EXHIBIT TITLE
- --------------------------------------------------------------------------------
3.1(3) Restated Articles of Incorporation of the Registrant.
3.2(1) Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 through 3.2.
4.2(1) Restated Investor Rights Agreement among the Registrant and certain
other persons named therein, dated April 29, 1993, as amended
October 29, 1993.
4.5(1) Warrant to purchase 18,182 Shares of Series C Preferred Stock between
the Registrant and Phoenix Leasing Incorporated, dated October 29,
1993.
4.6(1) Specimen stock certificate.
4.9(2) Stock Purchase Agreement between the Registrant and Pfizer Inc., dated
January 18, 1995.
4.10(8) Warrant to purchase 10,000 shares of Common Stock between the
Registrant and Thomas J. Peirona, dated November 1, 1996.
4.11(8) Warrant to purchase 10,000 shares of Common Stock between the
Registrant and Kiet Nguyen, dated November 1, 1996.
4.12(9) Form of Stock Purchase Agreement between the Registrant and the
Selling Shareholders dated January 28, 1997.
10.1(4) Registrant's 1994 Equity Incentive Plan (the Equity Incentive Plan).
10.2(1) Form of Incentive Stock Option under the Equity Incentive Plan.
10.3(1) Form of Nonstatutory Stock Option under the Equity Incentive Plan.
10.4(7) Registrant's 1994 Non-Employee Directors' Stock Option Plan, as
amended.
10.5(1) Registrant's 1994 Employee Stock Purchase Plan.
10.6(1) Standard Industrial Lease between the Registrant and W.F. Batton &
Co., Inc., dated September 17, 1992, as amended September 18, 1992.
10.7(1) Master Equipment Lease between the Registrant and Phoenix Leasing
Incorporated, dated August 15, 1992 and Schedules i to 4 thereto.
10.8(1) Senior Loan and Security Agreement between the Registrant and Phoenix
Leasing Incorporated, dated September 15, 1993.
10.9(1) Sublicense Agreement between the Registrant and John S. Patton, dated
September 13, 1991.
10.10(2) Offer Letter, dated September 16, 1994, from the Registrant to
Jack M. Anthony.
10.11(2) Addendum to Lease dated September 17, 1992, between the Registrant and
W.F. Batton & Marie A. Batton.
10.12(6) Lease dated May 31, 1995, between the Registrant and W.F. Batton &
Marie A. Batton.
10.13(6) Addendum Number One to Lease dated September 17, 1992, between the
Registrant and W.F. Batton & Marie A. Batton.
10.14(6) Addendum to Lease dated May 31, 1995 between the Registrant and W.F.
Batton & Marie A. Batton.
10.15(6) Addendum Number Two to Lease dated September 17, 1992, between the
Registrant and W.F. Batton & Marie A. Batton.
10.16(5) Stock Purchase Agreement between the Registrant and Baxter World Trade
Corporation, dated March 1, 1996.
10.17(8) Sublease and Lease Agreement, dated October 2, 1996 between the
Registrant and T.M.T. Associates L.L.C.
27.1 Financial Data Schedule
___________
(1) Incorporated by reference to the indicated exhibit in the Company's
Registration Statement (No. 33-75942), as amended.
Page 14 of 15
<PAGE>
(2) Incorporated by reference to the indicated exhibit in the Company's
Registration Statement (No. 33-89502), as amended.
(3) Incorporated by reference to the indicated exhibit in the Company's
Annual Report on Form 10-K for the year ended December 31, 1994.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 333-07969).
(5) Incorporated by reference to the indicated exhibit in the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
(6) Incorporated by reference to the indicated exhibit in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
(7) Incorporated by reference to the indicated exhibit in the company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
(8) Incorporated by reference to the indicated exhibit in the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
(9) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 333-20787)
(b) Reports on Form 8-K.
No reports were filed on Form 8-K during the quarter ended June 30, 1997
(c) See Exhibits listed under Item 14(a)(3).
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto.
INHALE THERAPEUTIC SYSTEMS
DATE: August 13, 1997 BY: /S/ROBERT B. CHESS
-----------------------
Robert B. Chess
President, Chief Executive Officer and Director
DATE: August 13, 1997 BY: /S/JUDI R. LUM
-----------------------
Judi R. Lum
Chief Financial Officer
Page 15 of 15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR INHALE THERAPEUTIC SYSTEMS FOR THE THREE AND SIX MONTH
PERIODS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 33,449
<SECURITIES> 28,020
<RECEIVABLES> 5,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,797
<PP&E> 10,533
<DEPRECIATION> (3,832)
<TOTAL-ASSETS> 74,802
<CURRENT-LIABILITIES> 12,625
<BONDS> 0
0
0
<COMMON> 94,055
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 74,802
<SALES> 0
<TOTAL-REVENUES> 7,150
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,112
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<INCOME-CONTINUING> (4,342)
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<NET-INCOME> (4,342)
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