<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 September 30, 1998
or,
[ ] TRANSITION REPORTS 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, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3134940
- ------------------------------- ----------------------------
(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
150 INDUSTRIAL ROAD
SAN CARLOS, CALIFORNIA 94070
(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
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of outstanding shares of the registrant's Common Stock, $0.0001 par
value, was 15,690,495 as of October 26, 1998.
Page 1 of 20
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INHALE THERAPEUTIC SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
PAGE
<S> <C>
Item 1. Condensed Financial Statements - unaudited . . . . . . . . . . . . . 3
Condensed Balance Sheets - September 30, 1998 and
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Statements of Operations for the three and nine
month periods ended September 30, 1998 and 1997 . . . . . . . . . 4
Condensed Statements of Cash Flows for the nine month period
ended September 30, 1998 and 1997 . . . . . . . . . . . . . . . . 5
Notes to Condensed Financial Statements. . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . 7
<CAPTION>
PART II: OTHER INFORMATION
<S> <C>
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . .17
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . .17
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . .17
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . .17
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . .17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . .17
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
</TABLE>
Page 2 of 20
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Item 1.
INHALE THERAPEUTIC SYSTEMS, INC.
Condensed Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
(unaudited) (Note)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 18,312 $ 14,948
Short-term investments 44,552 85,225
Other current assets 1,673 752
--------- ---------
Total current assets 64,537 100,925
Property and equipment, net 37,918 18,694
Deposits and other assets 144 143
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$ 102,599 $ 119,762
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--------- ---------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and
accrued liabilities $ 5,308 $ 10,428
Deferred revenue 5,060 6,686
--------- ---------
Total current liabilities 10,368 17,114
Equipment financing obligations 4,957 5,102
Accrued rent 849 453
Stockholders' equity:
Common stock 1,569 1,377
Capital in excess of par value 135,452 133,896
Deferred compensation (864) (538)
Accumulated deficit (49,732) (37,642)
--------- ---------
Total stockholders' equity 86,425 97,093
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$ 102,599 $ 119,762
--------- ---------
--------- ---------
</TABLE>
Note: The balance sheet at December 31, 1997 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 20
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INHALE THERAPEUTIC SYSTEMS, INC.
Condensed Statements of Operations
(in thousands, except per share information)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Contract research revenue $ 4,883 $ 4,309 $ 15,427 $11,459
Operating costs and expenses:
Research and development 8,941 6,427 24,803 16,640
General and administrative 1,819 1,345 5,769 4,244
--------- --------- ---------- ----------
Total operating costs and expenses 10,760 7,772 30,572 20,884
--------- --------- ---------- ----------
Loss from operations (5,877) (3,463) (15,145) (9,425)
Interest income, net 835 812 3,104 2,432
--------- --------- ---------- ----------
Net loss $(5,042) $(2,651) $(12,041) $(6,993)
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Basic and diluted net loss per share $ (0.32) $ (0.19) $ (0.77) $ (0.52)
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Shares used in computing basic and
diluted net loss per share 15,681 13,726 15,630 13,417
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES.
Page 4 of 20
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INHALE THERAPEUTIC SYSTEMS, INC.
Condensed Statements of Cash Flows
Increase/(Decrease) in Cash and Cash Equivalents
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
-------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (12,041) $ (6,993)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,321 1,611
Amortization of deferred compensation 127 88
Increase in other current assets, deposits
and other assets (921) (5,421)
Increase (decrease) in accounts payable and
accrued liabilities (4,703) 2,915
Increase (decrease) in deferred revenue (1,626) 5,785
----------- ----------
Net cash used in operations (16,843) (2,015)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities (120,184) (53,354)
Sales and maturities of available for sale
securities 160,808 23,063
Purchases of property and equipment (21,546) (8,196)
----------- ----------
Net cash provided by (used in) investing
activities 19,078 (38,487)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of equipment financing obligations (165) (128)
Issuance of common stock, net of issuance costs 1,294 31,689
----------- ----------
Net cash provided by financing activities 1,129 31,561
----------- ----------
Net increase (decrease) in cash and cash
equivalents 3,364 (8,941)
Cash and cash equivalents at beginning of period 14,948 18,568
----------- ----------
Cash and cash equivalents at end of period $ 18,312 $ 9,627
----------- ----------
----------- ----------
</TABLE>
SEE ACCOMPANYING NOTES.
Page 5 of 20
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INHALE THERAPEUTIC SYSTEMS, I NC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Inhale Therapeutic Systems ("Inhale" or the "Company") was incorporated
in the State of California in July 1990. Since inception, the Company has
been engaged in the development of systems for the pulmonary delivery of
macromolecule drug therapies for systemic and local lung applications.
On June 23, 1998, the Company held its Annual Shareholders Meeting at
which the Shareholders approved the Company's reincorporation in Delaware.
The Company completed its reincorporation in Delaware on July 1, 1998.
The accompanying unaudited condensed financial statements of Inhale 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 September 30, 1998 and the
related statements of operations and cash flows for the nine month periods
ended September 30, 1998 and 1997, are unaudited but include all adjustments
for the three and nine months ended September 30, 1998 and 1997 (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, 1997 as 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. COMPREHENSIVE INCOME
Comprehensive income is equal to net income for the three and nine month
periods ended September 30, 1998 and 1997.
3. 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 three partners represented 91% of the
Company's revenue in the nine month period ended September 30, 1998.
Contract revenue from two partners accounted for 70% of the Company's revenue
in the comparable period in 1997. Costs of contract research revenue
approximate such revenue and are included in research and development
expenses.
Page 6 of 20
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4. NET LOSS PER SHARE
Basic and diluted net loss per common share is computed in conformance
with Statement of Financial Accounting Standards No. 128, "Earnings Per
Share", which the Company adopted in 1997. Accordingly, the weighted average
number of common shares outstanding are used while common stock equivalent
shares for stock options and warrants are not included in the per share
calculations as the effect of their inclusion would be antidilutive.
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 nine months ended September 30, 1998
and 1997 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, 1997.
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 under the
heading "Risk Factors" as well as those discussed in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
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 commercial products and does not anticipate receiving
revenue from product sales or royalties in the near future. For the period
from inception through September 30, 1998, the Company incurred a cumulative
net loss of approximately $49.7 million. The sources of working capital have
been equity financings, financings of equipment acquisitions, interest earned
on investments of cash, and payments received under research 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. 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.
RESULTS OF OPERATIONS
Revenue in the third quarter of 1998 was $4.9 million compared to $4.3
million in the third quarter of
Page 7 of 20
<PAGE>
1997, an increase of 13%. Revenues for the nine months ended September 30,
1998 were $15.4 million as compared to $11.5 million for the nine months
ended September 30, 1997, an increase of 35%. The increase in revenue for
both the three and nine months periods was primarily due to the expansion of
the Company's existing collaborative agreements. Revenue for the first,
second and third quarters of 1998 and 1997 was comprised of reimbursed
research and development expenses as well as the amortization of the pro-rata
portion of up-front signing and milestone payments received from the
Company's collaborative partners. Recognition of up-front signing and
milestone payments is 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 $8.9
million in the third quarter of 1998 from $6.4 million in the corresponding
period of 1997, an increase of 39%. Research and development expenses for the
nine months ended September 30, 1998 were $24.8 million compared to $16.6
million for the nine months ended September 30, 1997, an increase of 49%.
The increase for both the three and nine month periods was due primarily to
continued expansion of research activities resulting from an increase in the
number of projects, additional hiring of scientific and development
personnel, costs associated with validation process development for the
Company's commercial manufacturing facility and increased costs of laboratory
supplies, tooling and other product development expenses. The Company
expects research, development and process development spending to increase
significantly over the next few years as the Company expands its development
efforts under collaborative agreements and scales up its late stage clinical
and early stage commercial manufacturing facility.
General and administrative expenses increased to $1.8 million in the
third quarter of 1998 from $1.3 million in the third quarter of 1997, an
increase of 35%. For the nine month period ended September 30, 1998, general
and administrative expenses were $5.8 million compared to $4.2 million in the
comparable period of 1997, an increase of 36%. The increase for the three
and nine month periods was due primarily to costs associated with supporting
the Company's increased research efforts including administrative staffing,
business development and marketing activities, and the purchase of additional
computer equipment and supplies. General and administrative expenses are
expected to continue to increase over the next few years to support
increasing levels of research, development and manufacturing activities.
Net interest income increased to $840,000 in the third quarter of 1998
compared to $810,000 in the third quarter of 1997, an increase of 3%. Net
interest income increased to $3.1 million in the nine month period ended
September 30, 1998 compared to $2.4 million for the nine months ended
September 30, 1997. Interest income was earned on larger cash and
investment balances held by the Company in the nine month period ended
September 30, 1998, compared to the same period in 1997. The higher cash and
investment balances are the result of the Company receiving milestone and
research funding payments from collaborative partners as well as the
completion of a public offering of the Company's Common Stock in November
1997 which raised net proceeds of approximately $40.0 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through public and
private placements of its equity securities, contract research and milestone
payments, financing of equipment acquisitions and interest income earned on
its investments of cash. At September 30, 1998, the Company had cash, cash
equivalents and short-term investments of approximately $62.9 million.
The Company's operations used cash of $16.8 million in the nine months
ended September 30, 1998, as compared to $2.0 million used in the nine months
ended September 30, 1997. The increase in net cash used in operations is
principally due to the continued expansion of research activities resulting
from an increase in the number of projects and providing the related general
and administrative support for these increased research efforts, including
increased business development and marketing expenses.
The Company purchased property and equipment of approximately $21.5
million during the nine months ended September 30, 1998, compared to $8.2
million for the corresponding period in 1997. The increase is primarily due
to the build-out of the Company's manufacturing facility and corporate
headquarters in San Carlos, California. This facility will support the
Company's commercial manufacturing requirements.
Page 8 of 20
<PAGE>
The Company expects its cash requirements to continue to increase at an
accelerated rate due to expected increases in costs associated with further
research and development of its technologies, resulting in larger numbers 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, investments in technologies, inhalation device prototype
construction and facilities expansion, including the completion of its late
stage clinical and commercial manufacturing facility.
The Company believes that its cash, cash equivalents and short-term
investments as of September 30, 1998, together with interest income and
possible additional equipment financing, will be sufficient to meet its
operating expense and capital expenditure requirements at least through 1999.
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.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (Year 2000) approaches. The
Year 2000 ("Y2K") problem is pervasive and complex as virtually every
computer operation may be affected in some way by the rollover of the two
digit year value to "00". The issue is whether systems will properly
recognize date sensitive information when the year changes to 2000. If the
Company's software and firmware with date-sensitive functions are not Y2K
compliant, they may recognize a date with "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things,
interruptions in manufacturing operations, a temporary inability to process
transactions, or engage in similar normal business activities.
The Company is utilizing both internal and external resources to conduct
a comprehensive review of its systems to identify those systems that could
be affected by the Y2K problem and is developing an implementation plan to
resolve the issue by the end of 1999. The scope of the Y2K effort includes
information technology ("IT") such as software and hardware, non-IT systems
or embedded technology such as microcontrollers contained in various
manufacturing and lab equipment, environmental and safety systems, facilities
and utilities, and the Y2K readiness of key third parties such as suppliers
and financial institutions. A multi-step Y2K readiness plan has been
developed for its internal systems which includes development of corporate
awareness, inventory and assessment of internal systems, project planning,
project implementation (which includes remediation, upgrading and
replacement), and validation testing.
The Company has initiated formal communication with significant vendors
and suppliers to determine the extent to which the Company's operations are
vulnerable to those third parties' failure to remediate their own Y2K issues.
Suppliers of hardware, software or other products that might contain embedded
processors were requested to provide information regarding Y2K compliance
status of their products. The Company will continue to seek information from
non-responsive suppliers and plans to contact replacement vendors and
suppliers through the second quarter of 1999 and then develop and implement
contingency plans. In addition, in order to protect against the acquisition
of additional non-compliant products, the Company now requires suppliers to
warrant that products sold or licensed to the Company are Y2K compliant. In
the event that any of the Company's significant suppliers do not successfully
and timely achieve Y2K compliance, the Company's business or operations could
be adversely affected. There can be no assurance that the systems of other
companies on which the Company's systems rely will be converted on a timely
basis and would not have an adverse effect on the Company's operations.
The Company has not yet fully developed a comprehensive contingency plan
to address situations that may result if the Company is unable to achieve Y2K
readiness of its critical operations. Development of contingency plans is in
progress and will develop in detail and expand during the remainder of 1998
and the first half of 1999. There can be no assurance that the Company will
be able to develop a contingency plan that will adequately
Page 9 of 20
<PAGE>
address issues that may arise in the year 2000. The failure of the Company
to develop and implement, if necessary, an appropriate contingency plan could
have a material impact on the operations of the Company. Finally, the
Company is also vulnerable to external forces that might generally affect
industry and commerce, such as utility and transportation company Y2K
compliance failures and related service interruptions.
The Company anticipates completing the mission critical, high impact Y2K
issues by the first half of 1999, which is prior to any anticipated impact on
its operating systems and expects the Y2K project to continue beyond the year
2000 with respect to the upgrading, replacement and testing of non-critical
systems. These dates are contingent upon the timeliness and accuracy of
software and hardware upgrades from vendors, adequacy and quality of
resources available to work on completion of the project and any other
unforeseen factors. The total expense of the Y2K project is currently
estimated at approximately $1 million, which is not material to the Company's
business operations or financial condition. The expenses of the Y2K project
are being funded through operating cash flows.
The costs of the project and the date on which the Company believes it
will complete the Y2K modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third-party modification
plans and other factors. There can be no assurance that these estimates will
be achieved and actual results could differ materially from those
anticipated.
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 small molecule drugs. Only six of the Company's fourteen
pulmonary delivery formulations, insulin, interleukin-1 receptor, salmon
calcitonin, an osteoporosis drug and two small molecules 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, pre-clinical and clinical testing, and may
involve lengthy regulatory review. There can be no assurance that any of the
Company's potential products will prove to be safe and effective in clinical
trials, meet applicable regulatory standards, be capable of being produced in
commercial quantities at acceptable cost or be marketed successfully. 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.
UNCERTAINTIES RELATED TO TECHNOLOGY AND PRODUCT DEVELOPMENT. The success of
Inhale's pulmonary drug delivery system for any drugs will depend upon the
Company achieving sufficient system efficiency (measured by the percentage of
bulk drug entering the manufacturing process that eventually is absorbed into
the bloodstream relative to injection for systemic indications, or the amount
of drug delivered to the lung tissue for local lung indications), formulation
stability, safety and dosage reproducibility.
The initial screening determinant for the feasibility of pulmonary
delivery of any systemic drug is pulmonary bioavailability, which measures
the percentage of the drug absorbed into the bloodstream when delivered
directly to the lungs. In addition, a certain percentage of each drug dose is
lost at various stages of the manufacturing and pulmonary delivery process in
drug formulation, dry powder processing, packaging, and in moving the drug
from a delivery device into the lungs. Excessive drug loss at any one stage
or cumulatively in the manufacturing and delivery process could render a drug
commercially unfeasible for pulmonary delivery.
Formulation stability (the physical and chemical stability of the
formulated drug over time and under various storage conditions) and safety
will vary with each drug and the type and amount of excipients that are used
in the formulation. Reproducible dosing (the ability to deliver a consistent
and predictable amount of drug into the bloodstream over time both for a
single patient and across patient groups) requires the development of an
inhalation device that consistently delivers predictable amounts of dry
powder formulations to the deep lung, accurate unit dose packaging of dry
powder formulations and moisture resistant packaging. There can be no
assurance that the Company will be able to develop successfully such an
inhalation device or overcome such other obstacles to reproducible dosing.
Page 10 of 20
<PAGE>
The Company's integrated approach to systems development relies upon
several different but related technologies. Development of powder
formulations, processing and packaging technology and the delivery device,
establishing collaborations with partners, laboratory and clinical testing,
and manufacturing scale-up must proceed contemporaneously so as not to delay
any aspect of systems development. Any delay in one component of product or
business development could cause consequential delays in the Company's
ability to develop, obtain approval of or market therapeutic products using
its system. Further refinement of the Company's device prototype, further
scale-up of the powder processing system and automated packaging system will
need to be accomplished before initiation of late stage clinical trials.
There can be no assurance that Inhale will be able to demonstrate
pulmonary bioavailability for the drug candidates it has identified or may
identify, will be able to achieve commercial viability of its pulmonary
delivery system or will achieve the total system efficiency needed to be
competitive with alternative routes of delivery. Further, there can be no
assurance that the Company's pulmonary delivery system will prove to be safe
or provide reproducible dosages of stable formulations sufficient to achieve
clinical efficacy, regulatory approval or market acceptance. In addition,
there can be no assurance that Inhale will advance the numerous aspects of
product and business development such that delays in overall product
development do not occur. The failure to demonstrate pulmonary
bioavailability, achieve total system efficiency, provide safe, reproducible
dosages of stable formulations or advance on a timely basis the numerous
aspects of product and business development would have a material adverse
effect on the Company.
UNCERTAINTIES RELATED TO CLINICAL TRIALS. The Company has limited experience
in conducting clinical trials and intends to rely primarily on the
pharmaceutical companies with which it collaborates, including Pfizer Inc.
and Eli Lilly & Company. The Company is responsible for managing the
clinical trials in its collaboration with Baxter Healthcare Corporation
("Baxter"). Before seeking regulatory approvals for the commercial sale of
products under development, the Company must demonstrate through pre-clinical
studies and clinical trials that such products are safe and effective for use
in the target indications. The results from pre-clinical studies and early
clinical trials may not be indicative of results that will be obtained in
large-scale testing, and there can be no assurance that the Company's
clinical trials will demonstrate sufficient safety and efficacy to obtain the
requisite regulatory approvals or will result in marketable products.
Clinical trials are also often conducted with patients having advanced stages
of disease. During the course of treatment, these patients can die or suffer
other adverse medical effects for reasons that may not be related to the
pharmaceutical agent being tested but which can nevertheless affect clinical
trial results. A number of companies in the pharmaceutical industry have
suffered significant setbacks in advanced clinical trials, even after
promising results in earlier trials. Clinical trials for products being
developed by the Company and its partners may be delayed by many factors,
including enrolling a sufficient number of patients fitting the appropriate
trial profile. If any of the Company's products under development are not
shown to be safe and effective in clinical trials, the resulting delays in
developing other compounds and conducting related pre-clinical testing and
clinical trials, as well as the need for additional financing, 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 September 30,
1998, has incurred a cumulative deficit of approximately $49.7 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 COLLABORATIVE PARTNERS. The Company currently does not
possess the resources necessary to develop, obtain regulatory approvals, 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 certain of its partners to fund clinical
trials, assist in obtaining regulatory approvals, supply drugs for
formulation and market and distribute products. While 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
Page 11 of 20
<PAGE>
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, and the inability of
any partner to supply drugs for formulation would have a material adverse
effect on the Company.
The Company's existing partners have 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 new arrangements with companies whose products compete
with those of its existing partners. The Company also has 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 or renegotiate such agreements. 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,
renegotiation of an agreement, or failure by a partner to devote
sufficientresources to the development and commercialization of the Company's
products would have a material adverse effect on the Company.
LIMITED MANUFACTURING EXPERIENCE; RISK OF SCALE-UP. To achieve the levels of
production of Inhale's dry powder drug formulations necessary to support late
stage human clinical trials and for early commercialization of any of such
products, the Company will need to scale-up its current powder processing
facilities and automated filling, build a late stage clinical and early
commercial production facility, and comply with the good manufacturing
practice ("GMP") standards prescribed by the United States Food and Drug
Administration ("FDA") and other standards prescribed by various federal,
state and local regulatory agencies in the United States and any other
country of use.
The Company has no experience manufacturing products for large scale
clinical testing or commercial purposes. To date, the Company has performed
powder processing on the small scale needed for early stage trials and for
testing formulations of certain other potential therapeutic products and
scaled-up powder processing for larger clinical trials. There can be no
assurance that manufacturing and control problems will not arise as the
Company attempts to further scale-up its powder processing facilities or that
such scale-up can be achieved in a timely manner or at a commercially
reasonable cost. Any failure to surmount such problems could delay or prevent
late stage clinical testing and commercialization of the Company's products
and would have a material adverse effect on the Company. To date, the Company
has relied on a particular method of powder processing. There can be no
assurance that this technology will be applicable to all drugs or that the
drug losses in powder processing will not be too high for commercial
viability for certain drugs. In the event that the Company decides to pursue
alternative powder processing methods for some or all of its drugs, there can
be no assurance that these methods will prove commercially practical for
aerosol drugs or that the Company will have or be able to acquire rights to
use such alternative methods.
Fine particle powders and small quantity packaging (such as those to be
used in the Company's delivery system) require special handling. The Company
has designed and qualified small scale automated filling equipment for small
quantity packaging of fine powders. The Company faces significant technical
challenges scaling-up an automated filling system that can accurately and
economically handle the small dose and particle sizes of its powders in
commercial quantities. There can be no assurances that the Company will be
able to scale-up its automated filling equipment in a timely manner or at
commercially reasonable costs. Any failure or delay in such scale-up would
delay product development or bar commercialization of the Company's products
and would have a material adverse effect on the Company.
Page 12 of 20
<PAGE>
The Company also faces technical challenges in further developing its
inhalation device to achieve the efficiency necessary to deliver a broad
range of drugs, to produce such a device in quantities sufficient for later
stage clinical trials and early commercialization, and to adapt the device as
may be required for different powder formulations. There can be no assurance
that Inhale will successfully achieve such efficiencies, will be able to
produce such quantities or will be able to adapt the device as required. The
failure of the Company to overcome any such challenges would have a material
adverse effect on the Company. For late stage clinical trials and initial
commercial production, the Company intends to use one or more contract
manufacturers to produce its device. There can be no assurance that Inhale
will be able to enter into or maintain such arrangements. The failure of the
Company to enter into and maintain such arrangements would have a material
adverse effect on the Company.
UNCERTAINTY OF MARKET ACCEPTANCE. The commercial success of the Company's
pulmonary drug delivery system will depend upon market acceptance by health
care providers, payors and patients. The Company's products under development
use a new method of drug delivery, and there can be no assurance that any of
the Company's products under development will ever achieve market acceptance.
Market acceptance will depend on many factors, including the safety and
efficacy results of the Company's clinical trials, favorable regulatory
approval and product labeling, the frequency of administration, the
availability of third-party reimbursement, the availability of alternative
technologies and the price of the Company's products relative to alternative
technologies. There can be no assurance that health care providers, patients
or third-party payors will accept the Company's pulmonary drug delivery
system and the failure to do so would have a material adverse effect on the
Company.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company's
operations to date have consumed substantial and increasing amounts of cash.
The negative cash flow from operations is expected to continue and to
accelerate in the foreseeable future. The development of the Company's
technology and proposed products will require a commitment of substantial
funds to conduct costly and time-consuming research, preclinical and clinical
testing, establish an early commercial production facility and bring any such
products to market. The Company's future capital requirements will depend on
many factors, including continued progress in the research and development of
the Company's technology and drug delivery system, the ability of the Company
to establish and maintain collaborative arrangements with others and the
terms thereof, payments received from partners under research and development
agreements, progress with preclinical and clinical trials, the time and costs
involved in obtaining regulatory approvals, the cost of development and the
rate of scale-up of the Company's powder processing and packaging
technologies, the timing and costs of its late stage clinical and early
commercial production facility, the cost involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims, the need to acquire
licenses to new technology and the status of competitive products.
The Company expects that its existing capital resources, contract
research revenues from collaborations and the net proceeds from the November
1997 public offering and the interest thereon, will enable the Company to
maintain its current and planned operations at least through 1999.
Thereafter, the Company may need to raise substantial additional capital to
fund its operations. The Company intends to seek such additional funding
through collaborative or partnering arrangements, the extension of existing
arrangements, or through public or private equity or debt financings. There
can be no assurance that additional financing will be available on acceptable
terms or at all. If additional funds are raised by issuing equity securities,
further dilution to shareholders may result. If adequate funds are not
available, the Company may be required to delay, reduce the scope of, or
eliminate one or more of its research or development programs or obtain funds
through arrangements with collaborative partners or others that may require
the Company to relinquish rights to certain of its technologies, product
candidates or products that the Company would otherwise seek to develop or
commercialize.
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.
Currently the Company has been issued twenty-four U.S. and foreign patents
which cover certain aspects of its proprietary technology and the Company has
a number of patent applications pending. There can be no assurance that any
of the patents applied for by the Company will issue, or that any patents
that issue or have issued 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.
Page 13 of 20
<PAGE>
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 issued U.S. patents 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. 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.
The Company is aware of numerous pending and issued U.S. 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 can obtain a license from
the relevant party or parties on commercially reasonable terms, if at all.
There can be no assurance that the Company can 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.
In June 1997, the Company acquired the intellectual property portfolio
of the BioPreservation Division of Pafra Limited of Basildon, England
("Pafra"). This portfolio includes issued U.S. and foreign Letters Patent and
pending applications relating to the stabilization of macromolecule drugs in
dry formulations. A granted European patent included in this portfolio is
currently the subject of an opposition proceeding before the European Patent
Office and the Company is continuing the defense of this patent, the
opposition to which was initiated prior to the acquisition. There can be no
assurance that the Company will be successful in the defense of this
opposition proceeding. In addition, there can be no assurance that any of the
Pafra patent applications will issue, or that any Pafra patents will be valid
and enforceable. The loss of the opposition proceeding or the inability to
obtain or defend the Pafra patents could 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 assurances 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. The
resulting patent situation is highly complex, and the ability of any one
company
Page 14 of 20
<PAGE>
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.
In 1995 the PTO adopted changes to the United States patent law that
changed 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 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.
DEPENDENCE UPON AND NEED TO ATTRACT KEY PERSONNEL. The Company is highly
dependent upon the principal members of its scientific and management staff.
The Company does not have employment contracts with its key employees, nor
does the Company have key man insurance policies on them. The Company also
relies on consultants and advisors to assist the Company in formulating
research and development strategy. To pursue its product development and
commercialization plans, the Company will be required to hire additional
qualified scientific personnel to perform research and development, as well
as personnel with expertise in clinical testing, government regulation and
manufacturing. Expansion in product development and manufacturing also is
expected to require the addition of management personnel and the development
of additional expertise by existing management personnel. Retaining and
attracting qualified personnel, consultants and advisors will be critical to
the Company's success. The Company faces competition for qualified
individuals from numerous pharmaceutical, biotechnology and drug delivery
companies, universities and other research institutions. There can be no
assurance that the Company will be able to retain its current key employees
or attract and retain qualified additional personnel and management when
needed and its failure to do so would have a material adverse effect on the
Company's ability to develop and commercialize products.
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, including FDA policy relating
to GMP compliance, 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
Page 15 of 20
<PAGE>
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.
UNCERTAINTY RELATED TO THE HEALTH CARE INDUSTRY AND THIRD-PARTY
REIMBURSEMENT. Political, economic and regulatory influences are subjecting
the health care industry in the United States to fundamental change. Recent
initiatives to reduce the federal deficit and to reform health care delivery
are increasing cost-containment efforts. The Company anticipates that
Congress, state legislatures and the private sector will continue to review
and assess alternative benefits, controls on health care spending through
limitations on the growth of private health insurance premiums and Medicare
and Medicaid spending, the creation of large insurance purchasing groups,
price controls on pharmaceuticals and other fundamental changes to the health
care delivery system. Any such proposed or actual changes could cause the
Company or its collaborative partners to limit or eliminate spending on
development projects. Legislative debate is expected to continue in the
future, and market forces are expected to demand reduced costs. Inhale cannot
predict what effect the adoption of any federal or state health care reform
measures or future private sector reforms may have on its business.
In both domestic and foreign markets, sales of the Company's products
under development will depend in part upon the availability of reimbursement
from third-party payors, such as government health administration
authorities, managed care providers, private health insurers and other
organizations. In addition, other third-party payors are increasingly
challenging the price and cost effectiveness of medical products and
services. Significant uncertainty exists as to the reimbursement status of
newly approved health care products. There can be no assurance that the
Company's proposed products will be considered cost effective or that
adequate third-party reimbursement will be available to enable Inhale to
maintain price levels sufficient to realize an appropriate return on its
investment in product development. Legislation and regulations affecting the
pricing of pharmaceuticals may change before the Company's proposed products
are approved for marketing. Adoption of such legislation could further limit
reimbursement for medical products. If adequate coverage and reimbursement
levels are not provided by the government and third-party payors for the
Company's potential products, the market acceptance of these products would
be adversely affected, which 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 could 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 developed 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 or gain market acceptance more rapidly
than the Company. There can be no assurance that developments by others will
not render the Company's products or technologies uncompetitive or obsolete.
Page 16 of 20
<PAGE>
PRODUCT LIABILITY; AVAILABILITY OF INSURANCE. The design, development and
manufacture of the Company's products involve an inherent risk of product
liability claims and associated adverse publicity. Although the Company
currently maintains general liability insurance, there can be no assurance
that the coverage limits of the Company's insurance policies will be
adequate. The Company obtained clinical trial product liability insurance of
$3.0 million per event for certain clinical trials and intends to obtain
insurance for future clinical trials of insulin and other products under
development. There can be no assurance, however, that the Company will be
able to obtain or maintain insurance for any future clinical trials. Such
insurance is expensive, difficult to obtain and may not be available in the
future on acceptable terms, or at all. A successful claim brought against the
Company in excess of the Company's insurance coverage would have a material
adverse effect upon the Company and its financial condition.
HAZARDOUS MATERIALS. The Company's research and development involves the
controlled use of hazardous materials, chemicals and various radioactive
compounds. Although the Company believes that its safety procedures for
handling and disposing of such materials comply with the standards prescribed
by state and federal regulations, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of
such an accident, the Company could be held liable for any damages that
result and any such liability could exceed the resources of the Company. The
Company may incur substantial costs to comply with environmental regulations.
ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's Certificate of
Incorporation and the Delaware General Corporation Law could discourage a
third party from attempting to acquire, or make it more difficult for a third
party to acquire, control of the Company without approval of the Company's
Board of Directors. Such provisions could also limit the price that certain
investors might be willing to pay in the future for shares of Common Stock.
Certain of the provisions allow the Board of Directors to authorize the
issuance of Preferred Stock with rights superior to those of the Common
Stock.
POTENTIAL VOLATILITY OF STOCK PRICE. The market prices for securities of
early stage biotechnology companies have historically been highly volatile
and the market from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. Factors such as fluctuations in the Company's operating results,
announcements of technological innovations or new therapeutic products or the
announcement or termination of collaborative relationships by the Company or
its competitors, governmental regulation, clinical trial results,
developments in patent or other proprietary rights, public concern as to the
safety of drug formulations developed by the Company or others and general
market conditions may have a significant effect on the market price of the
Common Stock. The Company's securities are subject to a high degree of risk
and volatility. In the past, following periods of volatility in the market
price of a company's securities, class action securities litigation has often
been instituted against such a company. Any such litigation instigated
against the Company could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse
effect on the Company's business, financial condition and operating results.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information
Pursuant to the Company's bylaws, stockholders who wish to bring
matters or propose nominees for director at the Company's 1999
Annual Meeting of Stockholders must provide specified information
to the Company between March 25, 1999 and April 24, 1999 (unless
such matters are included in the Company's proxy statement pursuant
to Rule 14a-8 under the Securities Exchange Act of 1934, as
amended).
Item 6. Exhibits and Reports on Form 8-K
Page 17 of 20
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The following exhibits are filed herewith or incorporated by reference
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT TITLE
- -------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger Between Inhale Therapeutic Systems,
a California Corporation, and Inhale Therapeutic Systems
(Delaware), a Delaware Corporation
3.1 Certificate of Incorporation of the Registrant.
3.2 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.
4.6 (1) Specimen stock certificate.
4.9 (2) Stock Purchase Agreement between the Registrant and Pfizer Inc.,
dated January 18, 1995.
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, as amended (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.
10.8 (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.
10.11(2) Lease dated September 17, 1992, 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.
10.15 (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
</TABLE>
- ------------
(1) Incorporated by reference to the indicated exhibit in the Company's
Registration Statement (No. 33-75942), as amended.
(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. 333-59735).
(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.
Page 18 of 20
<PAGE>
(9) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 333-20787).
(b) Reports on Form 8-K.
(c) See Exhibits listed under Item 14(a)(3).
Page 19 of 20
<PAGE>
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, INC.
DATE: November 10, 1998 BY: /S/ Robert B. Chess
------------------- --------------------------
Robert B. Chess
Co-Chief Executive Officer and Director
(Duly Authorized Officer)
BY: /S/ Christian O. Henry
--------------------------
Christian O. Henry
Corporate Controller
(Chief Accounting Officer)
Page 20 of 20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AS FILED ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
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<PERIOD-END> SEP-30-1998
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<SECURITIES> 44,552
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<CURRENT-ASSETS> 64,537
<PP&E> 45,421
<DEPRECIATION> (7,503)
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0
0
<COMMON> 1,569
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