<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, 2000
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 45,243,210 as of October 31, 2000.
Page 1 of 21
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INHALE THERAPEUTIC SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
PAGE
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements - unaudited.................................3
Condensed Consolidated Balance Sheets - September 30, 2000 and
December 31, 1999......................................................................3
Condensed Consolidated Statements of Operations for the three and nine month periods
ended September 30, 2000 and 1999......................................................4
Condensed Consolidated Statements of Cash Flows for the nine month periods
ended September 30, 2000 and 1999......................................................5
Notes to Condensed Consolidated Financial Statements....................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............................18
PART II: OTHER INFORMATION
Item 1. Legal Proceedings......................................................................18
Item 2. Changes in Securities..................................................................18
Item 3. Defaults Upon Senior Securities........................................................18
Item 4. Submission of Matters to a Vote of Security Holders....................................18
Item 5. Other Information......................................................................18
Item 6. Exhibits and Reports on Form 8-K.......................................................18
Signatures.............................................................................21
</TABLE>
Page 2 of 21
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Item 1.
INHALE THERAPEUTIC SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
(UNAUDITED) *
--------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $93,095 $ 33,430
Short-term investments 187,819 104,755
Accounts receivable 1,942 1,756
Other current assets 5,788 7,377
--------------- ------------
Total current assets 288,644 147,318
Property and equipment, net 101,472 63,852
Equity Investment in Alliance Pharmaceutical Corp. 16,314 6,328
Deposits and other assets 13,895 9,308
--------------- ------------
$420,325 $226,806
=============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $17,158 $ 20,268
Deferred revenue 4,361 4,811
--------------- ------------
Total current liabilities 21,519 25,079
Tenant improvement loan 4,867 4,895
Convertible subordinated debentures 237,760 108,450
Accrued rent 2,010 1,753
Stockholders' equity:
Common stock 4 3
Capital in excess of par value 296,734 181,153
Deferred compensation (2,081) (1,530)
Accumulated other comprehensive loss 11,772 1,469
Accumulated deficit (152,260) (94,466)
--------------- ------------
Total stockholders' equity 154,169 86,629
--------------- ------------
$420,325 $226,806
=============== ============
</TABLE>
SEE ACCOMPANYING NOTES.
(*)The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date which are included in the Company's Form
10-K/A for the year ended December 31, 1999 as filed with the Securities and
Exchange Commission. This balance sheet does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
Page 3 of 21
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INHALE THERAPEUTIC SYSTEMS, INC.
CONDENSED CONSLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------- ------------------------------
2000 1999 2000 1999
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Contract research revenue $ 14,061 $ 10,628 $ 38,483 $ 28,285
Operating costs and expenses:
Research and development 26,933 16,084 74,797 43,413
General and administrative 3,066 2,177 9,696 5,374
Purchased in-process research and development 2,292
-------------- -------------- ------------- -------------
Total operating costs and expenses 29,999 18,261 86,785 48,787
-------------- -------------- ------------- -------------
Loss from operations (15,938) (7,633) (48,302) (20,502)
Other income 752 - 752 -
Interest income/(expense), net 1,971 588 (10,244) 2,228
-------------- -------------- ------------- -------------
Net loss $ (13,215) $ (7,045) $ (57,794) $ (18,274)
============== ============== ============= =============
Basic and diluted net loss per share $ (0.31) $ (0.21) $ (1.42) $ (0.54)
============== ============== ============= =============
Shares used in computing basic and diluted
net loss per common share 42,266 34,000 40,742 33,920
============== ============== ============= =============
</TABLE>
SEE ACCOMPANYING NOTES.
Page 4 of 21
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INHALE THERAPEUTIC SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
2000 1999
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash used in operations $ (32,656) $ (15,358)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of short-term investments, net of purchases and maturities (83,033) 18,836
Purchases of property and equipment (43,035) (10,398)
Other investing activities (193) -
--------------- --------------
Net cash provided by investing activities (126,261) 8,438
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of equipment financing obligations (28) (46)
Payments of debt conversion incentives (17,182) -
Issuance of convertible debt, net of issuance costs 222,439 -
Issuance of common stock, net of issuance costs 13,353 1,334
--------------- --------------
Net cash provided by financing activities 218,582 1,288
--------------- --------------
Net increase/(decrease) in cash and cash equivalents 59,665 (5,632)
Cash and cash equivalents at beginning of period 33,430 24,916
--------------- --------------
Cash and cash equivalents at end of period $ 93,095 $ 19,284
=============== ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Common stock issued upon conversion of convertible
subordinated debentures, net $ 97,220 $ -
</TABLE>
SEE ACCOMPANYING NOTES.
Page 5 of 21
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INHALE THERAPEUTIC SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Inhale Therapeutic Systems, Inc. ("Inhale" or the "Company") was
incorporated in the State of California in July 1990 and reincorporated in the
State of Delaware in July 1998. During 2000, Inhale created two wholly-owned
subsidiaries: Inhale Therapeutic Systems Deutschland GmbH, incorporated in the
Federal Republic of Germany; and Inhale Therapeutic Systems UK Limited,
incorporated in the United Kingdom. The consolidated financial statements of
Inhale include the accounts of the Company and its wholly-owned subsidiaries.
All significant inter-company balances and transactions have been eliminated.
Since inception, Inhale has been engaged in the development of systems for the
pulmonary delivery of macromolecule drug therapies for systemic and local lung
applications.
The Company's Board of Directors approved a two-for-one split which was
effected as a 100% common stock divided on August 22, 2000 for stockholders of
record as of August 1, 2000. The stockholders also increased the number of
authorized shares of common stock to 300,000,000 at the Annual Meeting of the
stockholders. All share and per share amounts in these condensed consolidated
financial statements have been retroactively restated.
The accompanying unaudited condensed consolidated financial
statements of Inhale have been prepared by management 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
condensed consolidated balance sheet as of September 30, 2000, the condensed
consolidated statements of operations for the three and nine month periods
ended September 30, 2000 and 1999, and the condensed consolidated statements
of cash flows for the nine month periods ended September 30, 2000 and 1999
are unaudited but have been prepared by Inhale to include all adjustments
(consisting only of normal recurring adjustments) which Inhale considers
necessary for a fair presentation of the financial position at such dates and
the operating results and cash flows for those periods. Although Inhale
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 "SEC"). The accompanying financial statements should be read
in conjunction with the financial statements and notes thereto included in
Inhale's Amended Annual Report on Form 10-K/A for the year ended December 31,
1999 as filed with the SEC.
Results for any interim period presented are not necessarily indicative
of results for any other interim period or for the entire year.
2. RECENT PRONOUNCEMENTS
In July 1999, the Financial Accounting Standards Board, or FASB,
announced the delay of the effective date of Statement of Financial
Accounting Standards No. 133 ("FAS 133") "Accounting for Derivative
Instruments and Hedging Activities," for one year, to the first quarter of
2001. Also, in June 2000, the FASB issued Statement of Financial Accounts
Standards Board No. 138 ("FAS 138") "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." FAS 133, as amended by FAS 138,
is intended to be comprehensive guidance on accounting for derivatives and
hedging activities. It requires companies to recognize all derivatives as
either assets or liabilities on the balance sheet and measure those
instruments at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for on either the Balance
Sheet or on the Statement of Operations depending on the use of the
derivatives and whether it qualifies for hedge accounting under FAS 133 and
138. Because of the Company's minimal use of derivatives, the Company does
not anticipate that the adoption of FAS 133 and 138 will not
effect earnings or the financial position of the Company.
Page 6 of 21
<PAGE>
In June 2000, the SEC delayed the implementation date of the Staff
Accounting Bulletin No. 101. ("SAB 101"), "Revenue Recognition in Financial
Statements," until no later than the fourth quarter of 2000. On October 12,
2000, the SEC staff issued its Frequently Asked Questions ("FAQ") document on
SAB 101. SAB 101 and the FAQ document provides guidance on applying generally
accepted principles to revenue recognition issues in financial statements and
also provides guidance on disclosure, both in footnotes and the Management's
Discussion and Analysis, registrants should make regarding their revenue
recognition policies and impact of events and trends on revenues. The Company
will adopt SAB 101 as required in the fourth quarter of 2000, with the
effective date of January 1, 2000. However, the Company does not expect that
SAB 101 will have significant effect on earnings.
3. COMPREHENSIVE GAIN
Other comprehensive gain or loss consists primarily of unrealized
gains or losses on available-for-sale securities. For the nine-month period
ended September 30, 2000, Inhale recorded unrealized gains of approximately
$10.3 million, consisting primarily of gains relating to its investment in
Alliance Pharmaceutical Corp. ("Alliance"). Inhale owns approximately 2% of
the outstanding common shares of Alliance and records its investment in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
4. 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
progress payments from collaborative research agreements are considered to be
payments to support continued research and development activities under the
agreements. In accordance with the Company's revenue recognition policy, these
payments are included in deferred revenue and are recognized as the related
research and development expenditures are incurred.
Contract research revenue from one partner represented 68% of Inhale's
revenue in the nine month period ended September 30, 2000 and 74% of Inhale's
revenue in the comparable period in 1999. Costs of contract research revenue
approximate such revenue and are included in operating costs and expenses.
5. NET LOSS PER SHARE
Basic and diluted net loss per share is computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share.
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.
6. LONG-TERM DEBT
In February 2000, Inhale received approximately $222.4 million in
net proceeds from the issuance of $230.0 million aggregate principal amount
of convertible subordinated notes to certain qualified institutional buyers
pursuant to an exemption under the Securities Act of 1933, as amended.
Interest on the notes accrues at a rate of 5.0% per year, subject to
adjustment in certain circumstances. The notes will mature in 2007 and are
convertible into shares of Inhale's common stock at a conversion price of
$38.355 per share, subject to adjustment in certain circumstances. The notes
are redeemable in part or in total at any time before February 8, 2003 at
$1,000 per $1,000 principal amount plus a provisional redemption exchange
premium of $137.93 per $1,000 principal amount, plus accrued and unpaid
interest, if any, to the redemption date, if the closing price of Inhale's
common stock has exceeded 150% of the conversion price then in effect for at
least 20 trading days within a period of 30 consecutive trading days. The
Company also can redeem some or all of the notes at any time after February
8, 2003 at certain redemption prices dependent on the date of redemption.
Interest is payable semi-annually on August 8 and February 8. The notes are
unsecured subordinated obligations, which rank junior in right of payment to
all of the Company's existing and future senior debt. In October 2000, Inhale
entered into privately negotiated agreements with certain holders of its
outstanding 5.0% convertible subordinated notes due 2007 providing for the
conversion of their notes into common stock in exchange for a cash payment.
To date, the Company has secured agreements that provide for the conversion
of $168.6 million aggregate principal amount of outstanding notes into
approximately 4.4 million shares of common stock for cash payments of
approximately $25.5 million. Such amounts will be reflected as a charge to
interest expense in the fourth quarter 2000.
Page 7 of 21
<PAGE>
Also beginning in February 2000, Inhale entered into privately
negotiated agreements with certain holders of its outstanding 6.75%
convertible subordinated debentures sold in October and November 1999,
providing for the conversion into Inhale common stock of approximately $100.7
million aggregate principal amount of the outstanding debentures. In exchange
for an aggregate exchange premium of approximately $17.2 million, $100.7
million of convertible debentures was converted into approximately 6.3
million shares of Inhale common stock. Inhale will no longer have interest
payment obligations on the convertible subordinated debentures or notes that
were converted. The exchange premium of $17.2 million is included in interest
expense for the nine months ended September 30, 2000.
At September 30, 2000, an aggregate of approximately $237.8 million
principal amount of these convertible debt instruments remained on the balance
sheet. Costs relating to the issuances of the notes are recorded as long-term
assets and are being amortized over the term of the debt.
7. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In the second quarter, the Company recorded a $2.3 million charge for
acquired in-process research and development ("IPR&D") costs. The acquisition
was recorded as a purchase and a portion of the purchase price was allocated to
IPR&D, which under current accounting rules is immediately expensed. At the date
of the acquisition, the in-process technology had no alternative future use and
did not qualify for capitalization.
8. SUBSEQUENT EVENTS
In October 2000, the Company entered into a build-to-suit lease
transaction in which the Company sold, transferred and contributed its land
and construction in progress in San Carlos to a special purpose entity for a
49% limited partnership interest and additional consideration valued at
approximately $14.4 million. This additional consideration consists of
approximately $10.2 million in cash, a promissory note in the principal
amount of $3.0 million and a right to receive an additional $1.2 million as
reimbursement for the previously incurred completed construction costs. The
present value of the total lease obligation approximates $46.2 million and
will be incrementally recorded as a liability. The Company has an option to
buy out the special purpose entity or increase its ownership percentage at
various times during the lease period. As a result of the Company's
continuing involvement in the special purpose entity, the assets and related
financing obligations will continue to be recorded in the Company's
consolidated financial statements.
In October 2000, Inhale received approximately $222.7 million in net
proceeds from the issuance of $230 million aggregate principal amount of
convertible subordinated notes to certain qualified institutional buyers
pursuant to an exemption under the Securities Act of 1933, as amended.
Interest on the notes accrues at a rate of 3.5% per year, subject to
adjustment in certain circumstances. The notes will mature in 2007 and are
convertible into shares of Inhale's common stock at a conversion price of
$50.46 per share, subject to adjustment under certain circumstances. The
notes are redeemable in part or in total at any time before October 17, 2003
at $1,000 per $1,000 principal amount plus a provisional redemption exchange
premium, payable in cash or shares of common stock, of $105.00 per $1,000
principal amount, plus accrued and unpaid interest, if any, to the redemption
date, if the closing price of Inhale's common stock has exceeded 150% of the
conversion price than in effect for at least 20 trading days within a period
of 30 consecutive trading days. The notes are also redeemable in part or in
total at any time after October 17, 2003 at certain redemption prices
dependent upon the date of redemption if the closing price of Inhale's common
stock has exceeded 120% of the conversion price than in effect for at least
20 trading days within a period of 30 consecutive trading days. Interest is
payable semi-annually on April 17 and October 17. The notes are unsecured
obligations, which rank junior in right of payment to all of the Company's
existing and future senior debt.
Also, in October 2000, Inhale entered into privately negotiated
agreements with certain holders of its outstanding 5.0% convertible
subordinated notes due 2007 and sold in February 2000 providing for the
conversion of their notes into common stock in exchange for a cash payment.
To date, the Company has secured agreements that provide for the conversion
of $168.6 million aggregate principal amount of these outstanding 5%
convertible subordinated notes into approximately 4.4 million shares of
common stock for cash payments of approximately $25.5 million. Such amounts
will be reflected as a charge to interest expense in the fourth quarter 2000.
Page 8 of 21
<PAGE>
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, 2000 and
1999 should be read in conjunction with the Management's Discussion and Analysis
of Financial Condition and Results of Operations included in Inhale's Amended
Annual Report on Form 10-K/A for the year ended December 31, 1999. The following
discussion contains forward-looking statements that involve risk and
uncertainties. Inhale'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 Inhale's Amended Annual Report on Form
10-K/A for the year ended December 31, 1999.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. Inhale 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. Inhale 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, 2000, Inhale incurred a cumulative net loss of approximately
$152.3 million. The sources of working capital have been equity and debt
financings, financings of equipment acquisitions and tenant improvements,
interest earned on investments of cash, and revenues from short-term research
and feasibility agreements and development contracts.
Inhale has generally been compensated for research and development
expenses during initial feasibility work performed under collaborative
arrangements. Partners that enter into collaborative agreements will typically
pay for some or all research and development expenses and make additional
payments to Inhale as Inhale achieves certain key milestones. Inhale expects to
receive royalties from its partners based on their revenues received from
product sales, and to receive revenue from the manufacturing of powders and the
supply of devices. In certain cases, Inhale may enter into collaborative
agreements under which Inhale's partners would manufacture or package powders or
supply inhalation devices, thereby potentially limiting one or more sources of
revenue for Inhale. To achieve and sustain profitable operations, Inhale, 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 Inhale can generate sufficient
product or contract research revenue to become profitable or to sustain
profitability.
RESULTS OF OPERATIONS
Revenues for the three months ended September 30, 2000 were $14.1
million compared to $10.6 million for the three months ended September 30,
1999, an increase of 32%. Revenues for the nine months ended September 30,
2000 were $38.5 million compared to $28.3 million for the nine months ended
September 30, 1999, an increase of 36%. The increase in revenue for both the
three and nine month periods ended September 30, 2000 as compared to
September 30, 1999 was primarily due to the expansion of Inhale's existing
collaborative agreement with Pfizer, Inc. and includes activities associated
with the manufacture of Phase III clinical supplies. Revenue for the three
and nine months ended September 30, 2000 and 1999 was comprised of reimbursed
research and development expenses as well as the amortization of the pro-rata
portion of up-front signing and progress payments received from Inhale's
collaborative partners. Recognition of up-front signing and progress payments
is based on actual efforts expended. Costs of contract research revenue
approximate such revenue and are included in research and development
expenses. Contract revenues are expected to fluctuate from year to year, and
future contract revenues cannot be predicted accurately. The level of
Page 9 of 21
<PAGE>
contract revenues depends in part upon future success in obtaining new
collaborative agreements, timely completion of feasibility studies, the
continuation of existing collaborations and achievement of milestone under
current and future agreements.
Research and development expenses increased to $26.9 million for the
three months ended September 30, 2000 from $16.1 million for the three months
ended September 30, 1999, an increase of 67%. Research and development expenses
increased to $74.8 million for the nine months ended September 30, 2000 from
$43.4 million for the nine months ended September 30, 1999, an increase of 72%.
The increase for the three and nine month periods ended September 30, 2000 as
compared to September 30, 1999 was due to increased spending related to the
scale-up of technologies for current partnered projects, the continuing
development of the Company's global manufacturing capabilities in order to
support Phase III inhaleable insulin clinical trials and commercial production,
increased investment in internally funded R&D projects for next-generation
products and non-cash compensation charges associated with non-employee stock
options. Inhale expects research, development and process development spending
to increase over the next few years as Inhale continues to expand its
development efforts under collaborative agreements and scales up its commercial
manufacturing facility.
In the second quarter of 2000 the Company recorded a $2.3 million
charge for acquired IPR&D costs. The acquisition was recorded as a purchase and
a portion of the purchase price was allocated to IPR&D, which under current
accounting rules is immediately expensed. At the date of the acquisition, the
in-process technology had no alternative future use and did not qualify for
capitalization.
General and administrative expenses increased to $3.1 million for the
three months ended September 30, 2000 from $2.2 million for the three months
ended September 30, 1999, an increase of 41%. General and administrative
expenses increased to $9.7 million for the nine months ended September 30, 2000
from $5.4 million for the nine months ended September 30, 1999, an increase of
80%. The increase for the three and nine month periods ended September 30, 2000
as compared to September 30, 1999 was due to a non-cash compensation charge
associated with the accounting for non-employee stock options and costs
associated with supporting Inhale's increased manufacturing and development
efforts, including administrative staffing, business development activities and
marketing activities. General and administrative expenses are expected to
continue to increase over the next few years as Inhale expands its operations
Net interest was $2.0 million of income for the three months ended
September 30, 2000 compared to $0.6 million of income for the three months ended
September 30, 1999, an increase of 235%. This increase was the result of the
Company's higher cash and investment balances, including the proceeds of its
issuances of convertible subordinated debentures in October 1999 and convertible
subordinated notes in February 2000. Net interest was $10.2 million of expense
for the nine months ended September 30, 2000 compared to $2.2 million of income
for the nine months ended September 30, 1999. The nine months ended September
30, 2000 includes interest expense of $20.8 million, of which approximately
$17.2 million relates to the payment of a conversion premium to holders of the
Company's 6.75% convertible subordinated debentures due 2006 to convert $100.7
million aggregate principal amount of outstanding debentures into approximately
6.3 million shares of Inhale's common stock.
LIQUIDITY AND CAPITAL RESOURCES
Inhale has financed its operations primarily through public and
private placements of its debt and equity securities, financing of equipment
acquisitions and tenant improvements, interest income earned on its
investments of cash and revenues from development contracts and short-term
research and feasibility agreements. At September 30, 2000, Inhale had cash,
cash equivalents and short-term investments of approximately $280.9 million.
Inhale's operations used cash of $32.7 million for the nine months
ended September 30, 2000, compared to $15.4 million for the nine months ended
September 30, 1999. The decrease in cash was primarily due to payment of $17.2
million conversion premium to holders of the Company's October 2006 convertible
subordinated debentures, compared to the same period in 1999.
Inhale purchased property and equipment of approximately $43.0 million
during the nine months ended September 30, 2000, compared to $10.4 million for
the corresponding period in 1999. The increase in purchased property and
equipment reflects the Company's investment in commercial manufacturing
facilities, including device manufacturing at third-party contract
manufacturers, and expansion of its San Carlos powder processing facilities.
Page 10 of 21
<PAGE>
Net cash provided by financing activities was the result of the Company
receiving approximately $222.4 million in net proceeds from the issuance of
$230.0 million aggregate principal amount of convertible subordinated notes in
February 2000. In addition, in February 2000, the Company entered into privately
negotiated agreements with certain holders of its outstanding 6.75% convertible
subordinated debentures sold in October and November 1999, providing for the
conversion into Inhale common stock of approximately $100.7 million aggregate
principal amount of the outstanding convertible subordinated debentures. In
exchange for an aggregate exchange premium of approximately $17.2 million,
$100.7 million of convertible subordinated debentures were converted into
approximately 6.3 million shares of Inhale common stock.
In October 2000, Inhale received approximately $222.7 million in net
proceeds from the issuance of $230 million aggregate principal amount of
convertible subordinated notes to certain qualified institutional buyers
pursuant to an exemption under the Securities Act of 1933, as amended.
Interest on the notes accrues at a rate of 3.5% per year, subject to
adjustment in certain circumstances. The notes will mature in 2007 and are
convertible into shares of Inhale's common stock at a conversion price of
$50.46 per share, subject to adjustment under certain circumstances. The
notes are redeemable in part or in total at any time before October 17, 2003
at $1,000 per $1,000 principal amount plus a provisional redemption exchange
premium, payable in cash or shares of common stock, of $105.00 per $1,000
principal amount, plus accrued and unpaid interest, if any, to the redemption
date, if the closing price of Inhale's common stock has exceeded 150% of the
conversion price than in effect for at least 20 trading days within a period
of 30 consecutive trading days. The notes are also redeemable in part or in
total at any time after October 17, 2003 at certain redemption prices
dependent upon the date of redemption if the closing price of Inhale's common
stock has exceeded 120% of the conversion price than in effect for at least
20 trading days within a period of 30 consecutive trading days. Interest is
payable semi-annually on April 17 and October 17. The notes are unsecured
obligations, which rank junior in right of payment to all of the Company's
existing and future senior debt.
Also, in October 2000, Inhale entered into privately negotiated
agreements with certain holders of its outstanding 5.0% convertible
subordinated notes due 2007 and sold in February 2000 providing for the
conversion of their notes into common stock in exchange for a cash payment.
To date, the Company has secured agreements that provide for the conversion
of $168.6 million aggregate principal amount of these outstanding 5%
convertible subordinated notes into approximately 4.4 million shares of
common stock for cash payments of approximately $25.5 million. Such amounts
will be reflected as a charge to interest expense in the fourth quarter 2000.
In October 2000, the Company entered into a build-to-suit lease
transaction in which the Company sold, transferred and contributed its land
and construction in progress in San Carlos to a special purpose entity for a
49% limited partnership interest and additional consideration valued at
approximately $14.4 million. This additional consideration consists of
approximately $10.2 million in cash, a promissory note in the principal
amount of $3.0 million and a right to receive an additional $1.2 million as
reimbursement for the previously incurred completed construction costs. The
present value of the total lease obligation approximates $46.2 million and
will be incrementally recorded as a liability. The Company has an option to
buy out the special purpose entity or increase its ownership percentage at
various times during the lease period. As a result of the Company's
continuing involvement in the special purpose entity, the assets and related
financing obligations will continue to be recorded in the Company's
consolidated financial statements.
Inhale expects its cash requirements to continue to grow at an
accelerated rate due to expected increases in costs associated with further
research and development of its technologies, 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. Inhale's planned facilities expansion
includes the completion of its commercial manufacturing facility and the
scale-up of device manufacturing with its third-party contract manufacturers.
Given its current cash requirements, Inhale believes that it will have
sufficient cash to meet its operating expense requirements for at least the next
36 months. However, the Company plans to continue to invest heavily in its
growth and the need for cash will be dependent upon the timing of these
investments. Inhale'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 Inhale'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, Inhale 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
Page 11 of 21
<PAGE>
required, will be available to Inhale on favorable terms, if at all.
RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE READ CAREFULLY IN CONNECTION WITH
EVALUATING INHALE'S BUSINESS. ANY OF THE FOLLOWING RISKS COULD MATERIALLY
ADVERSELY AFFECT INHALE'S BUSINESS AND OPERATING RESULTS OR FINANCIAL CONDITION.
WE DO NOT KNOW IF OUR DEEP LUNG DRUG DELIVERY SYSTEM IS COMMERCIALLY FEASIBLE.
We are in an early stage of development. There is a risk that our deep
lung drug delivery technology will not be commercially feasible. Even if our
deep lung delivery technology is commercially feasible, it may not be
commercially accepted across a range of large and small molecule drugs. We have
tested eight deep lung delivery formulations in humans, but many of our
potential formulations have not been tested in humans.
Many of the underlying drug compounds contained in our deep lung
formulations have been tested in humans by other companies using alternative
delivery routes. Our potential products require extensive research, development
and pre-clinical (animal) and clinical (human) testing. Our potential products
also may involve lengthy regulatory review before they can be sold. We do not
know if and cannot assure you that, any of our potential products will prove to
be safe and effective or meet regulatory standards. There is a risk that any of
our potential products will not be able to be produced in commercial quantities
at acceptable cost or marketed successfully. Our failure to achieve commercial
feasibility, demonstrate safety, achieve clinical efficacy, obtain regulatory
approval or, together with partners, successfully market products will
negatively impact our revenues and results of operations.
WE DO NOT KNOW IF OUR DEEP LUNG DRUG DELIVERY SYSTEM IS EFFICIENT.
We may not be able to achieve the total system efficiency needed to be
competitive with alternative routes of delivery. Total system efficiency is
determined by the amount of drug loss during manufacture, in the delivery
device, in reaching the site of absorption, and during absorption from that site
into the bloodstream. Deep lung bioavailability is the percentage of a drug that
is absorbed into the bloodstream when that drug is delivered directly to the
lungs as compared to when the drug is delivered by injection. Bioavailability is
the initial screen for whether deep lung delivery of any systemic drug is
commercially feasible. We would not consider a drug to be a good candidate for
development and commercialization if its drug loss is excessive at any one stage
or cumulatively in the manufacturing and delivery process or if its deep lung
bioavailability is too low.
WE DO NOT KNOW IF OUR DEEP LUNG DRUG FORMULATIONS ARE STABLE.
We may not be able to identify and produce powdered versions of drugs
that retain the physical and chemical properties needed to work with our
delivery device. Formulation stability is the physical and chemical stability of
the drug over time and under various storage, shipping and usage conditions.
Formulation stability will vary with each deep lung formulation and the type and
amount of ingredients that are used in the formulation. Problems with powdered
drug stability would negatively impact our ability to develop and market our
potential products or obtain regulatory approval.
WE DO NOT KNOW IF OUR DEEP LUNG DRUG DELIVERY SYSTEM IS SAFE.
We may not be able to prove potential products to be safe. Our products
require lengthy laboratory, animal and human testing. Most of our products are
in preclinical testing or the early stage of human testing. If we find that any
product is not safe, we will not be able to commercialize the product. The
safety of our deep lung formulations will vary with each drug and the
ingredients used in its formulation.
WE DO NOT KNOW IF OUR DEEP LUNG DRUG DELIVERY SYSTEM PROVIDES CONSISTENT DOSES
OF MEDICINE.
We may not be able to provide reproducible dosages of stable
formulations sufficient to achieve clinical or commercial success. Reproducible
dosing is 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. Reproducible dosing 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
Page 12 of 21
<PAGE>
- moisture resistant packaging.
We may not be able to develop reproducible dosing of any potential
product. The failure to do so means that we would not consider it a good
candidate for development and commercialization.
WE DEPEND ON PARTNERS FOR REGULATORY APPROVALS AND COMMERCIALIZATION OF OUR
PRODUCTS.
Page 13 of 21
<PAGE>
Because we are in the business of developing technology for delivering
drugs to the lungs and licensing this technology to companies that make and sell
drugs, we do not have the people and other resources to do the following things:
- make bulk drugs to be used as medicines;
- design and carry out large scale clinical studies;
- prepare and file documents necessary to obtain government
approval to sell a given drug product; and
- market and sell our products when and if they are approved.
When we sign a collaborative development agreement or license agreement
to develop a product with a drug company, the drug company agrees to do some or
all of the things described above. If our partner fails to do any of these
things, we cannot complete the development of the product.
WE MAY NOT OBTAIN REGULATORY APPROVAL FOR OUR PRODUCTS ON A TIMELY BASIS, OR AT
ALL.
There is a risk that we will not obtain regulatory approval for our
products on a timely basis, or at all. Our products must undergo rigorous animal
and human testing and an extensive review process mandated by the United States
Food and Drug Administration ("FDA") and equivalent foreign authorities. This
process generally takes a number of years and requires the expenditure of
substantial resources, although the time required for completing such testing
and obtaining such approvals is uncertain. We have not submitted any of our
products to the FDA for marketing approval. We have no experience obtaining such
regulatory approval.
In addition, we may encounter delays or rejections based upon changes
in FDA policies, including policies relating to good manufacturing practice
compliance during the period of product development. We may encounter similar
delays in other countries.
Even if regulatory approval of a product is granted, the approval may
limit the indicated uses for which we may market our product. In addition, our
marketed product, our manufacturing facilities and Inhale, as the manufacturer,
will be subject to continual review and periodic inspections. Later discovery
from such review and inspection of previously unknown problems may result in
restrictions on our product or on us, including withdrawal of our product from
the market. The failure to obtain timely regulatory approval of our products,
any product marketing limitations or a product withdrawal would negatively
impact our revenues and results of operations.
WE DO NOT KNOW IF OUR TECHNOLOGIES CAN BE INTEGRATED SUCCESSFULLY TO BRING
PRODUCTS TO MARKET.
We may not be able to integrate all of the relevant technologies to
provide a deep lung drug delivery system. Our integrated approach to systems
development relies upon several different but related technologies:
- dry powder formulations;
- dry powder processing technology;
- dry powder packaging technology; and
- a deep lung delivery device.
At the same time we must:
- establish collaborations with partners;
- perform laboratory and clinical testing of potential products;
and
- scale-up our manufacturing processes.
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<PAGE>
We must accomplish all of these steps without delaying any aspect of
technology development. Any delay in one component of product or business
development could delay our ability to develop, obtain approval of or market
therapeutic products using our deep lung delivery technology.
WE MAY NOT BE ABLE TO MANUFACTURE OUR PRODUCTS IN COMMERCIAL QUANTITIES.
POWDER PROCESSING. We have no experience manufacturing products for
commercial purposes. We have only performed powder processing on the small scale
needed for testing formulations and for early stage and larger clinical trials.
We may encounter manufacturing and control problems as we attempt to scale-up
powder processing facilities. We may not be able to achieve such scale-up in a
timely manner or at a commercially reasonable cost, if at all. Our failure to
solve any of these problems could delay or prevent late stage clinical testing
and commercialization of our products and could negatively impact our revenues
and results of operations.
To date, we have relied on one particular method of powder processing.
There is a risk that this technology will not work with all drugs or that the
cost of drug production will preclude the commercial viability of certain drugs.
Additionally, there is a risk that any alternative powder processing methods we
may pursue will not be commercially practical for aerosol drugs or that we will
not have, or be able to acquire the rights to use, such alternative methods.
POWDER PACKAGING. Our fine particle powders and small quantity
packaging require special handling. We have designed and qualified automated
filling equipment for small and moderate quantity packaging of fine powders. We
face significant technical challenges in scaling-up an automated filling system
that can handle the small dose and particle sizes of our powders in commercial
quantities. There is a risk that we will not be able to scale-up our 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 our products and would negatively impact our revenues and
results of operations.
INHALATION DEVICE. We face many technical challenges in further
developing our inhalation device to work with a broad range of drugs, to produce
such a device in sufficient quantities and to adapt the device to different
powder formulations. There is a risk that we will not successfully achieve any
of these things. Our failure to overcome any of these challenges would
negatively impact our revenues and results of operations.
For late stage clinical trials and initial commercial production, we
intend to use one or more contract manufacturers to produce our drug delivery
device. There is a risk that we will not be able to enter into or maintain
arrangements with potential contract manufacturers or effectively scale-up
production of our drug delivery devices through contract manufacturers that we
identify. Our failure to do so would negatively impact our revenues and results
of operations.
WE DEPEND ON SOLE OR EXCLUSIVE SUPPLIERS FOR OUR INHALATION DEVICE AND BULK
DRUGS.
We plan to subcontract the manufacture of our pulmonary delivery device
before commercial production of our first product. We have identified contract
manufacturers that we believe have the technical capabilities and production
capacity to manufacture our devices and which can meet the requirements of good
manufacturing practices. We cannot be assured that we will be able to obtain and
maintain satisfactory contract manufacturing on commercially acceptable terms,
if at all. Our dependence on third parties for the manufacture of our inhalation
device may negatively impact our cost of goods and our ability to develop and
commercialize products on a timely and competitive basis.
We obtain the bulk drugs we use to formulate and manufacture the dry
powders for our deep lung delivery system from sole or exclusive sources of
supply. For example, with respect to our source of bulk insulin, we have entered
into a collaborative agreement with Pfizer, Inc., which has, in turn, entered
into an agreement with Aventis S.A. to manufacture biosynthetic recombinant
insulin. Under the terms of their agreement, Pfizer and Aventis agreed to
construct a jointly owned manufacturing plant in Frankfurt, Germany. Until its
completion, Pfizer will provide us with insulin from Aventis's existing plant.
If our sole or exclusive source suppliers fail to provide bulk drugs in
sufficient quantities when required, our revenues and results of operations will
be negatively impacted.
WE DO NOT KNOW IF THE MARKET WILL ACCEPT OUR DEEP LUNG DRUG DELIVERY SYSTEM.
Page 15 of 21
<PAGE>
The commercial success of our potential products depends upon market
acceptance by health care providers, third-party payors like health insurance
companies and Medicare, and patients. Our products under development use a new
method of drug delivery and there is a risk that our potential products will not
be accepted by the market. Market acceptance will depend on many factors,
including:
- the safety and efficacy results of our clinical trials;
- favorable regulatory approval and product labeling;
- the frequency of product use;
- the availability of third-party reimbursement;
- the availability of alternative technologies; and
- the price of our products relative to alternative
technologies.
There is a risk that health care providers, patients or third-party
payors will not accept our deep lung drug delivery system. If the market does
not accept our potential products, our revenues and results of operations would
be significantly and negatively impacted.
IF OUR PRODUCTS ARE NOT COST EFFECTIVE, GOVERNMENT AND PRIVATE INSURANCE PLANS
MAY NOT PAY FOR OUR PRODUCTS.
In both domestic and foreign markets, sales of our 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, such 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.
Legislation and regulations affecting the pricing of pharmaceuticals may change
before our proposed products are approved for marketing. Adoption of such
legislation and regulations could further limit reimbursement for medical
products. A government or third-party payor decision to not provide adequate
coverage and reimbursements for our products would limit market acceptance of
such products.
WE EXPECT TO CONTINUE TO LOSE MONEY FOR THE NEXT SEVERAL YEARS.
We have never been profitable and, through September 30, 2000, we have
an accumulated deficit of approximately $152.3 million. We expect to continue to
incur substantial and increasing losses over at least the next several years as
we expand our research and development efforts, testing activities and
manufacturing operations, and as we further expand our late stage clinical and
early commercial production facility. All of our potential products are in
research or in the early stages of development except for our insulin
collaboration. We have generated no revenues from approved product sales. Our
revenues to date have consisted primarily of payments under short-term research
and feasibility agreements and development contracts. To achieve and sustain
profitable operations, we must, alone or with others, successfully develop,
obtain regulatory approval for, manufacture, introduce, market and sell products
using our deep lung drug delivery system. There is a risk that we will not
generate sufficient product or contract research revenue to become profitable or
to sustain profitability.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE.
We anticipate that our existing capital resources will enable us to
maintain currently planned operations through at least the next 36 months.
However, this expectation is based on our current operating plan, which is
expected to change as a result of many factors, and we may need additional
funding sooner than anticipated. In addition, we may choose to raise additional
capital due to market conditions or strategic considerations, even if we believe
we have sufficient funds for our current or future operating plans. To the
extent that additional capital is raised through the sale of equity or
convertible debt securities, the issuance of such securities could result in
dilution to our stockholders.
We have no credit facility or other committed sources of capital. To
the extent operating and capital resources are insufficient to meet future
requirements, we will have to raise additional funds to continue the
development and commercialization of our technologies. Such funds may not be
available on favorable terms, or at all. In particular, our substantial
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<PAGE>
leverage may limit our ability to obtain additional financing. If adequate
funds are not available on reasonable terms, we may be required to curtail
operations significantly or to obtain funds by entering into financing,
supply or collaboration agreements on unattractive terms. Our inability to
raise capital could negatively impact our business.
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS MAY SUFFER.
Our ability to commercialize our products, achieve our expansion
objectives, manage our growth effectively and satisfy our commitments under our
collaboration agreements depends on a variety of factors. Key factors include
our ability to develop products internally, enter into strategic partnerships
with collaborators, attract and retain skilled employees and effectively expand
our internal organization to accommodate anticipated growth including
integration of any potential businesses that we may acquire. If we are unable to
manage growth effectively, there could be a material adverse effect on our
business, financial condition and results of operations.
OUR PATENTS MAY NOT PROTECT OUR PRODUCTS AND OUR PRODUCTS MAY INFRINGE ON
THIRD-PARTY PATENT RIGHTS.
We have filed patent applications covering certain aspects of our
device, powder processing technology, and powder formulations and deep lung
route of delivery for certain molecules, and we plan to file additional patent
applications. We currently have 93 issued U.S. and foreign patents that cover
certain aspects of our technology and we have a number of patent applications
pending. There is a risk that many of the patents applied for will not issue, or
that any patents that issue or have issued will not be valid and enforceable.
Enforcing our patent rights would be time consuming and costly.
Our access or our partners' access to the drugs to be formulated will
affect our ability to develop and commercialize our technology. Many drugs,
including powder formulations of certain drugs that are presently under
development by us, are subject to issued and pending U.S. and foreign patents
that may be owned by our competitors. We know that there are issued patents and
pending patent applications relating to the deep lung delivery of large molecule
drugs, including several for which we are developing deep lung delivery
formulations. This situation is highly complex, and the ability of any one
company, including Inhale, to commercialize a particular drug is unpredictable.
We intend generally to rely on the ability of our partners to provide
access to the drugs that are to be formulated by us for deep lung delivery.
There is a risk that our partners will not be able to provide access to such
drug candidates. Even if such access is provided, there is a risk that our
partners or we will be accused of, or determined to be, infringing a
third-party's patent rights and will 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 to drug candidates or liability for damages would
negatively impact our revenues and results of operations.
OUR COMPETITORS MAY DEVELOP AND SELL BETTER DRUG DELIVERY SYSTEMS.
We are aware of other companies engaged in developing and
commercializing drug delivery systems, including pulmonary and enhanced
injectable and other drug delivery systems. Many of these companies have greater
research and development capabilities, experience, manufacturing, marketing,
financial and managerial resources than we do and represent significant
competition for us. Acquisitions of or collaborations with competing drug
delivery companies by large pharmaceutical companies could enhance our
competitors' financial, marketing and other resources. Accordingly, our
competitors may succeed in developing competing technologies, obtaining
regulatory approval for products or gaining market acceptance before us.
Developments by others could make our products or technologies uncompetitive or
obsolete. Our competitors may introduce products or processes competitive with
or superior to ours.
INVESTORS SHOULD BE AWARE OF INDUSTRY-WIDE RISKS.
In addition to the risks associated specifically with Inhale described
above, investors should also be aware of general risks associated with drug
development and the pharmaceutical industry. These include, but are not limited
to:
- changes in and compliance with government regulations;
- handling of hazardous materials;
- hiring and retaining qualified people; and
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<PAGE>
- insuring against product liability claims.
WE EXPECT OUR STOCK PRICE TO REMAIN VOLATILE.
Our stock price is volatile. In the twelve-month period ending
September 30, 2000, based on closing prices on the Nasdaq National Market, our
stock price ranged from $13.25 to $63.31. We expect it to remain volatile. A
variety of factors may have a significant effect on the market price of our
common stock, including:
- fluctuations in our operating results;
- announcements of technological innovations or new therapeutic
products;
- announcement or termination of collaborative relationships by
Inhale or our competitors;
- governmental regulation;
- clinical trial results or product development delays;
- developments in patent or other proprietary rights;
- public concern as to the safety of drug formulations developed
by Inhale or others; and
- general market conditions.
Any litigation brought against us as a result of this volatility could result in
substantial costs and a diversion of our management's attention and resources,
which could negatively impact our financial condition, revenues and results of
operations.
OUR SUBSTANTIAL INDEBTEDNESS MAY RESULT IN FUTURE LIQUIDITY PROBLEMS
As of September 30, 2000, we had approximately $242.6 million in
long-term debt and in October 2000, in connection with our build-to-suit lease
transaction, we incurred an additional incremental lease liability, the present
value of which approximates $46.2 million. In addition, the October 2000
issuance of the 3.5% convertible subordinated notes due 2007, increased our
long-term debt by approximately $230.0 million. This increased indebtedness has
and will continue to impact us by:
- significantly increasing our interest expense and related debt
service costs;
- making it more difficult to obtain additional financing; and
- constraining our ability to react quickly in an unfavorable
economic climate.
Currently, we are not generating sufficient cash flow to satisfy the
annual debt service payments that are required under the terms of our
outstanding convertible subordinated debentures and notes. This may require us
to use a portion of the proceeds from the sales of these securities to pay
interest or borrow additional funds or sell additional equity to meet our debt
service obligations. If we are unable to satisfy our debt service requirements,
substantial liquidity problems could result, which would negatively impact our
future prospects.
Page 18 of 21
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk is principally limited to its cash
equivalents and investments that have maturities of less than one year. The
Company maintains a non-trading investment portfolio of investment grade, liquid
debt securities that limits the amount of credit exposure to any one issue,
issuer or type of instrument. The securities in the Company's investment
portfolio are not leveraged, are classified as available-for-sale and are
therefore subject to interest rate risk. The Company currently does not hedge
interest rate exposure.
PART II: OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities and Use of Proceeds.
(c) On September 15, 2000, in connection with the build-to-suit
lease transaction described under "Management's Discussion and
Analysis of Financial Condition and Result of Operations -
Liquidity and Capital Resources," Inhale granted warrants
representing the right to purchase up to an aggregate of
10,000 shares of its common stock to the remaining partners of the
limited partnership in which Inhale acquired an interest in
connection with such transaction. The warrants, are exercisable
under certain circumstances, in the event that Inhale exercises its
option to purchase the partnership interests held by the entities
receiving the warrants. The warrants and the shares of Inhale's
common stock issued upon exercise of these warrants were sold in a
private placement exempt from registration under Rule 506 of
Regulation D promulgated under the Securities Act of 1933, as
amended (the "Act"). No underwriters were involved in this offering
and commission or remuneration was paid in connection with the sale
of these securities. The acquirers respectively indicated their
intent to acquire the securities for investment only and not with a
view to distribution and appropriate legends are affixed to the
warrants issued in the transaction. The entities acquiring the
warrants were each sophisticated and deemed to be an "accredited
investor" as that term is defined under Rule 501 of Regulation D
promulgated under the Act with access to adequate information about
the Company.
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information
Effective August 22, 2000, Mark J. Gabrielson resigned from the
Board of Directors.
Effective August 22, 2000, the remaining members of the Board of
Directors elected Roy A. Whitfield as a member of the Board to fill
the vacancy
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith or incorporated by
reference:
EXHIBIT EXHIBIT TITLE
--------------------------------------------------------------------------------
4.15 Specimen Warrants to Purchase Shares of Common Stock
10.19 The Company's 2000 Equity Incentive Plan
10.20 Company's Stock Option Agreement issued in accordance with the
Company's 2000 Equity Incentive Plan.
10.21 Contribution Agreement for 201 Industrial Road Project made
and entered into as of September 14, 2000 by and among the Company,
Inhale 201 Industrial Road, L.P., a California limited partnership
and Bernardo Property Advisors, Inc., a California corporation.
10.22 Agreement of Limited Partnership of Inhale 201 Industrial Road,
L.P., a California limited partnership made and entered into
September 14, 2000, by and among SCIMED PROP III, Inc., a
California corporation, as general partner, 201 Industrial
Page 19 of 21
<PAGE>
Partnership, a California general partnership, as limited partner,
and the Company, as limited partner.
10.23 Build-To-Suit Lease made and entered into as of September 14, 2000
by and between Inhale 201 Industrial Road, L.P., a California
limited partnership, as Landlord, and the Company, as Tenant.
10.24 Amendment to Lease dated October 3, 2000 by and between Inhale 201
Industrial Road, L.P., a California limited partnership, as
Landlord, and the Company, as Tenant.
10.25 Parking Lease Agreement entered into as of September 14, 2000
by and between Inhale 201 Industrial Road, L.P., a California
limited partnership, as Landlord, and the Company, as Tenant.
27.1 Financial Data Schedule
-------------------------------------------------------------------------------
b) Reports on Form 8-K.
On September 6, 2000, the Company filed a Report on Form 8-K to
announce its re-initiation with Eli Lilly and Company ("Lilly") of
the development and License Agreement of an inhaled formulation of
Forteo-TM-recombinant parathyroid hormone (PTH). In this Report on
Form 8-K the Company also announced that Lilly has decided to
discontinue work on an unspecified inhaleable protein product that
was in pre-clinical development with the Company
</TABLE>
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<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 14, 2000 BY: /s/ Ajit S. Gill
----------------- ------------------------------
Ajit S. Gill
Chief Executive Officer, President and Director
(Duly Authorized Officer)
BY: /s/ Brigid A. Makes
-----------------------------
Brigid A. Makes
Chief Financial Officer and
Vice President Finance and Administration
Page 21 of 21
