<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 March 31, 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 20,925,381 as of April 28, 2000.
Page 1 of 17
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INHALE THERAPEUTIC SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE
- -----------------------------
<C><S>
Item 1. Condensed Financial Statements - unaudited..............................................3
Condensed Balance Sheets - March 31, 2000 and December 31, 1999.........................3
Condensed Statements of Operations for the three-month periods ended
March 31, 2000 and 1999 ............................................................4
Condensed Statements of Cash Flows for the three month periods ended
March 31, 2000 and 1999.............................................................5
Notes to Condensed Financial Statements.................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................................7
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............................15
PART II: OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings......................................................................15
Item 2. Changes in Securities..................................................................15
Item 3. Defaults Upon Senior Securities........................................................15
Item 4. Submission of Matters to a Vote of Security Holders....................................16
Item 5. Other Information......................................................................16
Item 6. Exhibits and Reports on Form 8-K.......................................................16
Signatures.............................................................................17
</TABLE>
Page 2 of 17
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Item 1.
INHALE THERAPEUTIC SYSTEMS, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999 *
-------------- -------------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $129,778 $33,430
Short-term investments 205,940 104,755
Accounts receivable 682 1,756
Other current assets 7,883 7,377
--------------- --------------
Total current assets 344,283 147,318
Property and equipment, net 76,066 63,852
Investment in Alliance Pharmaceutical Corp. 14,674 6,328
Other assets 13,269 9,308
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$448,292 $226,806
--------------- --------------
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $23,737 $20,268
Deferred revenue 8,211 4,811
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Total current liabilities 31,948 25,079
Tenant improvement loan 4,885 4,895
Convertible subordinated notes and debentures 239,760 108,450
Accrued rent 1,824 1,753
Stockholders' equity:
Common stock 2 2
Capital in excess of par value 284,903 181,154
Deferred compensation (1,435) (1,530)
Accumulated other comprehensive gain 9,703 1,469
Accumulated deficit (123,298) (94,466)
--------------- --------------
Total stockholders' equity 169,875 86,629
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$448,292 $226,806
--------------- --------------
--------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES
(*) The balance sheet at December 31, 1999 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
Page 3 of 17
<PAGE>
INHALE THERAPEUTIC SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------
2000 1999
----------- ----------
<S> <C> <C>
Contract research revenue $10,633 $7,780
Operating costs and expenses:
Research and development 21,869 12,716
General and administrative 3,535 1,264
----------- ----------
Total operating costs and expenses 25,404 13,980
----------- ----------
Loss from operations (14,771) (6,200)
Interest income 3,627 1,095
Interest expense (17,688) (118)
----------- ----------
Net loss $(28,832) $(5,223)
----------- ----------
----------- ----------
Basic and diluted net loss per share $(1.51) $(0.31)
----------- ----------
----------- ----------
Shares used in computing basic and diluted net loss per share 19,034 16,929
----------- ----------
----------- ----------
</TABLE>
SEE ACCOMPANYING NOTES
Page 4 of 17
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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>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
2000 1999
---------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash used in operations $ (1,890) $ (3,586)
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase)/sale of short-term investments, net (101,298) 2,382
Purchases of property and equipment (13,583) (5,744)
Other investing activities (115) -
---------------- --------------
Net cash used in by investing activities (114,996) (3,362)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of equipment financing obligations (18) (16)
Payment of debt conversion incentives (16,569) -
Issuance of convertible debt, net of issuance costs 222,439 -
Issuance of common stock, net of issuance costs 7,382 71
---------------- --------------
Net cash provided by financing activities 213,234 55
---------------- --------------
Net increase (decrease) in cash and cash equivalents 96,348 (6,893)
Cash and cash equivalents at beginning of period 33,430 24,916
---------------- --------------
Cash and cash equivalents at end of period $ 129,778 $ 18,023
---------------- --------------
---------------- --------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Common stock issued upon conversion of convertible
subordinated debentures, net $ 95,220 $ -
</TABLE>
SEE ACCOMPANYING NOTES
Page 5 of 17
<PAGE>
INHALE THERAPEUTIC SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Inhale Therapeutic Systems ("Inhale" or the "Company") was
incorporated in the State of California in July 1990 and reincorporated in
the State of Delaware in July 1998. 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 accompanying unaudited condensed financial statements of Inhale
have been prepared by management in accordance with generally accepted
accounting principles for interim financial information, the instructions for
Form 10-Q and Article 10 of Regulation S-X. The condensed balance sheet as of
March 31, 2000 and the related condensed statements of operations and cash
flows for the three month periods ended March 31, 2000 and 1999, are
unaudited but 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 "Commission"). 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
Commission.
Results for any interim period presented are not necessarily
indicative of results for any other interim period or for the entire year.
2. CASH, CASH EQUIVALENTS AND INVESTMENTS
The following is a summary of Inhale's available-for-sale debt securities as
of March 31, 2000:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
(In thousands)
<S> <C> <C> <C> <C>
Amounts included in cash and cash equivalents........ $ 126,324 $ 121 $ (12) $ 126,433
Amounts included in short-term investments........... 206,021 236 (317) 205,940
----------- --------- ---------- ------------
$ 332,345 $ 357 $ (329) $ 332,373
=========== ========= ========== ============
</TABLE>
The following is a summary of the Company's available-for-sale debt securities
as of December 31, 1999:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
(In thousands)
<S> <C> <C> <C> <C>
Amounts included in cash and cash equivalents........ $ 29,822 $ 54 $ (-) $ 29,876
Amounts included in short-term investments........... 104,668 87 (-) 104,755
----------- --------- -------- ------------
$ 134,490 $ 141 $ (-) $ 134,631
=========== ========= ======== ============
</TABLE>
At March 31, 2000 and December 31, 1999, Inhale's investment
portfolio consisted largely of United States corporate commercial paper,
obligations of United States government agencies and repurchase agreements
secured by United States Government securities. The average portfolio
duration was approximately six months at March 31, 2000 and five months at
December 31, 1999. The contractual maturity of any single investment did not
exceed nineteen months at March 31, 2000 (eleven months at December 31, 1999).
3. COMPREHENSIVE LOSS
Other comprehensive gains/(losses) consists primarily of unrealized
gains or losses on available-for-sale securities. For the three-month period
ended March 31, 2000, Inhale recorded unrealized gains of approximately
$8,234,000, consisting of approximately $8,346,000 of gains relating to its
investment in Alliance Pharmaceutical Corp. and approximately $113,000 of
losses in other available for sale investments. For the three-month period
ended March 31, 1999, Inhale recorded unrealized losses of approximately
$13,000.
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 66% of
Inhale's revenue in the three-month period ended March 31, 2000. Contract
research revenue from one partner accounted for 77% of Inhale's revenue in
the three month period ended March 31, 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 common share is computed in
accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," which Inhale adopted in 1997. Accordingly, the weighted
Page 6 of 17
<PAGE>
average number of common shares outstanding are used while common stock
issuable upon the conversion of debt and 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 $222,439,000 in net
proceeds from the issuance of $230,000,000 aggregate principal amount of
convertible subordinated notes to certain qualified institutional buyers
pursuant to an exemption under Rule 144A of the Securities Act of 1933, as
amended. Interest on the notes accrues at a rate of 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
$76.71 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 an
exchange premium of $13.93 per $1,000 principal amount, less any interest
actually paid on the notes before the call for redemption, 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 can redeem some or all of the notes at any time
after February 8, 2003. 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.
Also in February 2000, Inhale entered into privately negotiated
agreements with certain holders of its outstanding 6 3/4% convertible
subordinated debentures sold in October and November 1999, providing for the
conversion into Inhale common stock of approximately $98,690,000 aggregate
principal amount of the outstanding debentures. In exchange for an exchange
premium of approximately $16,958,000, the $98,690,000 of convertible
debentures was converted into approximately 3,083,000 shares of Inhale common
stock. Inhale will no longer have interest payment obligations on the
debentures that were converted.
At March 31, 2000, an aggregate of $239,760,000 principal amount of
these 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.
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 months ended March 31, 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 Annual
Report on Form 10-K for the year ended December 31, 1999, as amended. 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 Annual Report on Form
10-K for the year ended December 31, 1999, as amended.
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
Page 7 of 17
<PAGE>
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 March 31, 2000, Inhale incurred a cumulative net loss of
approximately $123.3 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 feasibility agreements and development contracts.
Inhale typically has been compensated for research and development
expenses during initial feasibility work performed under collaborative
arrangements. Partners that enter into collaborative agreements will pay for
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 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
Revenue in the first quarter of 2000 was $10.6 million compared to
$7.8 million in the first quarter of 1999, an increase of 37%. The increase
in revenue 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 for the insulin program.
Revenue for the first quarter of 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.
Research and development expenses increased to approximately $21.9
million in the first quarter of 2000 from $12.7 million in the corresponding
period of 1999, an increase of 72%. The increase was due to increased
spending related to the scale-up of technologies and the continuing
development of global manufacturing capabilities in order to support Phase
III inhaleable insulin clinical trials and commercial production. In
addition, Inhale hired additional scientific and development personnel to
meet the needs of an increase in the number of development projects and
incurred increased expenses associated with device development and clinical
manufacturing. Inhale expects research, development and process development
spending to increase over the next few years as Inhale expands its
development efforts under collaborative agreements and scales up its
commercial manufacturing facility.
General and administrative expenses increased to $3.5 million in the
first quarter of 2000 from $1.3 million in the first quarter of 1999, an
increase of 169%. The increase in such expenses in 2000 was due primarily to
$1.4 million in non-cash compensation charges associated with stock and to
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
Interest income was $3.6 million in the first quarter of 2000,
compared to $1.1 million in the first quarter of 1999. The 227% increase
reflects the Company's larger cash and investment balances, including the
proceeds of its issuance of convertible subordinated debentures in October
and November 1999 and convertible subordinated notes in February 2000.
Interest expense was $17.7 million in the first quarter of 2000, compared to
$0.1 million in the first quarter of 1999. The $17.6 million increase largely
relates to the one-time net interest charge of approximately $15.2 million
for the payment to holders of the Company's October 2000 debentures of a
conversion premium to convert $98.7 million aggregate principal amount of
outstanding debentures into approximately 3.1 million shares of Inhale's
common stock.
Page 8 of 17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Inhale has financed its operations primarily through public and
private placements of its securities, contract research and milestone
payments, financing of equipment acquisitions and interest income earned on
its investments of cash. In February 2000, Inhale received approximately
$222.4 million in net proceeds from the sale of convertible subordinated
notes. Also in February 2000, Inhale converted approximately $98.7 million of
its outstanding convertible subordinated debentures into approximatly 3.1
million shares of its common stock at a net charge of $15.2 million. Inhale
will no longer have interest payment obligations on the converted debentures.
At March 31, 2000, Inhale had cash, cash equivalents and short-term
investments of approximately $335.7 million.
Inhale's operations used cash of $1.9 million in the three months
ended March 31, 2000, as compared to $3.6 million used in the three months
ended March 31, 1999. The decrease in cash used in operations was due
principally to the combination of decreased receivables and increased accrued
liability balances at March 31, 2000 compared to the same period in 1999.
Inhale purchased property and equipment of $13.6 million during the
three months ended March 31, 2000, compared to $5.7 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.
Inhale expects its cash requirements to continue 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 24 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 required, will be
available to Inhale on favorable terms, if at all.
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 seven deep lung delivery formulations in humans, but many of our
potential formulations have not been tested in humans.
Page 9 of 17
<PAGE>
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 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
- 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.
<PAGE>
WE DEPEND ON PARTNERS FOR REGULATORY APPROVALS AND COMMERCIALIZATION OF OUR
PRODUCTS.
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.
Page 10 of 17
<PAGE>
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
- deep lung delivery devices.
At the same time we must:
- establish collaborations with partners;
- perform laboratory and clinical testing of potential products;
and
- scale-up our manufacturing processes.
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.
Page 11 of 17
<PAGE>
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. In addition, we are attempting to develop a smaller inhalation
device, which presents particular technical challenges. There is a risk that we
will not successfully achieve any of these challenges. 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 any potential contract manufacturers or effectively scale-up
production of our drug delivery devices through contract manufacturers. 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.
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 of our clinical trials;
- favorable regulatory approval and product labeling;
- the frequency of product use;
- the availability of third-party reimbursement;
Page 12 of 17
<PAGE>
- 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 March 31, 2000, we have
an accumulated deficit of approximately $123.3 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 24 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 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.
Page 13 of 17
<PAGE>
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 49 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 pulmonary drug delivery systems and enhanced injectable 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
- insuring against product liability claims.
WE EXPECT OUR STOCK PRICE TO REMAIN VOLATILE.
Our stock price is volatile. In the twelve-month period ended
April 30, 2000, based on closing prices on the Nasdaq National Market, our
stock price ranged from $23.00 to $126.62. 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;
Page 14 of 17
<PAGE>
- 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 OUTSTANDING INDEBTEDNESS HAS INCREASED SUBSTANTIALLY.
As of March 31, 2000, we had approximately $244.6 million in long-term
debt. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the reported market risks since December
31, 1999.
PART II: OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities
In February 2000 we issued $230,000,000 aggregate principal amount
of convertible subordinated notes, which are convertible at the option of the
holder, at any time on or prior to maturity into shares of our common stock.
The notes were sold only in the United States to certain qualified
institutional buyers under an exemption from registration provided by Rule
144A of the Securities Act of 1933, as amended. The notes are convertible at
a conversion price of $76.71 per share, which is equal to a conversion rate
of approximately 13.037 shares per $1,000 principal amount of notes, subject
to adjustment. Interest on the debentures will accrue at a rate of 5.0% per
year subject to adjustment in certain circumstances . We will pay interest on
the notes on August 8 and February 8 of each year, beginning August 8, 2000.
The notes mature on February 8, 2007. We may redeem some or all of the notes
at any time before February 8, 2003 at a redemption price of $1,000 per
$1,000 principal amount of notes, plus accrued and unpaid interest, if any,
to the redemption date, if the closing price of our 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 ending on the trading day
before the date of mailing of the provisional redemption notice. We will make
additional payment in cash with respect to the notes, call for provisional
redemption in an amount equal to $13.93 per $1,000 principal amount of notes,
less the amount of any interest actually paid on the notes before the call
for redemption. We may redeem some or all of the notes at any time after
February 8, 2003. The notes are unsecured and subordinated to our existing
and future senior indebtedness. Merrill Lynch & Co. served as the sole
bookrunner for the offering and received approximately $7,187,500 in
discounts and commissions.
Item 3. Defaults upon Senior Securities - None
Page 15 of 17
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information- None
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are filed herewith:
EXHIBIT EXHIBIT TITLE
27.1 Financial Data Schedule
Reports on Form 8-K:
i On February 1, 2000, the Company filed a Current Report on Form 8-K
reporting an offer to issue convertible subordinated notes.
ii On February 9, 2000, the Company filed a Current Report on Form 8-K
reporting a purchase agreement regarding its convertible subordinated
notes.
iii On February 24, 2000, the Company filed a Current Report on Form 8-K
reporting the exercise of an over-allotment option by purchasers of
the Company's convertible subordinated notes.
Page 16 of 17
<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: May 11, 2000 BY: /s/Ajit S. Gill
------------ -----------------------
Ajit S. Gill
Chief Executive Officer and Director
(Duly Authorized Officer)
BY: /s/Brigid A. Makes
-----------------------
Brigid A. Makes
Chief Financial Officer
Page 17 of 17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY FINANCIAL STATEMENTS OF INHALE THERAPEUTIC SYSTEMS, INC., AS FILED ON
FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 129,778
<SECURITIES> 205,940
<RECEIVABLES> 682
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 344,283
<PP&E> 91,921
<DEPRECIATION> (15,855)
<TOTAL-ASSETS> 448,292
<CURRENT-LIABILITIES> 31,948
<BONDS> 239,760
0
0
<COMMON> 284,905
<OTHER-SE> (115,030)
<TOTAL-LIABILITY-AND-EQUITY> 448,292
<SALES> 0
<TOTAL-REVENUES> 10,633
<CGS> 0
<TOTAL-COSTS> (25,404)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (17,688)
<INCOME-PRETAX> (28,832)
<INCOME-TAX> 0
<INCOME-CONTINUING> (28,832)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,832)
<EPS-BASIC> (1.51)
<EPS-DILUTED> (1.51)
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