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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 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)
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DELAWARE 94-3134940
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(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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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 21,097,521 as of July 31, 2000.
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INHALE THERAPEUTIC SYSTEMS, INC.
INDEX
PART I: FINANCIAL INFORMATION
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PAGE
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Item 1. Condensed Consolidated Financial Statements - unaudited..... 3
Condensed Consolidated Balance Sheets - June 30, 2000 and
December 31, 1999......................................... 3
Condensed Consolidated Statements of Operations for the
three and six month periods ended June 30, 2000 and
1999...................................................... 4
Condensed Consolidated Statements of Cash Flows for the six
month periods ended June 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................................. 8
Item 3. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 16
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PART II: OTHER INFORMATION
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Item 1. Legal Proceedings........................................... 17
Item 2. Changes in Securities....................................... 17
Item 3. Defaults Upon Senior Securities............................. 17
Item 4. Submission of Matters to a Vote of Security Holders......... 17
Item 5. Other Information........................................... 18
Item 6. Exhibits and Reports on Form 8-K............................ 18
Signatures.................................................. 19
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Item 1.
INHALE THERAPEUTIC SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
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JUNE 30, 2000 DECEMBER 31, 1999
(UNAUDITED) *
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ASSETS
Current assets:
Cash and cash equivalents................................. $ 88,775 $ 33,430
Short-term investments.................................... 220,672 104,755
Accounts receivable....................................... 2,321 1,756
Other current assets...................................... 5,377 7,377
--------- --------
Total current assets.................................... 317,145 147,318
Property and equipment, net................................. 91,065 63,852
Investment in Alliance Pharmaceutical Corp.................. 12,772 6,328
Deposits and other assets................................... 13,379 9,308
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$ 434,361 $226,806
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 21,889 $ 20,268
Deferred revenue.......................................... 8,609 4,811
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Total current liabilities............................... 30,498 25,079
Tenant improvement loan..................................... 4,876 4,895
Convertible subordinated notes and debentures............... 237,760 108,450
Accrued rent................................................ 1,931 1,753
Stockholders' equity:
Common stock.............................................. 2 2
Capital in excess of par value............................ 291,434 181,154
Deferred compensation..................................... (1,190) (1,530)
Accumulated other comprehensive gain...................... 8,095 1,469
Accumulated deficit....................................... (139,045) (94,466)
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Total stockholders' equity.............................. 159,296 86,629
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$ 434,361 $226,806
========= ========
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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.
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INHALE THERAPEUTIC SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
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THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
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2000 1999 2000 1999
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Contract research revenue................. $ 13,789 $ 9,877 $ 24,422 $ 17,657
Operating costs and expenses:
Research and development................ 25,995 14,613 47,864 27,328
General and administrative.............. 3,095 1,933 6,630 3,197
Purchased in-process research and
development........................... 2,292 -- 2,292 --
------------ ----------- ----------- -----------
Total operating costs and expenses........ 31,382 16,546 56,786 30,525
------------ ----------- ----------- -----------
Loss from operations...................... (17,593) (6,669) (32,364) (12,868)
Interest income (expense), net............ 1,846 663 (12,215) 1,640
------------ ----------- ----------- -----------
Net loss.................................. $ (15,747) $ (6,006) $ (44,579) $ (11,228)
============ =========== =========== ===========
Basic and diluted net loss per share...... $ (0.75) $ (0.35) $ (2.40) $ (0.66)
============ =========== =========== ===========
Shares used in computing basic and diluted
net loss per share...................... 20,960 16,951 18,597 16,940
============ =========== =========== ===========
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SEE ACCOMPANYING NOTES.
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INHALE THERAPEUTIC SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
(UNAUDITED)
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SIX MONTHS ENDED JUNE 30,
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2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Cash used in operations................................... $ (13,312) $ (14,912)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of short-term investments, net of purchases and
maturities.............................................. (115,729) 14,248
Purchases of property and equipment....................... (30,940) (9,925)
Other investing activities................................ (316) --
----------- -----------
Net cash provided by investing activities................... (146,985) 4,323
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of equipment financing obligations............... (27) (25)
Payments of debt conversion incentives.................... (16,957) --
Issuance of convertible debt, net of issuance costs....... 222,439 --
Issuance of common stock, net of issuance costs........... 10,187 369
----------- -----------
Net cash provided by financing activities................... 215,642 344
----------- -----------
Net increase (decrease) in cash and cash equivalents........ 55,345 (10,245)
Cash and cash equivalents at beginning of period............ 33,430 24,916
----------- -----------
Cash and cash equivalents at end of period.................. $ 88,775 $ 14,671
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Common stock issued upon conversion of convertible
subordinated debentures, net............................ $ 97,220 $ --
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SEE ACCOMPANYING NOTES.
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INHALE THERAPEUTIC SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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. Inhale has 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 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 June 30, 2000, the condensed consolidated statements of operations
for the three and six month periods ended June 30, 2000 and 1999, and the
condensed consolidated statements of cash flows for the six month periods ended
June 30, 2000 and 1999 have been prepared by Inhale without audit, 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. COMPREHENSIVE GAIN
Other comprehensive gain or loss consists primarily of unrealized gains or
losses on available-for-sale securities. For the six-month period ended June 30,
2000, Inhale recorded unrealized gains of approximately $6.6 million, consisting
of approximately $6.4 million of gains relating to its investment in Alliance
Pharmaceutical Corp. and approximately $0.2 million of gains in other
available-for-sale investments. For the six-month period ending June 30 1999,
Inhale recorded unrealized losses of approximately $0.1 million.
3. REVENUE RECOGNITION
Contract revenue from collaborative research agreements is recorded when
earned and as the related costs are incurred. Payments received which are
related to future performance are deferred and recognized as revenue when earned
over future performance periods. In accordance with contract terms, up-front and
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 67% of Inhale's
revenue in the six month period ended June 30, 2000 and 76% 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.
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INHALE THERAPEUTIC SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED) (CONTINUED)
4. 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", which
Inhale adopted in 1997. Accordingly, the weighted average number of common
shares outstanding are used while common stock equivalent shares for stock
options and warrants are not included in the per share calculations as the
effect of their inclusion would be antidilutive.
5. LONG-TERM DEBT
In February 2000, Inhale received approximately $222.4 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 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 $1,000 per $1,000 principal amount
plus a provisional redemption 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.
Also beginning 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 $100.7 million aggregate
principal amount of the outstanding debentures. In exchange for an aggregate
exchange premium of approximately $16.9 million, $100.7 million of convertible
debentures was converted into approximately 3.1 million shares of Inhale common
stock. Inhale will no longer have interest payment obligations on the debentures
that were converted.
At June 30, 2000, an aggregate of approximately $237.8 million 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.
6. 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 (the "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.
7. SUBSEQUENT EVENTS
The Company's Board of Directors has approved a two-for-one stock split, to
be effected as a 100% common stock dividend. Stockholders of record on August 1,
2000 will be issued a certificate representing one additional share of common
stock for each share of common stock held on the record date. The payment date
for this stock dividend will be on or about August 22, 2000.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations for the three and six months ended June 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 June 30,
2000, Inhale incurred a cumulative net loss of approximately $139.0 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 typically has 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
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
additional 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 for the three months ended June 30, 2000 was $13.8 million compared
to $9.9 million for the three months ended June 30, 1999, an increase of 40%.
Revenue for the six months ended June 30, 2000 was $24.4 million compared to
$17.7 million for the six months ended June 30, 1999, an increase of 38%. The
increase in revenue for both the three and six month periods 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 six months of 2000 and 1999 was comprised of
reimbursed research and development expenses as well as the amortization of the
pro-rata
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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 $26.0 million for the three
months ended June 30, 2000 from $14.6 million for the three months ended June
30, 1999, an increase of 78%. Research and development expenses increased to
$47.9 million for the six months ended June 30, 2000 from $27.3 million for the
six months ended June 30, 1999, an increase of 75%. The increase for the three
and six month periods 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 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 were $3.1 million for the three months
ended June 30, 2000, compared to $1.9 million for the three months ended June
30, 1999, an increase of 60%. General and administrative expenses increased to
$6.6 million for the six months ended June 30, 2000 from $3.2 million for the
six months ended June 30, 1999, an increase of 107%. The increase for the three
and six month periods was due to a non-cash compensation charge associated with
the accounting for non-employee stock options 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
Net interest was $1.8 million of income for the three months ended June 30,
2000 compared to $0.7 million of income for the three months ended June 30,
1999, an increase of 178%. This increase resulted from 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. Net interest was $12.2 million of expense
for the six months ended June 30, 2000 compared to $1.6 million of income for
the six months ended June 30, 1999. The six months ended June 30, 2000 includes
interest expense of $20.8 million, of which approximately $16.9 million relates
to the one-time net interest charge for the payment to holders of the Company's
October 2006 debentures of a conversion premium to convert $100.7 million
aggregate principal amount of outstanding debentures into approximately
3.1 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, contract research and milestone
payments, financing of equipment acquisitions and interest income earned on its
investments of cash. At June 30, 2000, Inhale had cash, cash equivalents and
short-term investments of approximately $309.4 million.
Inhale's operations used cash of $13.3 million for the six months ended
June 30, 2000, compared to $14.9 million for the six months ended June 30, 1999.
The decrease in cash used in operations was due principally to the combination
of decreased receivables and increased accrued liability balances at June 30,
2000 compared to the same period in 1999.
Inhale purchased property and equipment of approximately $30.9 million
during the six months ended June 30, 2000, compared to $9.9 million for the
corresponding period in 1999. The increase in purchased
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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.
Net cash provided by financing activities resulted from Inhale receiving
approximately $222.4 million in net proceeds from the issuance of $230 million
aggregate principal amount of convertible subordinated notes. In addition, in
February 2000 the Company 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 $100.7 million aggregate principal amount of the
outstanding debentures. In exchange for an aggregate exchange premium of
approximately $16.9 million, $100.7 million of convertible debentures were
converted into approximately 3.1 million shares of Inhale common stock. Inhale
will no longer have interest payment obligations on the debentures that were
converted.
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
21 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.
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 seven
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,
<PAGE>
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.
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>
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
<PAGE>
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. 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;
<PAGE>
- 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 June 30, 2000, we have an
accumulated deficit of approximately $139.0 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 21 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>
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 82 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 ending June 30,
2000, based on closing prices on the Nasdaq National Market, our stock price
ranged from $23.63 to $126.63. 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;
<PAGE>
- 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 June 30, 2000, we had approximately $242.6 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.
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities
On April 20, 2000 we issued 1,805 shares of our common stock to an
individual as partial consideration valued at $124,000 in connection
with certain transactions relating to the acquisition of intellectual
property rights. These shares were sold in a private placement exempt
from registration under Section 4(2) of the Securities Act of 1933.
No underwriters were involved in this offering and no commissions or
remuneration was paid in connection with the sales of these
securities. The acquirer indicated his intent to acquire the
securities for investment only and not with a view to distribution
and appropriate legends are affixed to the certificate issued in the
transaction. The individual was a sophisticated accredited investor
with access to adequate information about the Company.
On June 19, 2000, the Company filed a Certificate of Amendment of the
Amended Certificate of Incorporation with the Delaware Secretary of
State effecting an increase of the total number of shares that the
Company is authorized to issue from 60,000,000 shares to 310,000,000
shares. Three hundred million shares are common stock, each having a
par value of one-hundredth of one cent ($.0001). Ten million shares
are designated preferred stock, each having a par value of
one-hundredth of one cent ($.0001). This increase has the effect of
diluting the ownership interests of existing holders of common stock
and the Company's other securities convertible into shares of common
stock.
The Company's Board of Directors has approved a two-for-one stock
split, to be effected as a 100% common stock dividend. Stockholders
of record on August 1, 2000 will be issued a certificate representing
one additional share of common stock for each share of common stock
held on the record date. The payment date for this stock dividend
will be on or about August 22, 2000.
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
A. The annual meeting of the stockholders was held on June 6, 2000.
B. The following matters were voted upon at the annual meeting:
1. To elect the following directors to hold office until the 2003
Annual Meeting of Stockholders:
<TABLE>
<CAPTION>
NOMINEE IN FAVOR WITHHELD
------- -------- --------
<S> <C> <C> <C>
Robert B. Chess 18,168,620 20,974
Mark J. Gabrielson 18,168,135 21,459
James B. Glavin 18,168,320 21,274
</TABLE>
2. To approve the amendment and restatement of the Company's 1994
Equity Incentive Plan, which as amended, is entitled the 2000
Equity Incentive Plan, and to increase the aggregate number of
shares of common stock authorized for issuance under such plan
by 500,000 shares.
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
<S> <C> <C> <C> <C>
12,443,164 5,538,847 207,583 2,721,765
</TABLE>
<PAGE>
3. To approve an amendment to the Company's Certificate of
Incorporation to increase the authorized number of shares of
Common Stock from 50,000,000 shares to 300,000,000 shares.
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
<S> <C> <C> <C> <C>
13,878,594 4,122,303 188,697 2,721,765
</TABLE>
4. To ratify the selection of Ernst & Young LLP as independent
auditors for the Company for its fiscal year ending
December 31, 2000.
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
<S> <C> <C> <C> <C>
18,162,539 20,277 6,778 2,721,765
</TABLE>
Item 5. Other Information
Effective April 19, 2000, Robert B. Chess resigned as Co-Chief
Executive Officer of the Company, remaining as Chairman of the Board.
Effective April 19, 2000, Ajit S. Gill was named the sole Chief
Executive Officer of the Company, remaining as the President of the
Company.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith or incorporated by
reference:
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT TITLE
<S> <C>
------------------------------------------------------------------------------------
3.3 Certificate of Amendment of the Amended Certificate of
Incorporation
4.14 Specimen Common Stock Certificate
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
None.
<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.
<TABLE>
<CAPTION>
<S> <C>
INHALE THERAPEUTIC SYSTEMS, INC.
DATE: August 14, 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
</TABLE>
