Back to GetFilings.com

Table of Contents

Form 10-K

[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For Fiscal Year Ended December 31, 2001

or

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934

From the transition period from ________ to ________

Commission file number 333-34120

ISTA PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)

Delaware		33-0511729
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

15279 Alton Parkway, Suite 100, Irvine, California 92618
(Address of principal executive offices)

(949) 788-6000
(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed 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. Yes [ X ] No [    ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [    ]

     The aggregate market value of the Registrant’s voting stock held by non-affiliates on March 1, 2002 was approximately $21,898,000.

     As of March 1, 2002 there were 16,694,670 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Part III of this Form 10-K incorporates information by reference from the Registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2001.

1

Table of Contents

TABLE OF CONTENTS

PART I
Item 1: Business					1
Item 2: Properties					19
Item 3: Legal Proceedings					20
Item 4: Submission of Matters to a Vote of Security Holders					20
PART II
Item 5: Market for Registrant’s Common Equity and Related Stockholder Matters					21
Item 6: Selected Financial Data					22
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations					23
Item 7A: Quantitative and Qualitative Disclosures about Market Risk					29
Item 8: Financial Statements and Supplemental Data					29
Item 9: Changes and Disagreements with Accountants and Financial Disclosure					29
PART III
Item 10: Executive Officers of the Registrant					30
Item 11: Executive Compensation					31
Item 12: Security Ownerships of Certain Beneficial Owners and Management					31
Item 13: Certain Relationships and Related Transactions					31
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K					32
Signatures					33
Consolidated Financial Statements					F-1

i

Table of Contents

PART I

     This Form 10-K contains forward-looking statements that concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Discussions containing forward-looking statements may be found in the material set forth under “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other sections of this Form 10-K. Words such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue” or similar words are intended to identify forward-looking statements, although not all forward-looking statements contain these words.

     Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date hereof to conform such statements to actual results or to changes in our expectations.

     Readers are urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the factors that affect our business, including without limitation “Risk Factors” set forth in this Form 10-K.

Item 1: Business

Overview

     ISTA Pharmaceuticals, Inc. (the Company or ISTA) was founded to discover, develop and market new remedies for diseases and conditions of the eye. To date, our product development programs have focused on using highly purified formulations of the enzyme hyaluronidase to treat diseases and conditions such as vitreous hemorrhage, diabetic retinopathy and corneal opacification. Each of these conditions affects a significant number of patients worldwide and can impair vision and potentially cause blindness. Building on our experience, our goal is to become a fully-integrated, specialty pharmaceutical company by acquiring complementary products, either already marketed or in development.

     In January 2002, as a part of our rolling New Drug Application of Vitrase for the treatment for severe vitreous hemorrhage, we submitted to the United States Food and Drug Administrative (FDA) the non-clinical pharmacology and toxicology section for their review. In March 2002, we announced preliminary efficacy and safety results for our two Phase III clinical trials of Vitrase for the treatment of severe vitreous hemorrhage. Data from both Phase III studies did not show a statistically significant improvement in the primary (surrogate) endpoint. We intend to meet with the FDA as soon as possible to discuss the results. Those discussions may result in a requirement that we conduct additional Phase III clinical studies to support regulatory approval or a decision by us to terminate further development of Vitrase for the treatment of severe vitreous hemorrhage. In 2001, we also completed a pilot Phase IIa clinical trial of Vitrase for the treatment of diabetic retrinopathy, the leading cause of adult blindness in the United States.

     In March 2000, we began a collaboration with Allergan, Inc. (Allergan), under which Allergan will be responsible for the marketing, sale and distribution of our lead product candidate, Vitrase, if approved, in the United States and all international markets, except Mexico and Japan. In December 2001, we began a collaboration with Otsuka Pharmaceutical Co., Ltd. (Otsuka), under which Otsuka will be responsible for all the clinical development, regulatory approvals, and sales and marketing activities for Vitrase in Japan.

Strategy

     During 2001, we announced our strategy to transition from a development organization to a fully-integrated, specialty pharmaceutical company with a primary focus on ophthalmology. The key elements of our strategy are to:

•

Maximize the market opportunity for Vitrase. We are focused on bringing Vitrase to market as quickly as possible and ensuring that it gains broad acceptance for the treatment of serious conditions of the eye. We have begun a collaboration with Allergan, under which Allergan has agreed to use its extensive marketing capabilities to commercialize Vitrase, if approved, in the United States and all international markets, except Mexico and Japan. We have also begun a collaboration with Otsuka, under which we have granted Otsuka

1

Table of Contents

			exclusive rights for the development and commercialization of Vitrase in Japan. Otsuka will be responsible for all clinical development, regulatory approvals, sales and marketing activities for Vitrase in Japan.
	•		Identify, in-license and acquire complementary ophthalmic products and technologies to become a fully-integrated, specialty pharmaceutical company. We believe that our substantial expertise in the development of ophthalmic products positions us well to attract, evaluate and acquire products and technologies.
	•		Focus our development efforts on diseases and conditions representing large under-served markets in ophthalmology. For example, our current development efforts are targeting diseases and conditions for which there are currently no approved drug treatments, including vitreous hemorrhage, diabetic retinopathy and corneal opacification. Surgical procedures, when available for these conditions, carry significant risks. These conditions represent a substantial market opportunity in the United States, Europe and Japan. We are developing Vitrase to address diseases and conditions in the back of the eye, an area where few therapies are currently available.

Anatomy of the Eye

     The human eye is approximately one inch in diameter and functions much like a camera. The eye incorporates a lens system (the cornea and the lens) that focuses light, a variable aperture system (the iris) that controls the amount of light passing through the eye and a film (the retina) that records the image. The cornea, lens and iris operate to focus light rays on the retina, which contains the receptors that transmit images through the optic nerve to the brain.

     The cavity between the lens and the retina is filled with the vitreous humor, a clear, gel-like substance. The vitreous humor is nearly solid in children and undergoes a natural transition to liquid as one ages.

2

Table of Contents

Hyaluronidase

     The term hyaluronidase describes a group of naturally occurring enzymes that can digest certain forms of carbohydrate molecules called proteoglycans. The primary role of hyaluronidase is to digest proteoglycans such as hyaluronan, hyaluronic acid and chondroitin sulphate, substances that are part of various connective tissues in the body, including connective tissues in the eye. Physicians have used hyaluronidase safely and extensively for over 50 years to enhance the absorption of drugs.

     In the eye, pharmacological applications of hyaluronidase exploit the properties of this enzyme to modify the structure of the eye for therapeutic purposes. In our development work, we have focused on applications of hyaluronidase to take advantage of its ability to digest proteoglycans to treat a variety of eye diseases and conditions, including vitreous hemorrhage, diabetic retinopathy and corneal opacification. For treatment of serious conditions of the eye, or ophthalmic indications, only highly purified and specially formulated hyaluronidase can be used. Hyaluronidase that is less pure or formulated with preservatives has been shown to be dangerous to the eye and may cause blindness.

Product Development Programs

     We have two product candidates in clinical development. The following is a summary of our clinical product candidates:

     Vitrase

     We are developing Vitrase, a proprietary formulation of hyaluronidase, for the treatment of severe vitreous hemorrhage and diabetic retinopathy. When injected into the vitreous humor, Vitrase breaks down the proteoglycan matrix, causing the vitreous humor to liquefy. We believe that this also results in the separation of the vitreous humor from the retina and that, together, these effects are beneficial for the treatment of severe vitreous hemorrhage and diabetic retinopathy. Vitrase is administered directly into the vitreous humor through a single-dose injection. The procedure is performed in several minutes in an ophthalmologist’s office and is virtually painless due to the application of a topical anesthetic.

     Vitreous Hemorrhage

     A vitreous hemorrhage occurs when retinal blood vessels rupture and bleed into the vitreous humor. These hemorrhages result from leakage from abnormal, weak blood vessels and are associated with diabetic retinopathy, trauma and other factors. The immediate consequence of a vitreous hemorrhage is a reduction in the amount of light that can pass through the normally clear vitreous humor to the retina. The effects of a hemorrhage can be limited to a few dark spots in vision or, in the case of a severe vitreous hemorrhage, can result in completely obscured vision. Depending on the severity of the vitreous hemorrhage, it may take several months or significantly longer for the body to reabsorb the blood and for the patient to regain vision. In addition to obstructing the patient’s vision, a vitreous hemorrhage often prevents physicians from seeing into the back of the eye to diagnose or treat the cause of the hemorrhage. If extensive or repeated bleeding occurs, fibrous tissue or scarring can form on the retina, which can lead to a detachment of the retina and permanent vision loss or blindness.

     Patients who seek medical care for a vitreous hemorrhage often visit a physician, who then refers them to a retinal specialist. Treatment options for patients with a vitreous hemorrhage are limited. Currently, there is no drug treatment for vitreous hemorrhage and most retinal specialists initially recommend a “watchful waiting” period, during which the attending physician provides no medical treatment in the hope that the hemorrhage will clear on its own. The risks related to watchful waiting may include continued bleeding and, if caused by diabetic retinopathy, disease progression during the time it takes for the blood to clear on its own, if at all. An alternative to watchful waiting is a surgical procedure called a vitrectomy, in which the vitreous humor and hemorrhage are surgically

3

Table of Contents

removed and replaced with a balanced salt solution. There are serious risks associated with a vitrectomy, including both cataract formation and possible loss of vision associated with retinal detachment. These risks contribute to the limited use of vitrectomy as an initial treatment option for vitreous hemorrhage patients.

     We believe that a substantial opportunity exists to establish Vitrase as the initial therapy for a severe vitreous hemorrhage. Vitrase, when injected into a blood-filled vitreous humor, promotes clearance by causing the vitreous humor to liquefy and the blood to settle to the bottom of the eye. Vitrase also stimulates the cells responsible for engulfing and breaking down the blood, accelerating the reabsorption of the blood. This clears the path for light to reach the retina enabling the patient to regain vision. In addition, clearing the hemorrhage permits the retinal specialist to visualize, diagnose and treat the underlying cause of the vitreous hemorrhage.

     Hemorrhage density can vary significantly between patients who experience vitreous hemorrhage, but even a mild hemorrhage indicates the existence of a serious problem. Because of the absence of a validated and generally accepted medical definition of the various densities of vitreous hemorrhage, we classify a vitreous hemorrhage as either mild, moderate or severe depending on the density of the vitreous hemorrhage as observed by the physician:

	•		mild vitreous hemorrhage is characterized by trace blurring of retinal blood vessels
	•		moderate vitreous hemorrhage is characterized by partial obscuration of retinal blood vessels and/or the optic nerve
	•		severe vitreous hemorrhage is characterized by complete obscuration of retinal blood vessels and/or the optic nerve

     Market Opportunity. Based on market research that we commissioned in February 1999, we believe that approximately 450,000 cases of vitreous hemorrhage occur each year in the United States, a total of 400,000 cases occur each year in the five largest European markets and 190,000 cases occur each year in Japan. Approximately 60% of all of these cases are due to diabetic retinopathy, 15% are due to trauma and 25% are due to other factors. Vitrase, if approved, is unlikely to be used in all cases of vitreous hemorrhage. We believe that only approximately half of all cases are candidates for treatment using Vitrase.

     Clinical/Regulatory Status. In October 1998, the FDA granted fast-track designation for Vitrase for the treatment of severe vitreous hemorrhage. The FDA’s provision for “fast-track” designated drugs, such as Vitrase, provides for early submission of completed sections of the New Drug Application (NDA). In January 2002, as a part of our rolling NDA of Vitrase for the treatment of severe vitreous hemorrhage, we submitted to the FDA the non-clinical pharmacology and toxicology section for their review.

     We have completed two Phase III trials of Vitrase for the treatment of severe vitreous hemorrhage. These trials were prospective, randomized, parallel, placebo-controlled and double-masked studies. We conducted one of the trials, our North American trial, in the United States, Mexico and Canada with an enrollment of 750 patients. We conducted the other trial in Europe, Brazil, Australia and South Africa with an enrollment of 556 patients. Patients enrolled in the studies will continue to be monitored in 2002.

     In both studies, we enrolled patients who had both a severe vitreous hemorrhage that had been present for at least one month and a Best Corrected Visual Acuity (BCVA) of less than 20/200 at initial screening. After enrollment, patients were randomly assigned to either a test group or a control group. Patients in the test group received either a 7.5 (North America only), 55 or 75 international unit, or IU, injection of Vitrase. Patients in the control group received a saline injection. Treatment success in both studies was defined by the occurrence of any one of the following primary (surrogate) endpoints, which must have occurred within three months following treatment with Vitrase:

	•		panretinal laser photocoagulation surgery to slow or stop the cause of the vitreous hemorrhage
	•		other surgical treatment not specifically indicated for the clearance of the vitreous hemorrhage (for example, vitrectomy to enable treatment of retinal detachment)

4

Table of Contents

•

documented medical evidence that the clinical cause of the vitreous hemorrhage has been resolved without the need for further therapy

     Additionally, at each study visit and specifically at months one, two and three following treatment, BCVA was assessed using an eye chart in both studies.

      In March 2002, we announced preliminary efficacy and safety results for these trials. Data from both Phase III trials did not show a statistically significant improvement in the primary (surrogate) endpoint. Although statistically significant improvement was not achieved for the primary (surrogate) endpoint, clinically relevant changes in BCVA, a secondary efficacy endpoint in both studies, for the 55 IU Vitrase dose were observed in both studies. The study conducted outside of North America showed a statistically significant difference for the 55 IU Vitrase dose in the time required to achieve an improvement in BCVA of three or more lines on an eye chart on or before three months following treatment, as compared to those receiving placebo treatment.

      Additional analysis, not prospectively defined, showed statistically significant changes in two parameters, BCVA and vitreous hemorrhage density. A statistically significant improvement in BCVA was shown in the proportion of patients who had an improvement at the month one visit and month two visit following treatment with the 55 IU dose of Vitrase in both studies, and these findings extended to the three month post-treatment visit in the study conducted outside North America. A clinically meaningful and statistically significant decrease in the density of the vitreous hemorrhage was shown in patients at the month one, month two and month three visits for the 55 IU dose of Vitrase in both studies.

      Statistically significant ocular adverse events observed in both Phase III studies were iritis, hyperemia and ocular pain, with iritis the ocular adverse event of highest incident. Additionally, in the North American study, other statistically significant ocular adverse events included eye irritation, increased lacrimation, reduced visual acuity, vitreous hemorrhage, photophobia and photopsia.

      We intend to meet with the FDA as soon as possible to discuss the results of our Phase III studies. Those discussions may result in a requirement that we conduct additional Phase III clinical studies to support regulatory approval or a decision by us to terminate further development of Vitrase for the treatment of severe vitreous hemorrhage. We cannot assure you that we will conduct additional clinical trials to support regulatory approval of Vitrase to treat severe vitreous hemorrhage, or, if we conduct additional studies, that the results will support the filing or approval of a NDA.

     Prior to the initiation of our Phase III trials, we completed Phase I, Phase IIa and two Phase IIb trials of Vitrase. The Phase I trial was conducted in Mexico and involved 14 patients. Our Phase IIa trial was a pilot safety/efficacy study involving 18 patients with vitreous hemorrhage, four of whom were administered a saline injection, 13 of whom were administered a 75 IU injection of Vitrase and one of whom was administered Vitrase in one eye and saline in the other eye. The primary efficacy variable was time to clearance of the vitreous hemorrhage, defined as the investigator’s ability to view the retina with sufficient clarity to treat all areas from which the hemorrhage might have originated. Following the administration of either Vitrase or saline, patients were observed for a period ranging from 19 to 124 days, with the average being 56 days. Nine of the 14 patients treated with Vitrase experienced clearance of their vitreous hemorrhage during the period in which these patients were observed while none of the patients that received saline experienced clearance of their vitreous hemorrhage.

     We have completed two Phase IIb clinical trials of Vitrase in the United States and Mexico. The two prospective, randomized, double-masked, non-placebo controlled clinical trials involved a total of 378 patients who had a vitreous hemorrhage for at least one month due to diabetic retinopathy or spontaneous bleeding that was sufficiently severe to prevent adequate diagnosis or treatment. The patients were randomly administered a 7.5, 37.5 or 75 IU injection of Vitrase. The primary efficacy variable for both clinical trials was clearance of the vitreous hemorrhage, which was defined as the ability of the investigator to see the back of the eye with sufficient clarity to identify the cause and/or begin appropriate treatment.

     In our Phase IIb Mexico clinical trial, we evaluated 225 patients for up to eight weeks following treatment. Hemorrhage clearance was achieved in 48.5% of patients in the 7.5 IU group, 47.1% of patients in the 37.5 IU group, and 63.2% of patients in the 75 IU group. There was no statistically significant difference among any of the dosage groups for the total patient population analysis. In a retrospective analysis, however, we divided the total patient population into two discrete subsets, mild/moderate and severe, and found that for patients with a severe vitreous hemorrhage, there was a statistically significant difference in vitreous hemorrhage clearance in the 75 IU dosage group (62.7%) when compared to either the 7.5 IU (40.4%) or the 37.5 IU (40.4%) dosage groups. Although this study was not designed to evaluate visual acuity as a primary endpoint, visual acuity data was collected. Visual acuity improved an average of three lines on the eye chart for patients in each of the three treatment groups who experienced clearance of their vitreous hemorrhage. Visual acuity in patients with non-cleared eyes was essentially unchanged from baseline with no improvement shown. A valid statistical analysis comparing the change in visual acuity between patients with cleared eyes and patients with non-cleared eyes could not be made because patients had not been prospectively randomized into these two groups.

     In our Phase IIb U.S. clinical trial, we evaluated 153 patients for up to eight weeks following treatment. Hemorrhage clearance was achieved in 54.0% of patients in the 7.5 IU group, 41.5% of patients in the 37.5 IU group, and 56.5% of patients in the 75 IU group. There was no statistically significant difference among dosage groups. A retrospective analysis of patients that we classified as having either a mild/moderate or severe vitreous hemorrhage was not statistically significant between dosage groups. In this retrospective analysis, the vitreous hemorrhage clearance rates for severe hemorrhage patients was 56.3% in the 75 IU group as compared to 36.1% in the 37.5 IU group and 40.0% in the 7.5 IU group.

     Despite the absence of a control group in our two Phase IIb clinical trials, we believe that all three doses used in our Phase IIb clinical trials were active and showed varying levels of clearance. We believe this is the first time that any pharmacological agent has been shown to promote the clearance of vitreous hemorrhage in patients. Based on

5

Table of Contents

the results of our Phase IIb clinical trials, we commenced our two Phase III clinical trials of Vitrase, including a placebo control group involving a saline injection, for the treatment of severe vitreous hemorrhage.

Diabetic Retinopathy

     Abnormal changes and/or damage to the blood vessels in the eye due to diabetes are known as diabetic retinopathy. Diabetic retinopathy is a progressive disease consisting of two stages, nonproliferative and proliferative. Nonproliferative diabetic retinopathy is the first stage of diabetic retinopathy and occurs when the retinal blood vessels swell and leak fluid and small amounts of blood into the eye. Under current practice, physicians do not generally treat patients at the nonproliferative stage of the disease because there is no effective treatment available. If untreated, nonproliferative diabetic retinopathy will likely progress into the more dangerous, proliferative stage of diabetic retinopathy. Proliferative diabetic retinopathy occurs when normal retinal blood vessels become obstructed and new, abnormal blood vessels begin to grow, or proliferate, on the surface of the retina or into the vitreous humor. The growth of these new, abnormal blood vessels creates a dangerous condition because they are weak and grow beyond the supporting structure of the retina. These blood vessels are prone to bleeding and hemorrhage, and can lead to serious problems, including retinal tears and retinal detachment, both of which can severely impair vision and cause blindness. There is no cure for diabetic retinopathy.

     The most common treatment for patients with proliferative diabetic retinopathy is panretinal laser photocoagulation. In this treatment, a laser makes hundreds of tiny burns to the retina to reduce the growth of the abnormal blood vessels into the vitreous humor. Panretinal laser photocoagulation surgery has been shown to be effective in slowing the progression of proliferative diabetic retinopathy. Panretinal laser photocoagulation surgery frequently leads to increased loss of night vision and can make night driving more difficult. Also, after panretinal laser photocoagulation surgery, peripheral, or side vision, is often not as good as before the surgery.

     We believe that Vitrase can treat diabetic retinopathy at the nonproliferative stage. Following injection into the vitreous humor, Vitrase acts to separate the vitreous humor from the retina, thereby limiting growth of retinal blood vessels into the vitreous humor. We believe that Vitrase achieves this by breaking down the proteoglycan component of the substance that binds the vitreous humor to the retina and by liquefying the vitreous humor. This process allows the vitreous humor to detach from the retina. Retinal specialists consider this detachment to be beneficial to diabetic retinopathy patients because it may delay the progression of the disease.

     Market Opportunity. Diabetes continues to be a major healthcare problem in the United States and is projected to continue growing rapidly in many regions outside the United States. Eye disease is commonly associated with diabetes, and the risk of blindness to individuals with diabetes is 25 times greater than in the general population. Of the nearly eight million individuals in the United States diagnosed with diabetes, four to six million have some form of diabetic retinopathy. The majority of individuals with diabetic retinopathy are in the nonproliferative stage of the disease. We believe that these people are potential candidates for treatment using Vitrase.

     Clinical/Regulatory Status. We have completed a 60 patient pilot Phase IIa clinical trial in Mexico City to evaluate the safety and efficacy of a single-dose injection of Vitrase to cause a detachment of the vitreous humor from the retina and the impact on slowing the progression of diabetic retinopathy over a one-year period. This trial was a prospective, randomized, placebo controlled, double masked study. Patients with nonproliferative diabetic retinopathy were randomly assigned to one of four groups; a control group who received a saline injection, a test group who received a 75 IU injection of Vitrase, a test group who received a 0.3 ml injection of a gas called sulphur-hexafluroride or SF6, and a test group who received a 75 IU injection and a 0.3 ml injection of SF6 at 4 weeks following Vitrase injection if a complete detachment of the vitreous humor from the retina had not occurred.

6

Table of Contents

     Interim study results at 16 weeks post-treatment demonstrated that complete detachment of the vitreous humor from the retina was documented in 60% of eyes treated with a single dose of Vitrase. This is compared with only 6% of patients in the saline control group. In the study’s two additional treatment groups, detachment of the vitreous humor from the retina was documented in 53% of eyes treated with SF6 gas and in 50% of eyes treated with a combination of Vitrase and SF6 gas.

     To assess and measure the progression of diabetic retinopathy for study patients, seven-field fundus photographs (photographs of the retina) were taken at approximately 16 weeks following study entry and again 12 months later. The fundus photographs were reviewed in a masked fashion by an independent reading center to determine an Early Treatment for Diabetic Retinopathy Study (ETDRS) retinopathy severity scale score assigned for each patient’s study eye. These ETDRS retinopathy severity scores were then evaluated to identify any changes in the patients’ diabetic retinopathy over the one-year evaluation period. Of the study’s 60 patients, complete sets of fundus photographs were available, analyzed and scored for 46 patients.

     Although the study was not designed to demonstrate statistical significance for progression of diabetic retinopathy among study groups, evaluation of ETDRS retinopathy severity scores did highlight trends for slowing the progress of diabetic retinopathy. Of the 46 patients with fundus photographs that were analyzed and scored, 67% of patients treated with Vitrase (10 of 15) had stable ETDRS scores, indicating no measurable progression of diabetic retinopathy over the one-year evaluation period. This compares to stable ETDRS scores for the one-year evaluation period of 38% of patients treated with saline (6 of 16); 40% of patients treated with SF6 gas (6 of 15) and 43% of patients treated with Vitrase plus SF6 gas (6 of 14). Worsening of ETDRS scores, indicating a progression of diabetic retinopathy over the one-year evaluation period was seen in 13% of patients treated with Vitrase (2 of 15); 38% of patients treated with saline (6 of 16); 20% of patients treated with SF6 gas (3 of 15) and 21% of patients treated with Vitrase plus SF6 gas (3 of 14).

     The continued development of Vitrase for the treatment of diabetic retinopathy will be dependent upon our ability to raise additional capital. If we are successful in raising capital in a timely manner, then we may conduct additional trials in the United States to evaluate the safety and efficacy of Vitrase for the treatment of diabetic retinopathy.

Keratase

     We are developing Keratase, a proprietary formulation of hyaluronidase, for the nonsurgical treatment of corneal opacification. Keratase is a more concentrated formulation of hyaluronidase than Vitrase and is delivered in lower volume. Corneal opacification occurs when the cornea, which is normally transparent, becomes scarred, cloudy or opaque, diminishing the amount of light entering the eye. The severity of opacification can range from scars outside the line of vision to uniformly opaque corneas where light transmission is reduced to the point of blindness.

     A normal, clear cornea contains collagen fibrils that are uniformly spaced and connected together by proteoglycans. We believe that abnormal deposits of proteoglycans cause corneal opacification following bacterial, fungal or viral infection or trauma to the eye. We believe this results in an irregular rearrangement of the collagen fibrils, which leads to scattering of light and hazy or blurry vision.

     There are currently no approved drug treatment options for corneal opacification. The only treatment option is a corneal transplant, whereby a donor cornea is used to replace a damaged cornea. The number of corneal transplants is limited by cost and availability of donor corneas. The risks associated with corneal transplants include loss of vision, rejection of the donor cornea and creation of severe astigmatism.

     We believe Keratase can be used to treat corneal opacifications with benefits equivalent to those of corneal transplants but without the associated risks of rejection and astigmatism. We believe that Keratase digests the abnormal deposits of proteoglycans that connect the collagen, allowing the collagen to reorganize, thereby enabling improved vision. Over time, the proteoglycans reform to connect the corneal collagen in the proper reorganized structure.

     Market Opportunity. Based on market research that we commissioned in October 1999, we believe that there are approximately three million people in the United States, Western Europe and Japan that have a form of vision

7

Table of Contents

impairment due to corneal opacification, with nearly 200,000 new cases of corneal opacification occurring each year. While Keratase is unlikely to be used in all cases of vision impairment due to corneal opacification, we believe that the majority of cases are candidates for treatment using Keratase.

     Clinical/Regulatory Status. We have conducted preclinical studies using human donor corneas with opacification due to scarring. Keratase, when injected into these corneas, cleared a majority of the corneas with opacification in less than one week, while a saline control injection was not effective.

     In May 2001, we completed a 30 patient Phase IIb trial of Keratase for the treatment of corneal opacification due to infection or trauma. To be eligible for the study, patients were required to have a corneal opacification that had persisted for at least six months, have a BCVA no better than 20/63, and be registered on a corneal transplant waiting list or eligible for corneal transplant. The mean BCVA for all patients enrolled in the study was no better than 20/300. The trial included five Keratase dose groups and a saline control group. The trial was conducted in Mexico City under U.S. and Mexico Investigational New Drug applications. The study’s clinical efficacy endpoint was the evaluation of improvement in aided and unaided visual acuity in patients which was defined as an improvement in visual acuity of at least three or more lines using a standard eye chart exam at 90 days following dose administration. Nine of the 25 patients treated with Keratase exhibited an improvement in visual acuity of three or more lines as compared to one of five in the saline control group. Due to the small number of patients per treatment group, statistical evidence of efficacy was not seen. There were no significant safety issues noted for any of the five dose levels of Keratase administered.

     The continued development of Keratase is dependent upon our ability to raise additional capital and the prioritization of our development activities.

Collaboration With Allergan

     In March 2000, we began a collaboration with wholly owned subsidiaries of Allergan, including a license agreement for the marketing, sale and distribution of Vitrase, a supply agreement for Vitrase and a stock purchase agreement for $10.0 million of our Series D preferred stock. A joint operating committee has been constituted and consists of an equal number of members from each company who will oversee development, regulatory and marketing activities with respect to Vitrase. Allergan is a leading provider of eye care and specialty pharmaceutical products throughout the world.

     Under the terms of our agreements with Allergan:

	•		Development. We are responsible for all product development, preclinical studies and clinical trials in support of marketing approvals of Vitrase for the treatment of severe vitreous hemorrhage in the United States and Europe. We are also responsible for all preclinical studies and clinical trials to demonstrate the safety and efficacy of Vitrase for the treatment of diabetic retinopathy.
	•		Regulatory Approvals. We are responsible for applying for and obtaining regulatory approval of Vitrase in the United States and in the European Union. Allergan will be responsible for applying for and obtaining regulatory approvals of Vitrase in markets outside the United States and the European Union where it deems appropriate, other than Mexico and Japan.
	•		Manufacturing. We are responsible for the manufacture of Vitrase and, if approved, for supplying all of Allergan’s requirements for Vitrase during the term of the license agreement.
	•		Marketing. In the United States, Allergan will be responsible for the overall management of marketing, sale and distribution activities for Vitrase through its established sales and marketing organization. Under the terms of the license agreement, we will employ medical specialists in the United States to assist in physician training and usage development. In all markets outside the United States, except Mexico until 2004 and Japan, Allergan will be solely responsible for the marketing, sale and distribution of Vitrase.
	•		Milestone Payments. Allergan has agreed to pay us up to $35.0 million in milestone payments based on our achievement of specified regulatory and development objectives with respect to Vitrase for the treatment of vitreous hemorrhage and diabetic retinopathy. To date, we have not earned any milestone payments from Allergan.
	•		Profit Sharing and Royalties. In the United States, we will share profits on the sale of Vitrase with Allergan on a 50/50 basis during the term of the license agreement. In all markets outside the United States, except Mexico until 2004 and Japan, we will receive a royalty on all sales of Vitrase by Allergan.
	•		Term and Termination. Allergan’s license to market, sell and distribute Vitrase in the United States will expire ten full calendar years following the date of its first commercial sale, at which time all commercial rights for Vitrase in the United States will revert to us. Allergan’s obligation to pay royalties will terminate on a country-by-country basis upon the latest of 10 full calendar years following the date of the first commercial sale in each particular country and the expiration date of the last-to-expire licensed patent relating to Vitrase in that country. Allegran may terminate the license agreement at any time with three months notice to us. We may terminate the license agreement on a country-by-country basis in certain countries if Allegran fails to commercialize Vitrase within 12 months of regulatory approval in that country.

Collaboration With Otsuka

     In December 2001, we began a collaboration with Otsuka including a license agreement for the clinical development, regulatory approval, marketing, sale and distribution of Vitrase, a supply agreement for Vitrase and a stock purchase agreement for $4.0 million of our common stock. Otsuka is part of the Otsuka

8

Table of Contents

Group, headquartered in Tokyo, Japan and has a diverse portfolio including ophthalmic, central nervous system, cardiovascular, circulatory, gastro-intestinal, respiratory, oncological and dermatological products.

     Under the terms of our agreements with Otsuka:

	•		Clinical Development. Otsuka is responsible for all preclinical studies and clinical trials in support of marketing approval of Vitrase for the treatment of severe vitreous hemorrhage in Japan. Otuska is also responsible for all preclinical studies and clinical trials for regulatory approvals for additional indications including the treatment of diabetic retinopathy.
	•		Regulatory Approvals. Otsuka is responsible for applying for and obtaining regulatory approval of Vitrase in Japan. Otsuka will also be responsible for obtaining National Health Insurance pricing approval for Vitrase from the Japanese Ministry of Health. We will be responsible for providing Otsuka with copies of preclinical and clinical data and study reports and other documents in connection with our regulatory filings for Vitrase in the United States.
	•		Manufacturing. We are responsible for the manufacture of Vitrase and for the supply of all of Otsuka’s requirements for clinical trials in Japan. If approved, we will also be responsible for supplying all of Otsuka’s commercial product requirements for Vitrase during the term of the license agreement.
	•		Marketing. Otsuka will be responsible for the overall management of marketing, sales and distribution activities for Vitrase in Japan through its established sales and marketing organization.
	•		Milestone Payments. Otsuka paid us a non-refundable license fee as part of the license agreement. Otsuka has also agreed to pay us a milestone payment upon regulatory approval of Vitrase for the treatment of vitreous hemorrhage in Japan.
	•		Commercial Purchase of Vitrase. Otsuka is required to purchase Vitrase from us at a percentage of the annual National Health Insurance price as established for Vitrase in Japan during the term of the license agreement, unless we are unable to supply Vitrase to Otsuka. If we are unable to supply Vitrase to Otsuka and Otsuka, or a third party, is required to manufacture Vitrase to meet Otsuka’s supply requirements, we will only receive a royalty on sales of Vitrase, by Otsuka.
	•		Term and Termination. Our agreements with Otsuka will terminate upon the latest of 15 full calendar years following the date of the first commercial sale in Japan and the expiration date of the last-to-expire licensed patent relating to Vitrase in Japan. Otsuka may terminate the agreements at any time with six months notice to us. We may terminate the agreements if Otsuka fails to submit an application for regulatory approval of Vitrase in Japan within 12 months of completing all necessary clinical trials and the initial meeting with the Japanese Ministry of Health to review the clinical trial results.

Research and Development

     Since our inception, we have made substantial investments in research and development. During the years ended December 31, 2001, 2000 and 1999, we spent $15.8 million, $16.2 million and $11.1 million, respectively, on research and development activities. Given our limited capital resources, we plan to focus primarily on the continued development of Vitrase for the treatment of severe vitreous hemorrhage. If we are successful in raising additional capital that enables us to continue the development of all of our clinical stage products and our preclinical

9

Table of Contents

stage projects, then we plan to focus our internal research and development efforts on the development of novel ophthalmic therapies.

Patents and Proprietary Rights

     Our success will depend in part on our ability to obtain patent protection for our inventions, to preserve our trade secrets and to operate without infringing the proprietary rights of third parties. Our strategy is to actively pursue patent protection in the United States and foreign jurisdictions for technology that we believe to be proprietary and that offers a potential competitive advantage for our inventions. To date, we have filed six U.S. patent applications for Vitrase technologies, two of which have been issued for the use of hyaluronidase to clear vitreous hemorrhage, one of which is pending for the additional use of hyaluronidase to clear vitreous hemorrhage, and one of which is pending for the use of hyaluronidase to treat other vitreoretinal disorders. In addition, we have licensed one U.S. patent and the corresponding European patents for the treatment of certain ophthalmic conditions using enzymes, such as hyaluronidase derived from other sources. We hold four issued U.S. patents for the Keraform technologies and have one additional U.S. patent application pending. We have ceased negotiations with a third party for our acquisition of rights to patent applications owned by such third party related to our Keraform product in development. As a result, we may be required to license these patent rights in order to commercialize our Keraform product as currently planned. Such a license may not be available to us on favorable terms, if at all. If such license is not available and we commercialize our Keraform product in its current configuration, there is a possibility that we could be sued for patent infringement should any patents containing claims related to our Keraform product issue from these patent applications. We have also filed two other U.S. patent applications, one covering the use of our Keratase product for clearing corneal opacification and the other covering the use of our technology for retinal translocation.

     In addition to patents, we rely on trade secrets and proprietary know-how. We seek protection of these trade secrets and proprietary know-how, in part, through confidentiality and proprietary information agreements. We require our employees, directors, consultants and advisors, outside scientific collaborators and sponsored researchers, other advisors and other individuals and entities to execute confidentiality agreements upon the start of employment, consulting or other contractual relationships with us. These agreements provide that all confidential information developed or made known to the individual or entity during the course of the relationship is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and some other parties, the agreements provide that all inventions conceived by the individual will be our exclusive property. These agreements may not provide meaningful protection for or adequate remedies to protect our technology in the event of unauthorized use or disclosure of information. Furthermore, our trade secrets may otherwise become known to, or be independently developed by, our competitors.

Competition

     The markets for therapies that treat diseases and conditions of the eye are subject to intense competition and technological change. Many companies, including major pharmaceutical companies and specialized biotechnology companies, are engaged in activities similar to ours. Such companies include Alcon Laboratories, Inc., Bausch & Lomb Incorporated and CIBA Vision (a unit of Novatis AG). Some of these companies have substantially greater financial and other resources, larger research and development staffs and more extensive marketing and manufacturing organizations than ours. Many of these companies have significant experience in preclinical testing, clinical trials and other parts of the regulatory approval process.

     Should we be successful in acquiring or in-licensing currently marketed ophthalmic products, we will be subject to intense competition from major pharmaceutical companies who have extensive marketing and distribution organization and substantially greater financial resources than ours.

     We are not aware of any other drug candidates in clinical trials for the treatment of vitreous hemorrhage or corneal opacification. Eli Lilly and Company is currently conducting clinical trials for the use of a systemic drug to treat diabetic retinopathy, and several companies are working on drugs and systems to help control diabetes and the consequences of diabetes, including diabetic retinopathy.

     Our success will depend, in part, on our ability to:

10

Table of Contents

	•		demonstrate the safety and efficacy of our products
	•		obtain regulatory approval in a timely manner
	•		demonstrate potential advantages over alternative treatment methods
	•		obtain marketing and distribution support from our collaborators
	•		obtain reimbursement coverage from insurance companies and other third-party payers
	•		demonstrate cost-effectiveness
	•		obtain patent protection

Marketing and Sales

     We plan to market and distribute our Vitrase product in the United States and all international markets, except Mexico and Japan, through our collaboration with Allergan. We have a distribution agreement with Laboratories Sophia S.A. de C.V. providing for the marketing, sales and distribution of Vitrase in Mexico until April 2004. We have an agreement with Otsuka providing for the development and commercialization of Vitrase in Japan. In the United States, the primary target market for Vitrase will initially be retinal specialists to whom most patients with vitreous hemorrhage are referred.

     Should we be successful in acquiring or in-licensing currently marketed ophthalmic products, we will need to establish our own sales, marketing and distribution capabilities. We will need to devote significant financial and management resources to develop such sales, marketing and distribution capabilities. Our failure to establish effective sales and marketing capabilities could prevent us from directly marketing and selling such acquired or in-licensed products.

Third-party Reimbursement

     In the United States, physicians, hospitals and other healthcare providers that purchase pharmaceutical products generally rely on third-party payers, principally private health insurance plans and Medicare and, to a lesser extent, Medicaid, to reimburse all or part of the cost of the product and procedure for which the product is being used. We expect that patients with severe vitreous hemorrhage who are candidates for Vitrase treatment will include, primarily due to demographic factors, patients with health insurance coverage provided by Medicare and private insurers, including Medicare health maintenance organizations. Currently, a Medicare reimbursement code has been established for the intravitreal injection of a pharmaceutical agent, which, we believe, will be appropriate for physician billing for a Vitrase injection. Hospitals and physicians are reimbursed separately for drugs. Typically, the Health Care Financing Administration, or HCFA, the governmental agency responsible for Medicare reimbursement policy, does not issue national coverage guidelines for individual drugs. Drug specific coverage policies are primarily developed by individual health insurance companies following Medicare’s criteria for drug coverage, which include, among other requirements, that the drug be FDA approved, be used in connection with a physician service and be medically reasonable for the treatment of an illness or injury. While reimbursement may be available under existing payment codes for miscellaneous injectable drugs, each Medicare health insurance provider reviews such reimbursement requests separately. Widespread and uniform reimbursement for our injectable drug products will require the establishment of a specific reimbursement code for the injectable drug, which is issued by HCFA following review of an application by the manufacturer. To support our applications for reimbursement coverage with Medicare and other major third-party payers, we intend to use data from clinical trials, including Phase III and Phase IV clinical trials, to demonstrate the healthcare and economic benefits of using Vitrase for the treatment of severe vitreous hemorrhage. The lack of satisfactory reimbursement for our drug products will limit their widespread use and lower potential product revenues.

     Reimbursement systems in international markets vary significantly by country and, within some countries, by region. Reimbursement approvals must be obtained on a country-by-country basis. In many foreign markets,

11

Table of Contents

including markets in which we anticipate selling our products, the pricing of prescription pharmaceuticals is subject to government pricing control. In these markets, once marketing approval is received, pricing negotiations could take another six to twelve months or longer. As in the United States, the lack of satisfactory reimbursement or inadequate government pricing of our products will limit their widespread use and lower potential product revenues.

Government Regulation

     Our pharmaceutical products are subject to extensive government regulation in the United States. If we distribute our products abroad, these products will also be subject to extensive foreign government regulation. In the United States, the FDA regulates pharmaceutical products. FDA regulations govern the testing, manufacturing, advertising, promotion, labeling, sale and distribution of our products.

     The FDA approval process for drugs includes:

	•		preclinical studies
	•		submission of an Investigational New Drug application for clinical trials
	•		adequate and well-controlled human clinical trials to establish the safety and efficacy of the product
	•		submission of a New Drug Application
	•		review of the New Drug Application
	•		inspection of the facilities used in the manufacturing of the drug to assess compliance with the current Good Manufacturing Practices regulations

     The NDA includes comprehensive, complete descriptions of the preclinical testing, clinical trials, and the chemical, manufacturing and control requirements of a drug that enables the FDA to determine the drug’s safety and efficacy. An NDA must be submitted by us, and filed and approved by the FDA before any of our drugs can be marketed commercially.

     The FDA testing and approval process requires substantial time, effort and money. We cannot assure you that any approval will ever be granted.

     Preclinical studies include laboratory evaluation of the product, as well as animal studies to assess the potential safety and effectiveness of the product. These studies must be performed according to good laboratory practices. The results of the preclinical studies, together with manufacturing information and analytical data, are submitted to the FDA as part of the Investigational New Drug application. Clinical trials may begin 30 days after the Investigational New Drug application is received, unless the FDA raises concerns or questions about the conduct of the clinical trials. If concerns or questions are raised, the Investigational New Drug application sponsor and the FDA must resolve any outstanding concerns before clinical trials can proceed. We cannot assure you that submission of an Investigational New Drug application will result in authorization to commence clinical trials. Nor can we assure you that if clinical trials are approved, that data will result in marketing approval.

     Clinical trials involve the administration of the product that is the subject of the trial to volunteers or patients under the supervision of a qualified principal investigator. Furthermore, each clinical trial must be reviewed and approved by an independent institutional review board at each institution at which the study will be conducted. The institutional review board will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution. Also, clinical trials must be performed according to good clinical practices. Good clinical practices are enumerated in FDA regulations and guidance documents.

     Clinical trials typically are conducted in three sequential phases: Phases I, II and III, with Phase IV studies conducted after approval and generally required for drugs subject to accelerated approval regulations. These phases may overlap. In Phase I clinical trials, the drug is usually tested on healthy volunteers to determine:

12

Table of Contents

	•		safety
	•		any adverse effects
	•		dosage tolerance
	•		absorption
	•		metabolism
	•		distribution
	•		excretion
	•		other drug effects

     In Phase II clinical trials, the drug is usually tested on a limited number of afflicted patients to evaluate the efficacy of the drug for specific, targeted indications, determine dosage tolerance and optimal dosage, identify possible adverse effects and safety risks. In Phase III clinical trials, the drug is usually tested on a larger number of patients, in an expanded patient population and at multiple clinical sites. The FDA may require that we suspend clinical trials at any time on various grounds, including a finding that the subjects are being exposed to an unacceptable health risk.

     In Phase IV clinical trials or other post-approval commitments, additional studies and patient follow-up are conducted to gain experience from the treatment of patients in the intended therapeutic indication. Additional studies and follow-up are also conducted to document a clinical benefit where drugs are approved under accelerated approval regulations and based on surrogate endpoints. In clinical trials, surrogate endpoints are alternative measurements of the symptoms of a disease or condition that are substituted for measurements of observable clinical symptoms. Failure to promptly conduct Phase IV clinical trials and follow-up could result in expedited withdrawal of products approved under accelerated approval regulations.

     Food and Drug Administration Modernization Act of 1997

     The Food and Drug Administration Modernization Act of 1997 was enacted, in part, to ensure the availability of safe and effective drugs, biologics and medical devices by expediting the FDA review process for new products. The Modernization Act establishes a statutory program for the approval of fast-track products. The fast-track provisions essentially codify the FDA’s accelerated approval regulations for drugs and biologics. A fast-track product is defined as a new drug or biologic intended for the treatment of a serious or life-threatening condition that demonstrates the potential to address unmet medical needs for this condition. Under the new fast-track program, the sponsor of a new drug or biologic may request the FDA to designate the drug or biologic as a fast-track product at any time during the clinical development of the product. The Modernization Act specifies that the FDA must determine if the product qualifies for fast-track designation within 60 days of receipt of the sponsor’s request. Fast-track designated products may qualify for accelerated approval and priority review, or review within six months. Accelerated approval will be subject to:

	•		post-approval studies and follow-up to validate the surrogate endpoint or confirm the effect on the clinical endpoint
	•		prior review of all promotional materials

13

Table of Contents

     If a preliminary review of the clinical data suggests that the product is effective, the FDA may initiate review of sections of an application for fast-track designation for a product before the application is complete. This rolling review is available if the applicant provides a schedule for submission of remaining information and pays applicable user fees. However, the time period specified in the Prescription Drug User Fees Act, which governs the time period goals the FDA has committed for reviewing an application, does not begin until the complete application is submitted.

     In October 1998, the FDA granted our application for fast-track designation for Vitrase for the treatment of severe vitreous hemorrhage. We cannot predict the ultimate impact, if any, of the fast-track process on the timing or likelihood of FDA approval of Vitrase or, if fast-track status is granted, any of our other potential products.

     International

     For marketing outside the United States, we also are subject to foreign regulatory requirements governing human clinical trials and marketing approval for pharmaceutical products. The requirements governing the conduct of clinical trials, product approval, pricing and reimbursement vary widely from country to country. Whether or not FDA approval has been obtained, approval of a product by the comparable regulatory authorities of foreign countries must be obtained before manufacturing or marketing the product in those countries. The approval process varies from country to country and the time required for such approvals may differ substantially from that required for FDA approval. We cannot assure you that clinical trials conducted in one country will be accepted by other countries or that approval in one country will result in approval in any other country. For clinical trials conducted outside the United States, the clinical stages are generally comparable to the phases of clinical development established by the FDA.

Manufacturing

     Hyaluronidase, the active pharmaceutical ingredient used in Vitrase and Keratase, is sourced from ovine testes and processed in several stages to produce a highly purified raw material for formulation. We have a supply agreement with Biozyme Laboratories Limited (Biozyme) for cGMP-grade hyaluronidase for use in ophthalmic applications. The hyaluronidase is lyophilized, or freeze dried, by Biozyme and delivered to our contract manufacturer for formulation and filling of dose specific vials. Vitrase is currently required to be stored under refrigerated conditions prior to its use. We have entered into a letter of intent and are in the process of negotiating a definitive agreement with SP Pharmaceuticals, Inc. (SP) for the manufacture of commercial quantities of Vitrase.

     We intend to use Biozyme and SP, subject to the completion of a definitive agreement, as our sole source suppliers of raw materials and manufacturing services. To date, they have manufactured only limited quantities of our products for non-commercial purposes. For commercial scale production, we may need to qualify and validate additional suppliers and contract manufacturers and hire and train additional employees to supervise these operations.

Human Resources

     Including the employees of our Visionex Pte. Ltd. (Visionex) subsidiary, as of March 1, 2002, we had 41 full-time employees, 39 of whom were based in the United States and two of whom were based in Singapore. Approximately 32 of our employees are involved in research and clinical development activities. Nine of our employees hold Ph.D. or M.D. degrees and eight other employees hold other advanced degrees. Our employees do not have a collective bargaining agreement. We consider our relations with our employees to be good.

Risk Factors

We have a history of net losses and negative cash flow, and we may never achieve or maintain profitability.

     We have only a limited operating history upon which you can evaluate our business. We have incurred losses every year since we began operations. As of December 31, 2001, our accumulated deficit was $99.4 million,

14

Table of Contents

including a net loss of approximately $22.5 million for the year ended December 31, 2001. We have not generated any revenue from product sales to date, and we may never generate revenues from product sales in the future. Even if we do achieve significant revenues from product sales, we expect to incur significant operating losses over the next several years. We may never achieve profitable operations.

If we cannot raise additional capital on acceptable terms, we will need to significantly curtail our operations.

     We believe that our cash on hand will be sufficient to fund our operations and capital expenditure needs for the next 12 months. During this period, we plan to allocate our capital resources primarily to the development of our lead product candidate, Vitrase, for the treatment of severe vitreous hemorrhage. We will need to raise additional funds to continue the development and commercialization of all our product candidates, including Vitrase, beyond this period. These funds may not be available on favorable terms, or at all. If we do not succeed in raising additional funds, we will need to curtail our operations significantly.

Due to the preliminary results of our Phase III clinical trials for Vitrase, we may terminate the development of Vitrase for severe vitreous hemorrhage.

     In March 2002, we announced preliminary efficacy and safety results for our two Phase III clinical trials of Vitrase for the treatment of severe vitreous hemorrhage. Data from both Phase III studies did not show a statistically significant improvement in the primary (surrogate) endpoint. We intend to meet with the FDA as soon as possible to discuss the results of our Phase III studies. Those discussions may result in a requirement that we conduct additional Phase III clinical studies to support regulatory approval. Additional Phase III clinical studies will require us to raise additional capital, which we may not be able to raise on favorable terms, or at all. Even if we raise additional funds, we may decide to terminate further development of Vitrase for the treatment of severe vitreous hemorrhage. If we terminate development of Vitrase, we will not have a lead product candidate, and we will be dependent on the development of our other product candidates and our ability to successfully acquire other products and technologies. Even if we conduct additional studies for Vitrase, we cannot assure you that the results will support the filing or regulatory approval of a NDA.

If we do not receive and maintain regulatory approvals for our products, we will not be able to manufacture or market our products.

     None of our product candidates has received regulatory approval from the FDA. Approval from the FDA is necessary to manufacture and market pharmaceutical products in the United States. Other countries have similar requirements.

     The process that pharmaceuticals must undergo to receive necessary approval is extensive, time-consuming and costly, and there is no guarantee that regulatory authorities will approve any of our product candidates. FDA approval can be delayed, limited or not granted for many reasons, including:

	•		a product candidate may not be safe or effective
	•		FDA officials may not find that the data from preclinical testing and clinical trials justifies approval
	•		the FDA might not approve our manufacturing processes or facilities or the processes or facilities of our contract manufacturers or raw material suppliers
	•		the FDA may change its approval policies or adopt new regulations
	•		the FDA may approve a product candidate for indications that are narrow, which may limit our sales and marketing activities

     The process of obtaining approvals in foreign countries is subject to delay and failure for the same reasons.

15

Table of Contents

If we are not able to complete our clinical trials successfully, we may not be able to obtain regulatory approvals to market our products.

     Many of our research and development programs are at an early stage and clinical testing is a long, expensive and uncertain process. Even if initial results of preclinical studies or clinical trial results are positive, we may obtain different results in later stages of drug development, including failure to show desired safety and efficacy. For example, our preliminary efficacy and safety results for our two Phase III clinical trials of Vitrase for the treatment of severe vitreous hemorrhage did not show a statistically significant improvement in the primary (surrogate) endpoint. We cannot assure you that any additional clinical trials we may decide to conduct of Vitrase for the treatment of severe vitreous hemorrhage will support the filing or regulatory approval of a NDA.

     The clinical trials of any of our product candidates could be unsuccessful, which would prevent us from obtaining regulatory approval and commercializing the product. Our failure to develop safe and effective products would substantially impair our ability to generate revenues and materially harm our business and financial condition.

We may be unable to execute our strategic plan to transition to a fully-integrated, specialty pharmaceutical company.

     Our strategy to acquire or in-license currently marketed ophthalmic products will be dependent upon a number of factors including identifying such acquisition opportunities, successfully negotiating favorable terms with third parties for the acquisition of such products and our ability to raise additional capital to enable the acquisition of such products. Furthermore, we have not established sales, marketing or distribution capabilities to support the marketing of any products and we do not have experience in the manufacturing of any products in commercial quantities.

     We may not be able to identify any product acquisition opportunities or be successful in negotiating favorable terms for such product acquisitions, or at all. Should we be successful in acquiring any products, we will need to establish our own sales, marketing, distribution and manufacturing capabilities, each of which will require substantial financial and management resources. Our failure to establish an effective sales, marketing, distribution and manufacturing capabilities on a timely basis would adversely affect our ability to commercialize any acquired products.

We depend on our new Chief Executive Officer, Vicente Anido, Jr., Ph.D., to execute our strategic plan to transition to a fully-integrated, specialty pharmaceutical company.

     Our success largely depends on the skills, experience and efforts of our new Chief Executive Officer, Vicente Anido, Jr., Ph.D. Dr. Anido may terminate his employment at any time. In addition, we do not maintain "key person" life insurance policies covering Dr. Anido. The loss of Dr. Anido would jeopardize our ability to execute our strategic plan.

If we have problems with our contract manufacturer, our product development and commercialization efforts could be delayed or stopped.

     We have relied on Prima Pharm, Inc. (Prima Pharm) for formulation and filling of dose specific vials of hyaluronidase used in our clinical trials. The manufacturing facilities of all of our contract manufacturers must comply with current Good Manufacturing Practice regulations, which the FDA strictly enforces. Furthermore, the facilities of the contract manufacturer must undergo and pass pre-approval inspection by the FDA before any of our products can be approved for manufacture. If we fail to reach an agreement with a new contract manufacturer, we will have to negotiate with Prima Pharm to improve Prima Pharm’s manufacturing facilities in order to manufacture our products in commercial volume in compliance with current Good Manufacturing Practice regulations. Such improvements will require a substantial capital commitment on our part. Difficulties in our relationship with Prima Pharm could limit our ability to insure that the required improvements are made.

     We have entered into a letter of intent with a new contract manufacturer, SP, to scale up production and are in the process of negotiating a definitive agreement for the manufacture of commercial quantities of Vitrase. To date, we needed Vitrase only for clinical trials. We may not be able to complete an agreement with this new contract manufacturer on favorable terms, or at all. Additionally, before any new contract manufacturer can produce commercial quantities of Vitrase, if applied, we must demonstrate to the FDA’s satisfaction that the new source of Vitrase is substantially equivalent to the supply of the drug used in our clinical trials. Such demonstration may include the requirement to conduct additional clinical trials. A new manufacturer will also be subject to new testing and compliance inspections by regulatory authorities. We cannot assure you that any new contract manufacturer will be able to develop processes necessary to produce substantially equivalent product or that regulatory authorities would approve any new manufacturer. Failure to complete an agreement with a new contract manufacturer on a

16

Table of Contents

timely basis, or alternatively, successfully implement improvements to the manufacturing facilities of Prima Pharm, will adversely affect our ability to provide sufficient quantities of our products for commercial sale.

Our strategic partners may not perform their duties under our agreements, in which case our ability to commercialize Vitrase may be significantly impaired.

     We have entered into collaborations with both Allergan and Otsuka for Vitrase. If we obtain regulatory approval for Vitrase in the United States and Europe, we will be dependent on Allergan for the commercialization of Vitrase in the United States and Europe. We will depend on Otsuka for obtaining regulatory approval of Vitrase in Japan, and if such approval is obtained, we will be dependent upon Otsuka for the commercialization of Vitrase in Japan. The amount and timing of resources Allergan and Otsuka dedicate to our collaborations is not within our control. Accordingly, any breach or termination of our agreements by Allergan or Otsuka could delay or stop the commercialization of Vitrase. For various reasons, including our preliminary results of our two Phase III clinical trials of Vitrase for the treatment of severe vitreous hemorrhage, our strategic partners may change their strategic focus, terminate our agreements, pursue alternative technologies or develop competing products. Unfavorable developments in our relationship with our strategic partners could have a significant adverse effect on us and our stock price.

If we have problems with Biozyme, our product development and commercialization efforts could be delayed or stopped.

     We have a supply agreement with Biozyme pursuant to which Biozyme supplies our contract manufacturer with all of our ovine hyaluronidase requirements for use in our clinical trials. Biozyme is currently our only source for highly purified hyaluronidase, which is extracted from sheep in New Zealand. Difficulties in our relationship with Biozyme could limit our ability to provide sufficient quantities of our products for clinical trials and commercial sales.

The outbreak of foot-and-mouth disease in Europe and elsewhere may significantly interrupt the supply of the active pharmaceutical ingredient for our products.

     The active pharmaceutical ingredient in our product candidates is hyaluronidase, which is extracted from sheep in New Zealand. Biozyme, the company that processes hyaluronidase for us, is located in Wales and ships hyaluronidase to our manufacturer, Prima Pharm, in San Diego, approximately twice per month for formulation and filling of dose specific vials. The export of each shipment of hyaluronidase from the United Kingdom (UK) requires that the Ministry of Agriculture, Fisheries and Food (MAFF) issue an export permit. The MAFF has never denied the issuance of an export permit for any shipment of hyaluronidase to ISTA. To permit the importation of hyaluronidase in to the United States, we are required to secure an annual import permit from the United States Department of Agriculture (USDA). The USDA has never denied the issuance of an annual import permit to ISTA.

     In February 2001, an outbreak of foot-and-mouth disease in the UK led to governmental actions around the world to prevent the highly contagious disease from spreading to animals in other countries. Such actions have included temporarily prohibiting the importation and exportation of cattle, sheep and other animals subject to the disease, and products derived from these animals, to and from the UK and to and from other countries. As a result, the MAFF temporarily placed exportation of processed hyaluronidase and other biological materials on hold because of the foot-and-mouth disease outbreak. Before it will issue export permits for these materials, including hyaluronidase, MAFF is requiring that the USDA make a written request that permits be issued. The USDA issued a permit request for our hyaluronidase. The MAFF then issued the export permit and the shipment of hyaluronidase was delivered to ISTA. Subsequent shipments of hyaluronidase have been delivered without delay consistent with the procedure in place prior to the outbreak of foot-and-mouth disease. If future events lead to lengthy delays in the shipment of our active pharmaceutical ingredient to our manufacturer, our on-going clinical studies and our business and financial condition may be materially impaired.

17

Table of Contents

We may be required to bring litigation to enforce our intellectual property rights, which may result in substantial expense.

     We rely on patents to protect our intellectual property rights. The strength of this protection, however, is uncertain. In particular, it is not certain that:

	•		our patents and pending patent applications use technology that we invented first
	•		we were the first to file patent applications for these inventions
	•		others will not independently develop similar or alternative technologies or duplicate our technologies
	•		any of our pending patent applications will result in issued patents
	•		any patents issued to us will provide a basis for commercially viable products, will provide us with any competitive advantages or will not face third party challenges or be the subject of further proceedings limiting their scope