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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Mark One
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
[X] OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d)
[_] OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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Commission File No. 000-31135
INSPIRE PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 04-3209022
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4222 Emperor Boulevard, Suite 470, Durham, North Carolina 27703-8466
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(Address of principal executive offices) (zip code)
(919) 941-9777
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(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
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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. [ ]
State the aggregate market value of the equity stock held by non-affiliates
of the Registrant: $235,396,350 at January 22, 2001 based on the last sales
price on that date.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of March 15, 2001.
Class Number of Shares
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Common Stock, $.001 par value 25,585,534
Documents incorporated by reference
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The Proxy Statement to be filed with respect to the Annual Meeting of
Stockholders to be held on June 1, 2001 is incorporated by reference into Part
III.
Item 1. Business.
Overview
We discover and develop new drugs, or pharmaceutical products, to treat
diseases characterized by deficiencies in the body's innate defense mechanisms
of mucosal hydration and mucociliary clearance as well as other non-mucosal
disorders. Our products are based on our proprietary technology relating to P2Y
receptors. Studies indicate that a subtype of this family, the P2Y2 receptor,
coordinates the mechanisms of mucosal hydration and mucociliary clearance. These
complex mechanisms, which involve movement of salt and water, a protein
substance made in specialized cells that act to lubricate surfaces, called
mucin, and the movement of cilia, or hairlike projections on the surface of
cells that move together in a sweeping motion to move liquid and particles
forward, can be regulated therapeutically through the stimulation of this
receptor. Our lead products target respiratory and ophthalmic diseases with
inadequate current treatments. We currently have four product candidates in
clinical development:
. INS365 Respiratory for the treatment of chronic bronchitis;
. INS365 Ophthalmic for the treatment of dry eye disease;
. INS316 Diagnostic to aid in the diagnosis of lung cancer and lung
infection; and
. INS37217 Respiratory for the treatment of cystic fibrosis.
In addition, we have two products that are scheduled to enter clinical
trials within the next 12 months: INS37217 Respiratory for the treatment of
sinusitis and INS37217 Ophthalmic for the treatment of retinal disease. We have
entered into development and commercialization alliances with Genentech Inc.
("Genentech"), Kissei Pharmaceuticals Co., Ltd. ("Kissei") and Santen
Pharmaceutical Co., Ltd. ("Santen") and Kirin Brewery Co., Ltd. Pharmaceutical
Division ("Kirin"). We are also exploring other target diseases where we believe
P2Y receptors play important biological roles.
We commenced operations in March 1995. At that time, we acquired a license
to our initial technology, including patents relating to P2Y receptors and on
method of use for P2Y2 receptor agonists in the respiratory area, from The
University of North Carolina at Chapel Hill. We initially focused on the
clinical development of INS316 for the treatment of respiratory diseases such as
cystic fibrosis and chronic bronchitis. In early 1996, we initiated a research
program to develop an improved P2Y2 agonist compound, INS365. A joint patent for
this compound was granted to us and The University of North Carolina at Chapel
Hill. We began preclinical studies of INS365 for respiratory uses in 1997, and
clinical testing of INS365 for respiratory uses in early 1998. We filed an
investigational new drug application (IND) in the United States in the spring of
1998. We acquired an exclusive license to use INS365 to treat respiratory
disease from The University of North Carolina at Chapel Hill in 1998. During the
development of INS365 for respiratory uses, our scientists began to recognize
the potential for using INS365 to treat eye diseases such as dry eye. We
initiated ophthalmic clinical testing of INS365 in the United Kingdom in early
1999, filed an IND in the United States in the fall of 1999 and completed a
Phase II clinical trial in the fall of 2000. Our chemistry lab also synthesized
INS37217, a new P2Y2 receptor agonist, in 1998. We began preclinical testing of
INS37217 for respiratory uses in 1998 and for ophthalmic uses in 1999. This
preclinical work for the initial indications in both the respiratory and
ophthalmic areas has now been completed. In the fall of 2000, we filed an IND
for INS37217 Respiratory for the treatment of cystic fibrosis and in December
2000 we filed an IND for INS37217 Ophthalmic for the treatment of retinal
disease.
Industry Background
Mucosal hydration and mucociliary clearance processes are observed at a
number of human mucosal surfaces including those in the respiratory tract, eyes,
sinuses, vaginal and endocervical surfaces. Mucosal hydration and mucociliary
clearance are natural mechanisms for cleansing and protecting mucosal surfaces
and require a coordinated balance of salt, water and mucus. Studies indicate
that P2Y2 receptors regulate these mechanisms on
epithelial cells that line mucosal surfaces. Diseases that are characterized by
impairment of mucosal hydration and mucociliary clearance include chronic
bronchitis, sinusitis, cystic fibrosis, dry eye disease and vaginal dryness.
Respiratory
For lungs to function normally, airway surfaces must be kept properly
hydrated and clear of particles. Airway liquid, including salt and water, is
secreted through channels in the membranes of respiratory epithelial cells.
Mucus, secreted by goblet cells, traps microorganisms and particulates.
Specialized epithelial cells containing cilia beat synchronously to propel the
overlying "mucociliary blanket" of salt, water and mucus to the mouth and throat
where secretions are swallowed or expelled. This process is the principal
mechanism by which the body keeps airway surfaces free of dust, pollutants,
bacteria and viruses. Genetic and environmental factors can lead to a breakdown
in the normal process of mucosal hydration and mucociliary clearance that is
observed in many debilitating respiratory diseases, including chronic bronchitis
and cystic fibrosis. Studies indicate that stimulating P2Y2 receptors with
effective agonists can help restore the respiratory system's innate defense
mechanisms.
Chronic Bronchitis
Chronic bronchitis is a serious and potentially life-threatening lung
condition characterized by acute and chronic airway inflammation, chronic
obstruction of airflow and a mucus-producing cough. Patients with chronic
bronchitis experience shortness of breath, labored breathing, excessive and
chronic coughing and production and retention of excessive mucus. Chronic
bronchitis can be caused by smoking, environmental toxins, and viral or
bacterial infections. Chronic bronchitis is defined by the American Thoracic
Society as the presence of a mucus-producing cough most days of the month, three
months of the year, for at least two successive years without obvious
alternative explanation. Patients with chronic bronchitis experience acute
flare-ups of the illness, their medication usage increases and they may require
hospitalization. If left untreated, these patients experience progressive
deterioration in lung function, which can eventually result in respiratory
failure and death.
The American Thoracic Society guidelines for the treatment of chronic
bronchitis recommend three main objectives to pharmaceutical intervention:
dilation of the airways, reduction of airway inflammation, and clearance of
retained respiratory secretions. Current management of chronic bronchitis treats
the symptoms, but does not cure the disease, and is based on the degree of
airflow obstruction and the extent of the patient's disability. Physicians
generally prescribe bronchodilators, which act to open airways in the lungs.
These are usually inhaled medications such as Serevent(R), Ventolin(R),
Atrovent(R), or Combivent(R). Physicians may also prescribe inhaled steroids
such as Beclovent(R) and Azmacort(R) to reduce the inflammation in the airways.
Additionally, physicians often use antibiotics during acute flare-ups of the
illness if they diagnose or suspect bacterial infections. There is currently no
FDA approved pharmaceutical agent that effectively clears retained mucous
secretions in this disease.
Approximately 35.5 million patients have been diagnosed with chronic
bronchitis in the eight major international prescription pharmaceutical markets,
including 13 million in the United States, making it more prevalent than asthma.
Chronic bronchitis is estimated to account for approximately $15 billion in
direct costs in the United States annually. In the United States, there are
estimated to be 500,000 hospitalizations per year due to acute flare-ups of
chronic bronchitis and it is the fourth leading cause of death. In the eight
major international prescription pharmaceutical markets, sales of
ethical/proprietary pharmaceutical products to treat chronic bronchitis were
approximately $1.3 billion in 1996 and have been estimated to reach
approximately $2.5 billion in 2001.
Cystic Fibrosis
Cystic fibrosis is a life-threatening disease involving a genetic mutation
that disrupts the cystic fibrosis transmembrane regulator protein. In healthy
individuals, this protein acts as an ion-specific channel that modulates salt
and water movement. In cystic fibrosis patients, a defect in this channel leads
to poorly hydrated, thickened mucous secretions in the airways and severely
impaired mucociliary clearance. Impairments in these vital lung defense
mechanisms typically begin in early childhood. Chronic secondary infections
invariably occur, resulting in progressive lung dysfunction and deterioration.
Cystic fibrosis-induced damage to the respiratory tract accounts for
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more than 95% of the morbidity and mortality associated with this disease.
According to the U.S. Cystic Fibrosis Foundation, the median life expectancy for
patients is 32 years.
The current therapeutic approaches to address cystic fibrosis mainly treat
the symptoms, but do not cure the disease, and are aimed at reducing respiratory
infections and breaking up thickened mucous secretions that cause airflow
obstruction and harbor bacteria. For example, TOBI(R) is an inhaled antibiotic
that treats the infection, and Pulmozyme(R) is an inhaled protein that breaks up
excessive DNA in cystic fibrosis mucus that reduces the thickness and tackiness
of the respiratory secretions. While both products are approved for the
treatment of cystic fibrosis, neither product is designed to address the
underlying ion-transport defect, which results in dehydrated mucus and severely
impaired mucociliary clearance.
There are approximately 30,000 diagnosed cystic fibrosis patients in the
United States and approximately 75,000 in the eight major international
prescription pharmaceutical markets. The average annual cost of treating a
cystic fibrosis patient in the United States exceeds $45,000, and the annual
cost for patients in the United States is over $1 billion. We estimate that in
the United States sales of ethical/proprietary pharmaceutical products to treat
cystic fibrosis currently are in excess of $200 million annually.
Respiratory Diagnostics
Physicians use microscopic examination of lung cells to diagnose lung
cancer and lung infections, including pneumonia and tuberculosis. Effective
diagnosis requires the collection of an adequate specimen, one which is enriched
with deep-lung material obtained from the lower part of the lung. Bronchoscopy,
an invasive medical procedure, can be performed to obtain a specimen; however it
is a procedure that costs over $1,000 and poses a risk to patients with impaired
lung function. The induction of sputum, either spontaneously or with inhaled
solutions, is a less invasive and less costly alternative for obtaining a
deep-lung specimen. Once the specimens are collected, they are tested for the
presence of cancerous cells or pathogens associated with lung infections.
However, many patients have difficulty producing adequate specimens on their
own, which is a key barrier to early and effective diagnosis and treatment.
There are no FDA approved agents currently available to enhance the
production of an adequate deep-lung specimen. In an effort to produce a quality
specimen, non-approved agents are frequently used, including inhaled solutions
such as hypertonic saline and propylene glycol, which cause irritation and
excessive coughing. Because these agents have limited utility and are often
poorly tolerated, pulmonologists and respiratory therapists have expressed a
strong interest in a better-tolerated and more effective therapy, which could
reduce the need for bronchoscopies.
Market research conducted by us, including interviews with pulmonologists
and oncologists, indicates that deep-lung specimens are frequently collected for
the diagnosis of lung cancer and lung infections. The testing of specimens is a
recommended component of annual physical examinations in Japan.
Ophthalmic
The eyes and inner eyelids are surrounded by a mucosal surface which serves
as an important innate defense mechanism, keeping the surface of the eye, or
ocular surface, moist, clear and free from infection. Tears produced by the
mucosal hydration process and the lacrimal glands help maintain eye moisture and
in response to physical stimuli can be greatly increased to flush out irritants.
This tear film is a complex mixture of fluid, ions, mucin and proteins that,
when mixed in the proper proportions, coats the cornea with a protective film.
The mucosal hydration process and the lacrimal glands maintain an optimal
balance of salt, water, mucin and proteins in people with a healthy ocular
surface. Studies indicate that stimulating P2Y2 receptors with effective
compounds can help restore the eye's innate mucosal defense mechanism on the
ocular surface.
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Dry Eye Disease
Dry eye, an ocular surface disease, is the general term for a condition in
which abnormalities in the eye's tear film lead to burning, painful, red,
irritated and dry eyes. These abnormalities are typically characterized by a
decrease in tear production, an increase in tear evaporation or the improper
mixture of the eye's tear film components. If left untreated, dry eye disease
can result in permanent corneal damage and visual impairment.
The current treatments for dry eye disorders in the major markets consist
of artificial tear solutions and lubricant drops. In some cases, small plugs are
inserted by physicians in the corner of the eyes to slow tear drainage.
Artificial tears, which are available as over-the-counter and, in some
countries, as prescription products, provide temporary relief of symptoms, but
also wash out the natural proteins and other components that keep an eye
healthy. There are currently no approved pharmacologically active agents, drugs
that work by affecting a biological process such as stimulation of a receptor,
for dry eye disease.
We estimate, based on an extrapolation from United States data, that
moderate to severe dry eye affects approximately nine million people in the
eight major international prescription pharmaceutical markets and can be caused
by eye stress, aging, environmental factors, autoimmune disorders and various
medications. The market for dry eye treatments consists of both prescription and
over-the-counter products. Because dry eye disease is more prevalent among the
elderly and post-menopausal women, this market is expected to grow as
populations age. We estimate that, in the eight major international prescription
pharmaceutical markets, sales of ethical/proprietary pharmaceutical products for
dry eye treatments exceed $230 million annually.
Inspire's Solution
Mucosal hydration and mucociliary clearance are natural mechanisms for
cleansing and protecting epithelial surfaces and require a coordinated balance
of salt, water and mucus. Studies indicate that P2Y2 receptors coordinate these
processes that can be regulated therapeutically by the local delivery of
compounds that bind to and stimulate these receptors. We have focused our
initial efforts on developing P2Y2 receptor agonists to treat diseases by
activating natural processes of mucosal hydration and mucociliary clearance.
We believe that P2Y2 agonists represent a new, pharmacological approach to
the treatment of respiratory and eye diseases. We also believe that a P2Y2
agonist may be effective as a drug that enhances the production of deep-lung
sputum samples for diagnostic tests. Importantly, our product candidates
currently in clinical testing can be applied directly to these mucosal surfaces
in a topical form such as inhaled aerosols and eye drops. These products act and
are degraded locally, resulting in minimizing the potential for systemic side
effects. Our current products are designed to address the medical need for
effective new products for chronic bronchitis, cystic fibrosis, respiratory
diagnostics, dry eye disease and other diseases that involve impairment of
mucosal hydration and mucociliary clearance on epithelial surfaces. Our
principal product candidates are:
INS365 Respiratory. We are developing INS365 Respiratory as an inhaled
product for the treatment of chronic bronchitis. We believe our product
will be the first FDA approved product that addresses the need for an
effective agent to clear the build-up of mucus in the airways of bronchitis
sufferers. Thus, we believe our product will reduce the need for
antibiotics, steroids and bronchodilators, and may reduce the frequency and
length of flare-ups of the illnesses and hospitalizations. In many cases,
we believe that our product will be complementary to existing treatments.
INS37217 Respiratory. We are developing INS37217 Respiratory as an
inhaled product for the treatment of cystic fibrosis. We believe our
product will be the first FDA approved product that mitigates the
underlying ion-transport defect in the airways of patients with cystic
fibrosis. We believe our product will improve respiratory symptoms, reduce
infections and enhance the health status of patients with this disease and
will be complementary to other currently approved products.
INS316 Diagnostic. We are developing INS316 Diagnostic as an inhaled
diagnostic drug to aid in the detection of lung cancer and lung infection.
We believe that INS316 Diagnostic will be an effective
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acute-use product to enhance the production of adequate deep-lung specimens
for diagnostic purposes. As such, we believe our product will facilitate
the diagnosis of lung cancer and lung infection and potentially reduce the
need for costly and invasive bronchoscopies.
INS365 Ophthalmic. We are developing INS365 Ophthalmic as an eye drop
for dry eye disease. We believe that, by promoting the eyes' natural
defense mechanism, INS365 Ophthalmic will be one of the first FDA approved
pharmacologically effective agents to treat the symptoms of dry eye, and
the first one with this mechanism of action. We believe our product will
help restore a natural corneal tear film, reduce dry eye symptoms, help
prevent long-term corneal damage, and improve ocular surface health in dry
eye sufferers.
Our Strategy
Our objective is to become a leading biopharmaceutical company focused on
developing new treatments for diseases involving impaired mucosal hydration or
inadequate mucociliary clearance and other disorders. The principal elements of
our strategy include:
Aggressively Advance Our Lead Products. Our focus is on discovering
and developing therapies where current treatments are ineffective and where
large therapeutic market opportunities exist. By the end of 2001, we expect
to have six products in clinical development that target chronic
bronchitis, cystic fibrosis, respiratory diagnostics, dry eye disease,
retinal detachment and sinusitis. We intend to continue to rapidly develop
and commercialize these products and to advance other preclinical product
candidates toward clinical development.
Establish Collaborative Relationships with Market Leaders while
Selectively Retaining Marketing Rights. In order to minimize the costs to
us of late-stage clinical trials and in order to more effectively market
our products, we will continue to establish and expand strategic alliances
with leading corporations in our target markets. In general, we seek to
advance our compounds into later-stage clinical trials before partnering
such compounds so as to retain maximum economic benefit to us.
Additionally, we may selectively retain partial or full commercialization
rights to our products in some limited indications. An example is our
co-development and co-promotion options under the Genentech agreement for
cystic fibrosis that enable us to retain additional economic benefit in
this opportunity.
Use Our Proprietary Technology Relating to P2Y Receptors to Develop
New Products. Our research focus is to discover new pharmaceutical products
based on our P2Y receptor technology. Studies indicate that a subtype of
this family, the P2Y2 receptor, has broad applicability as a regulator of
the body's innate defense mechanisms of mucosal hydration and mucociliary
clearance. One of our key strengths is our ability to understand the role
and importance of P2Y2 receptors and, through research, high-volume
screening techniques and pharmacology models, develop compounds that target
a patient's impaired mucosal hydration and clearance mechanisms and other
non-mucosal applications. Our discovery group is pursuing opportunities to
expand our base of compounds and therapeutic targets for P2Y2 agonists and
the biological role of other P2Y receptor subtypes. This group generates
additional mucosal and non-mucosal opportunities internally and through
collaborative relationships with academic and governmental organizations
and private enterprises.
Protect and Enhance Our Technology Leadership Position. We have a
substantial intellectual property position related to our technology. We
intend to continue to pursue an aggressive patent strategy to protect our
expanding proprietary discoveries.
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Product Development Programs
The following table provides a summary of our development programs by
indication, development status and corporate partners.
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Indication Product Candidate Development Status Corporate Partners
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Respiratory
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Chronic bronchitis INS365 Respiratory Phase II underway in U.S.; Genentech (ex-Japan)
Phase I in Japan Kissei (Japan)
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Cystic fibrosis INS37217 Phase I/II planned for 2001 Genentech (ex-Japan)
Respiratory
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Sinusitis INS37217 Preclinical; Phase I Genentech
Respiratory planned for 2001 (worldwide)
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Diagnostic aid for INS316 Diagnostic Phase III planned to start Kirin (Asia) Uncommitted
lung disease in 2001 outside Asia
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Ophthalmic
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Dry eye INS365 Ophthalmic Phase III underway in Santen (Asia)
U.S.; Phase I in Japan Uncommitted
outside Asia
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Retinal disease INS37217 IND filed; Phase I planned Uncommitted
Ophthalmic to
start in 2001
======================================================================================================================
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INS365 Respiratory for Chronic Bronchitis
INS365 Respiratory is being developed in an inhaled form for the treatment
of chronic bronchitis. We have completed five Phase I clinical trials of INS365
Respiratory. These trials have evaluated the safety and preliminary efficacy of
INS365 Respiratory in healthy volunteers, chronic smokers who are at a high risk
for developing chronic bronchitis and cystic fibrosis patients with airflow
obstruction. In total, these studies enrolled approximately 250 subjects. These
studies have indicated that INS365 Respiratory was well tolerated and
significantly enhanced mucus clearance when compared to placebo. One of these
studies, conducted in 35 chronic smokers, indicated that INS365 Respiratory in
single inhaled doses significantly enhanced clearing of mucus from the lungs,
which occurred rapidly following dosing. This effect was dose-related and was
significantly greater than mucus cleared from lungs following inhalation of a
saline placebo; the results were statistically significant. We have conducted a
series of good laboratory practice toxicology studies, including 28-day
inhalation studies, which, together with the Phase I data, have allowed us to
progress INS365 Respiratory into a Phase II program.
We have initiated, in consultation with our strategic partner, Genentech, a
Phase II clinical study in patients with chronic bronchitis which is now
underway. This trial is a multi-center study enrolling patients with mild to
moderate chronic bronchitis. We intend to dose patients for up to one month
using standard air-jet nebulizers. The clinical efficacy measures in this study
are intended to include respiratory symptoms and health status, using a
validated respiratory questionnaire, lung function and adverse events. Kissei,
our partner in Japan, filed a Japanese IND for INS365 Respiratory in December
1999 and has completed an initial Phase I clinical trial in smokers and
non-smokers. This study demonstrated safety and tolerability in the subject
population.
We have developed a drug delivery strategy for INS365 Respiratory based on
segmenting the chronic bronchitis patient population by severity of
disease--mild, moderate and severe. We anticipate that each segment may have
different drug delivery needs based on convenience, ease of use, and degree of
patient mobility, such as whether the patient is working, homebound or
hospitalized. In recognizing this variety of needs, we are exploring various
delivery options which will allow for flexibility in dosing across the various
segments of the chronic bronchitis market. One option will be plastic unit-dose
vials that are used with a standard air-jet nebulizer system. Another possible
approach, a new, hand-held, portable delivery system, has been evaluated in two
radio-labeled lung deposition studies. These studies included 12 healthy
volunteers and 12 chronic smokers. Results from these studies suggest that this
new system can be used to deliver a small volume of concentrated INS365
Respiratory in one to two breaths providing rapid delivery in a convenient
manner to patients. These studies have also demonstrated that INS365 respiratory
significantly enhances mucus clearance with this new system. These studies have
been conducted to assist our strategic partners to demonstrate that this product
can be delivered in a more convenient device. The intention is to gain approval
first with a standard nebulizer, then to potentially add approval of a portable
delivery system.
In September 1998, we entered into a joint development, license and supply
agreement with Kissei through which Kissei received exclusive rights to develop
and market INS365 Respiratory for respiratory therapeutic indications in Japan.
In December 1999, we entered into a development, supply and license agreement
with Genentech to develop P2Y2 agonists, including INS365 Respiratory, for
respiratory diseases, including chronic bronchitis, throughout the world outside
Japan. See "--Corporate Collaborations."
INS37217 Respiratory for Cystic Fibrosis
INS37217 Respiratory is a second-generation P2Y2 agonist with an extended
duration of action. This product is highly stable in the mucous secretions of
cystic fibrosis patients making it an attractive product candidate for this
disease. The previous studies we have conducted with INS365 Respiratory provide
the scientific rationale for the use of INS37217 Respiratory for cystic
fibrosis. We completed all necessary preclinical studies for initial clinical
testing and in the fall of 2000 filed an IND in the United States. We initiated
and completed a Phase I clinical trial for the development of INS37217
Respiratory for cystic fibrosis in late 2000. We intend to develop INS37217
Respiratory for cystic fibrosis as a chronic use agent in an inhaled delivery
form.
-7-
INS37217 Respiratory is designed to enhance the lung's innate mucosal
hydration and mucociliary clearance mechanisms, which in cystic fibrosis
patients are impaired by a genetic defect. By hydrating airways and stimulating
mucociliary clearance through stimulation of the P2Y2 receptor, we expect that
INS37217 Respiratory will help keep the lungs of cystic fibrosis patients clear
of thickened mucus, reducing infections and the damage that occurs as a
consequence of the retention of thick and tacky infected secretions. We further
believe that these effects may result in reduced frequency and length of
hospitalizations, reduced need for antibiotics and other medications, reduced
deterioration of respiratory function, and improved respiratory symptoms and
health status. In addition, this product is expected to be complementary with
the two approved products, Pulmozyme(R) and TOBI(R), neither of which affects
the underlying ion-transport defects in cystic fibrosis airways.
We expect to receive orphan drug status and an accelerated regulatory
approval process for INS37217 Respiratory for the treatment of cystic fibrosis.
In December 1999, we entered into a co-development partnership with Genentech to
develop P2Y2 agonists for respiratory diseases, including cystic fibrosis,
throughout the world outside Japan. See "--Corporate Collaborations."
INS37217 Respiratory for Sinusitis
INS37217 Respiratory is also being developed to treat sinusitis, an
infectious and inflammatory condition of the nose and sinuses that often results
in painful flare-ups of the illness. We believe that increasing mucociliary
clearance in the nose and sinuses with INS37217 Respiratory may be beneficial
for treating this condition. Clinical studies with other P2Y2 agonists such as
INS316 have already shown that these agents open ion channels in the nasal
mucosa thus hydrating this surface. It is expected that INS37217 Respiratory
will also stimulate mucociliary clearance in the sinuses. We estimate that
sinusitis affects approximately 12% of the U.S. adult population, or
approximately 25 million adults. The current market consists of both
over-the-counter and prescription treatments. Our research and development of
drug candidates in this area depends on our collaboration with Genentech. See
"--Corporate Collaborations."
INS316 for Respiratory Diagnostics
INS316 Diagnostic, a P2Y2 agonist with a short duration of action, is being
developed as an acute-use inhaled solution to stimulate enhanced clearance of
mucus from the lungs to provide a deep-lung sputum sample for diagnosing lung
disease and infections. We have conducted four clinical trials to evaluate
INS316 Diagnostic's utility as an acute use agent. These clinical studies have
demonstrated that INS316 Diagnostic is well tolerated and appears to enhance the
ability of patients to produce rapidly an adequate deep-lung specimen. These
studies were conducted in healthy volunteers, as well as chronic smokers and
patients with chronic bronchitis who are at a high risk for developing lung
cancer and lung infections. Phase II studies in patients diagnosed with or
suspected of having lung cancer have now been completed.
INS316 Diagnostic has been administered by inhalation to more than 325
patients, and has been well tolerated in these trials. INS316 Diagnostic's
safety profile is based on studies including non-smokers, smokers, patients with
obstructive lung diseases and patients diagnosed with or suspected of having
lung cancer, and on the results of good laboratory practice, genotoxicity and
28-day inhalation toxicology studies. We believe that INS316 Diagnostic is
rapidly degraded in blood and plasma and, so has minimal systemic absorption.
Therefore, the potential for unwanted side effects is minimized.
These studies have demonstrated that single inhaled doses of INS316
Diagnostic significantly enhance clearing of mucus from the lungs relative to
that following administration of normal saline solution. These effects occurred
within a few minutes following dosing and were dose-related. Specimens obtained
from individuals exposed to INS316 Diagnostic were found to be highly enriched
with cell types characteristic of deep-lung secretions, including alveolar
macrophages and ciliated epithelial cells, when compared to samples from
individuals exposed to a placebo. These findings were statistically significant.
In a trial in 25 patients with chronic bronchitis who are at high risk for lung
cancer, 90% of the patients produced an adequate deep-lung specimen following
INS316 Diagnostic inhalation versus only 25% following inhalation of a placebo.
These study results were
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statistically significant. Based on these encouraging results and the recently
completed Phase II lung cancer trials, we except to move INS316 Diagnostic into
Phase III testing in 2001.
In September 2000, we entered into a licensing agreement with Kirin.
Pursuant to this agreement Kirin has obtained rights to develop and
commercialize INS316 Diagnostic in twenty-one Asian countries and regions,
including Japan. See "--Corporate Collaborations."
INS365 Ophthalmic for Dry Eye Disease
INS365 Ophthalmic is being developed as a topical eye drop for the
treatment of dry eye disease. A series of good laboratory practice ocular
toxicology studies have been completed to support the ongoing clinical program.
In preclinical testing, topically applied INS365 Ophthalmic produced a
consistent, statistically significant increase in tear secretion, relative to
that produced by normal saline controls. INS365 Ophthalmic has also enhanced
mucin secretion on the ocular surface in several preclinical models. Many of
these studies were conducted by our Asian partner, Santen. The preclinical study
results were statistically significant in multiple relevant dry eye models.
We have completed one Phase I clinical trial in 50 healthy subjects and
demonstrated good ocular safety and tolerability. We also completed a Phase IIa
study in 35 patients with mild to moderate dry eye, which showed the product
candidate to be well tolerated in the target patient population. In the fall of
2000 we completed a multi-center Phase II clinical trial. This study enrolled
158 patients with dry eye disease. Patients were treated with multiple-daily
doses of placebo (saline drops) or INS365 Ophthalmic for up to six weeks.
Clinical efficacy measures included both objective and subjective parameters for
measuring ocular surface health. The results of this study were positive and
based on these results a large-scale Phase III program has been initiated and is
underway in the United States.
In December 1998, we entered into a joint development, license and supply
agreement with Santen in Asia. Santen is a premier ophthalmic company and
markets the only approved prescription product for dry eye disease in Japan.
Santen has filed an IND with Japanese regulatory authorities and has begun Phase
I testing in Japan. See "--Corporate Collaborations."
INS37217 Ophthalmic for Retinal Disease
INS37217 Ophthalmic, a second-generation proprietary P2Y2 receptor agonist,
is being developed as a sterile intravitreal injection for the treatment of
retinal disease, including retinal detachment, a separation of the retina from
the eye. Retinal detachment occurs when fluid accumulates between the retina and
the underlying retinal epithelium. We estimate, based on an extrapolation from
United States data, that retinal detachment affects approximately 200,000 people
in the eight major international prescription pharmaceutical markets. This
condition leads to loss of vision, and when left untreated, can result in
permanent damage to the retina, a sensory organ at the back of the eye that is
responsible for vision, and irreversible blindness. Previous work conducted in
vitro has shown that the retinal pigment epithelium contains P2Y2 receptors at
the retinal-facing membrane, which can be stimulated by appropriate agonists to
enhance fluid absorption across the retinal pigment epithelium. Later work
conducted in vivo has demonstrated the ability of INS37217 Ophthalmic to
facilitate the reattachment of the retina to the retinal pigment epithelium in
two distinct animal models. Retinal disease in humans may result from several
ophthalmic diseases, ocular trauma, or side-effects from invasive intraocular
surgery. There is currently no pharmaceutical treatment for retinal detachment.
We have completed a series of preclinical studies with INS37217 Ophthalmic
and have completed intravitreal toxicology to support initiation of clinical
trials. We filed an IND with the FDA in December 2000 and expect to initiate
clinical testing in patients in the first half of 2001.
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Corporate Collaborations
Genentech, Inc.
In December 1999, we entered into a collaboration with Genentech to develop
treatments for respiratory disorders, including chronic bronchitis, cystic
fibrosis and sinusitis. Under the terms of the agreement, we granted an
exclusive license to Genentech for the use of INS365 Respiratory and our other
related P2Y2 agonists existing on the date of the agreement for all human
therapeutic uses for the treatment of respiratory tract disorders throughout the
world, excluding Japan. In addition, Genentech has an exclusive license for the
use of INS365 Respiratory and such existing P2Y2 agonists for all human
therapeutic uses for the treatment of sinusitis and middle ear infection
worldwide. Finally, Genentech has the right to use related P2Y2 agonists we
discover and develop for these uses and in these territories during the term of
the agreement upon reimbursing us for discovery costs or funding our discovery
efforts leading to those compounds. However, even if Genentech does not
reimburse or fund our discovery efforts, we have agreed not to develop any such
P2Y2 agonist for use in the therapeutic respiratory field during the term of our
agreement.
We have established joint project teams to oversee and coordinate the joint
development programs and a joint steering committee to establish the strategy
and manage the relationship. Under the terms of the agreement, we provide bulk
active drug substance to Genentech for its requirements, at an agreed-upon
price, through the end of Phase II. After Phase II, Genentech is responsible for
obtaining or manufacturing all of its bulk active drug substance requirements.
We received an up-front payment of $15 million, comprising a non-refundable
cash license fee, funding for the Phase II clinical trials for chronic
bronchitis and the purchase of shares of our preferred stock, which subsequently
converted to shares of our common stock. In the third quarter of 2000, we also
received a $1 million payment in the form of an equity investment for the
achievement of a technical milestone. In addition, depending on whether all
milestones in each of the chronic bronchitis, cystic fibrosis and sinusitis
development programs are met, we could receive additional payments of up to $62
million, of which $1 million would be in the form of an equity investment by
Genentech at the fair market value of the stock at the time of the investment.
Genentech is required to pay us royalties on net sales of products licensed
under the agreement.
In the United States, we will lead the early clinical development of
INS37217 Respiratory for the treatment of cystic fibrosis through the end of
Phase II clinical trials. We then have the option to continue to co-fund the
development of the product in the United States in exchange for a share of
United States operating profits instead of royalties. In addition, we have the
option, any time before Genentech initiates pre-launch activities, to choose to
co-promote the product in the United States at our own expense.
We are responsible for conducting, in collaboration with Genentech, the
Phase II clinical trials for INS365 Respiratory for chronic bronchitis. We will
also lead the preclinical program for INS37217 Respiratory for the treatment of
sinusitis, and will be responsible for filing the IND for such compound.
Genentech is responsible for all other development conducted under the
agreement, including all development outside the United States and in their
territories, and for all other regulatory submissions, filings and approvals
relating to products. Genentech is required to use commercially reasonable
efforts to conduct development, seek regulatory approvals and market and sell
the products.
The agreement will be in effect until all patents licensed under the
agreement have expired. If we exercise our option to co-fund the development of
INS37217 Respiratory for the treatment of cystic fibrosis, then the agreement
will remain in effect for those products in the United States until the products
are no longer being marketed in the United States. Either Genentech or we may
terminate the agreement if the other materially breaches the agreement. In
addition, Genentech has the right, by giving us 150 days prior notice, to
terminate the agreement at any time. If Genentech breaches the agreement or
terminates the agreement early other than for our breach, Genentech's license
will terminate. Genentech must provide us with all data and information relating
to our products, and Genentech must assign or permit us to cross-reference all
regulatory filings and approvals.
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Kissei Pharmaceutical Co., Ltd.
In September 1998, we entered into a Joint Development, License and Supply
Agreement with Kissei for the development of INS365 Respiratory for all
therapeutic respiratory applications, excluding sinusitis and middle ear
infection, in Japan. We granted Kissei an exclusive license to INS365
Respiratory in the field in Japan and a first right to negotiate a license to
particular P2Y2 agonists that show utility as inhalation products for
respiratory uses in Japan.
We established a joint development committee with Kissei to oversee the
development program, approve development plans, protocols and studies, and
review and approve all regulatory submissions and filings. In consultation with
Kissei, we are responsible for formulation of the compound and the design of the
delivery system to be used. We are also responsible, through the use of
development and manufacturing liaisons, for coordinating and facilitating
communications among our corporate partners for the worldwide development and
manufacture of INS365 Respiratory. Kissei is responsible for all development of
the compound and all regulatory filings.
We received an up-front payment of $4.5 million, which included the
purchase of shares of our preferred stock, which subsequently converted into
shares of our common stock. In addition, depending on whether all milestones are
met, we could receive additional payments of up to $13.0 million, as well as
royalties on net sales of licensed products. To date, we have received $2.1
million in milestone payments. We also are receiving funding for development and
manufacturing liaison staff positions.
We are obligated to supply Kissei with its requirements of INS365
Respiratory in bulk drug substance at our cost. In addition, we are obligated to
supply Kissei with its requirements of finished product contained in a vial or
nebule and in a delivery system approved by the joint development committee for
all clinical trials to be conducted by Kissei. Kissei will pay us an agreed-upon
transfer price for all such supplies. We have also agreed to negotiate a
commercial supply arrangement with Kissei at the appropriate time to supply
Kissei's requirements of finished product and the delivery system.
The agreement will terminate when all patents licensed under the agreement
have expired. Either Kissei or we may terminate the agreement if the other
materially breaches the agreement. In addition, Kissei has the right, by giving
us three months prior notice, to terminate the agreement at any time if Kissei
determines that continued development or marketing of the product is
scientifically or economically infeasible. If Kissei breaches the agreement or
terminates the agreement early other than for our breach, Kissei's license will
terminate. Kissei will provide us with all data and information relating to our
products, and Kissei will assign or permit us to cross-reference all regulatory
filings and approvals.
Santen Pharmaceutical Co., Ltd.
In December 1998, we entered into a Development, License and Supply
Agreement with Santen for the development of INS365 Ophthalmic for the
therapeutic treatment of ocular surface diseases, such as dry eye disease, in
Asia. Under the agreement, we granted Santen an exclusive license to market
INS365 Ophthalmic for ocular surface diseases in Japan, China, South Korea, the
Philippines, Thailand, Vietnam, Taiwan, Singapore, Malaysia and Indonesia.
We established a coordinating committee to review and evaluate Santen's
progress in the development and commercialization of products. Santen is
responsible for all development, regulatory submissions, filings and approvals,
and all marketing of products. We are obligated to supply Santen with its
requirements of INS365 Ophthalmic in bulk drug substance form for all
preclinical studies, clinical trials and commercial requirements at agreed-upon
prices.
Under the terms of the agreement, we received an up-front equity investment
of $1.5 million in shares of our preferred stock, which subsequently converted
into shares of our common stock. In addition, depending on whether all
milestones are met, we could receive additional payments of up to $4.75 million,
as well as royalties on
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net sales of licensed products. The Company has not received any milestone
payments to date under the Santen agreement.
The agreement will terminate when all patents licensed under the agreement
have expired. Either Santen or we may terminate the agreement if the other
materially breaches the agreement. In addition, we have the right to terminate
the agreement at any time if we determine, subject to the coordinating
committee's review and arbitration, that Santen has not made reasonably
sufficient progress in the development or commercialization of products. If
Santen breaches the agreement, or if we terminate the agreement because Santen
has not made sufficient progress, Santen's license will terminate, and Santen
will provide us with all data and information relating to our products, and will
assign or permit us to cross-reference all regulatory filings and approvals.
Kirin Brewery Co., Ltd. Pharmaceutical Division
In September 2000, we entered into a License Agreement with Kirin for the
development and commercialization of INS316 Diagnostic. Under the agreement we
granted Kirin an exclusive license to commercialize INS316 Diagnostic in
twenty-one Asian countries and regions, including Japan.
We established a coordinating committee to review and evaluate Kirin's
progress in the development and commercialization of a product and to provide
input and recommendations regarding development of the products Kirin is
responsible for all development regulatory submissions, filings and approvals
and all marketing of the products. We are responsible for providing to Kirin
copies of preclinical and clinical data relating to the development and
commercialization of the products. Under the terms of the agreement, we received
an upfront payment in cash and will receive milestone payments based on clinical
success and approval.
The agreement will terminate as to a product on the later of the 10th
anniversary of the first commercial sale of the product or the date on which the
sale of the product ceases to be covered by a licensed clause under the
agreement. Either Kirin or we may terminate the agreement if the other
materially breaches the agreement. In addition, Kirin has the right, by giving
us 180 days prior notice, to terminate the agreement at any time.
Discovery
Our scientists have specific expertise and proprietary knowledge relating
to the design and synthesis of P2Y receptor agonists, and we have invested
heavily in state-of-the-art equipment and laboratory space for performing
synthetic chemistry, determination of compound structure and receptor location
and function identification. We have acquired, by licenses and/or material
transfer agreements, rights to three of the five unique human P2Y receptors that
have been functionally expressed. We have cloned and expressed the other two
receptors in-house.
Our discovery effort is focused on conducting studies using our proprietary
cell-based MUCOSA(TM) assay system, a cell-based scientific test that measures
biological activities caused by stimulation of P2Y receptors, to identify new
compounds that specifically and selectively bind to members of the P2Y receptor
family. The MUCOSA high-volume assay enables us to identify agonists and
antagonists that act at specific receptor subtypes and have demonstrated a level
of specificity and activity that merits further investigation. We use data from
the assays to design and synthesize compounds specific to each P2Y receptor
subtype which can be advanced to clinical trials.
By screening against several P2Y receptor subtypes, we have been able to
identify agonists and/or antagonists that interact preferentially with a
specific receptor subtype. Several proprietary discovery compounds, including
new chemical entities, with promising stability and metabolic profiles, are
being actively explored. We intend to conduct further preclinical development
studies to advance such proprietary compounds to project status, if appropriate.
These compounds will then be targeted to the treatment of new disease areas, as
identified through our strategic planning process.
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We obtain access to chemical libraries through our own proprietary
combinatorial chemistry, commercial sources and corporate agreements. The
chemicals are screened for both agonist and antagonist activity. Our chemistry
department also assists in the development of analytical protocols used by
contract service organizations for analysis of a drug substance, clinical trials
material and drug stability studies which will be incorporated into IND and new
drug application (NDA) filings.
We use sponsored research agreements to investigate specific biological
processes to augment our technology platform. We have sponsored research at
major universities, including The University of North Carolina at Chapel Hill,
Columbia University, the University of Southern California, Duke University,
Schepens Eye Research Institute, Boston University and Brigham and Women's
Hospital.
Patents and Proprietary Rights
We believe that the proprietary protection of our product candidates,
processes and know-how is important to the success of our business. We
aggressively file and prosecute patents covering our proprietary technology,
and, if warranted, will defend our patents and proprietary technology. As of
December 31, 2000, we owned or licensed patent rights consisting of 21 issued
United States patents, none of which expire before 2011, and numerous pending
applications in the United States and corresponding patents and patent
applications in foreign jurisdictions. We seek patent protection for our
proprietary technology and products in the United States and Canada and in key
commercial European and Asia/Pacific countries and other major commercial
sectors of the world, as appropriate. We intend to seek protection in the United
States and foreign countries for trademarks from time to time. We also rely upon
trade secrets, know-how, continuing technological innovation and licensing
opportunities to develop and maintain our competitive position.
In March 1995 and September 1998, we entered into two agreements with The
University of North Carolina at Chapel Hill ("UNC") granting us exclusive
worldwide licenses to develop, make, use and sell products based on UNC patented
technology relating to the use of P2Y2 receptor agonists for respiratory
therapeutics, such as INS365 Respiratory, and respiratory diagnostics, such as
INS316 Diagnostic. The United States government may have limited rights in some
of this UNC patented technology. We also entered into a third agreement that
granted us a non-exclusive worldwide license to use other UNC patented
technology as a research tool to identify agonists and antagonists for P2Y
receptors. The agreements require us to pay licensing fees upon the attainment
of development milestones and royalties on net sales or a share of sublicensing
income on products covered by the patents. We are also required to meet due
diligence milestones and UNC may terminate the licenses if we fail to do so. In
connection with the licenses, we issued to UNC an aggregate of 326,286 shares of
our common stock, of which 128,610 shares have been transferred to the inventors
of the licensed UNC patented technology. We have also entered into consulting
agreements with some of the inventors of these technologies, all of whom are
from The University of North Carolina at Chapel Hill, including Dr. Richard C.
Boucher, one of our founders and a member of our Board of Directors, M. Jackson
Stutts, Kendall Harden and Michael Knowles, in which they agreed to consult with
us regarding their respective fields of knowledge.
Additional patent applications have since been filed on discoveries made in
support of such technologies, from research conducted at The University of North
Carolina at Chapel Hill or in our own laboratories. Our sponsored research
agreements, material transfer agreements, and other collaborations have the
potential to result in license agreements with universities, institutes and
businesses. We believe that our patents and licensed patents provide a
substantial proprietary base that will allow us, and our collaborative partners,
to exclude others from conducting our business as described in this prospectus
and as encompassed by our issued patents and issued patents licensed to us. We
cannot be sure, however, that pending or future applications will issue, that
the claims of any patents which do issue will provide any significant protection
of our technology or that our directed discovery research will yield compounds
and products of therapeutic and commercial value.
Our competitors or potential competitors may have filed for or have
received U.S. and foreign patents and may obtain additional patents and
proprietary rights relating to compounds or processes which may compete with our
product candidates. Accordingly, there can be no assurance that our patent
applications will result in patents
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being issued or that, if issued, the claims of the patents will afford
protection against competitors with similar technology, nor can we be sure that
others will not obtain patents that we would need to license or get around.
Manufacturing and Supply
We do not engage in, and do not expect to engage in, the manufacture of
bulk active pharmaceutical ingredient for preclinical, clinical or commercial
purposes. We rely on a contract manufacturing supply agreement with a single
manufacturer for the development stage production of INS316, INS365 and
INS37217. We have identified an alternative supplier as a backup. We have
already obtained clinical trial grade material of these compounds from the lead
supplier. In addition, we expect the same lead manufacturer will supply
commercial quantities of INS316, INS365 and INS37217 for both respiratory and
ophthalmic applications. We believe this lead manufacturer is capable of
producing sufficient quantities for commercial purposes within current good
manufacturing practices. See "Risk Factors--If we are unable to contract with
third parties for synthesis and manufacturing of our product candidates for
preclinical testing and clinical trials and for large scale manufacturing of any
of our drug candidates, we may be unable to develop or commercialize products."
We currently obtain all of our bulk active ingredient for INS316, INS365
and INS37217 from Yamasa Corporation, in Choshi, Japan, but the first two are
also available from other fine chemical manufacturers. In addition to the bulk
active ingredient, our products are made up of sodium chloride, sodium
hydrochloric acid and sterile water, all of which are readily available from
numerous sources. Our products are packaged in unit-dose vials, which we obtain
from Cardinal Health Manufacturing Services - Automatic Liquid Packaging of
Woodstock, Illinois, but these vials are also available from other commercial
filling and packing companies.
Competition
Many drug companies engage in research and development to commercialize
products to treat chronic bronchitis, cystic fibrosis, dry eye disease and other
diseases that we are researching. We compete with these companies for funding,
access to licenses, personnel, third-party collaborators and product
development. Almost all of these companies have substantially greater financial,
marketing, sales, distribution and technical resources and more experience in
research and development, clinical trials and regulatory matters, than we do. We
are aware of existing palliative treatments that will compete with our products.
We believe that several major pharmaceutical companies have initiated
research programs to design P2Y receptor agonists or antagonists; however, we
are not aware of any competing P2Y2 receptor agonists that have entered clinical
testing. If successfully developed and commercialized, our products will compete
with existing therapeutics and improved versions of these treatments.
The current therapeutic approaches used in the treatment of chronic
bronchitis are palliative and are aimed at reducing airway inflammation,
respiratory infections and airflow obstruction. These approaches include
corticosteroids and other anti-inflammatory agents, bronchodilators and
antibiotics. We are aware of many anti-inflammatory agents, including
Azmacort(R), Beclovent(R) and antibiotics such as Biaxin(R) and Zithromax(R). We
believe that other anti-inflammatory agents are in development. Numerous
bronchodilators are also on the market, including among others generic
albuterol, Alupent(R), Proventil(R), Ventolin(R), Serevent(R), and Theo-Dur(R).
Outside of the United States, mucolytics, agents that liquefy or reduce the
viscoelastic consistency of mucus, are widely used even though they have shown
minimal efficacy in well-controlled trials.
Although we believe that none of the therapeutic approaches described above
address the underlying problem of excessive retained mucus and impaired
mucociliary clearance, drugs based on other therapeutic mechanisms may be
efficacious in treating respiratory diseases. The development by others of
treatments that are not related to our mucociliary clearance approach could
render our product candidates non-competitive or obsolete.
There are two products approved in the United States specifically for the
treatment of cystic fibrosis: Pulmozyme(R), an agent designed to break up
thickened airway secretions, and TOBI(R), an inhaled antibiotic. Pulmozyme(R) is
marketed by Genentech, which is one of our collaborative partners.
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The current prescription and non-prescription treatments for dry eye
disease include artificial tear replacement therapy or lubricant drops. The only
prescription pharmacological agent in late-stage clinical trials for dry eye is
Restasis(R) from Allergan. We are aware of early clinical trials with various
other potential products as possible alternative modes of therapy.
Governmental Regulation
The research, development, testing, manufacture, promotion, marketing and
distribution of human therapeutic and diagnostic products are extensively
regulated by government authorities in the United States and other countries. In
the United States, the FDA regulates drugs and diagnostic products and similar
regulatory bodies exist in other countries. The steps ordinarily required before
a new drug may be marketed in the United States, which are similar to steps
required in most other countries, include:
. preclinical laboratory tests, preclinical studies in animals and
formulation studies and the submission to the FDA of an IND for a new
drug;
. adequate and well-controlled clinical trials to establish the safety
and efficacy of the drug for each indication;
. the submission of an NDA to the FDA; and
. FDA review and approval of the NDA before any commercial sale or
shipment of the drug.
Preclinical tests include laboratory evaluation of product toxicity and
formulation, as well as animal studies. The results of preclinical testing are
submitted to the FDA as part of an IND. A 30-day waiting period after the filing
of each IND is required before the commencement of clinical testing in humans.
At any time during this 30-day period or later, the FDA may halt proposed or
ongoing clinical trials until the FDA authorizes trials under specified terms.
The IND process may be extremely costly and substantially delay development of
our products. Moreover, positive results of preclinical tests will not
necessarily indicate positive results in clinical trials.
Clinical trials to support NDAs are typically conducted in three sequential
phases, but the phases may overlap. During Phase I, the initial introduction of
the drug into healthy human subjects or patients, the drug is tested to assess
metabolism, pharmacokinetics and pharmacological actions and safety, including
side effects associated with increasing doses. Phase II usually involves studies
in a limited patient population to:
. assess the efficacy of the drug in specific, targeted indications;
. assess dosage tolerance and optimal dosage; and
. identify possible adverse effects and safety risks.
If a compound is found to be potentially effective and to have an
acceptable safety profile in Phase II evaluations, Phase III trials, also called
pivotal studies, major studies or advanced clinical trials, are undertaken to
further demonstrate clinical efficacy and to further test for safety within an
expanded patient population at geographically dispersed clinical study sites.
After successful completion of the required clinical testing, generally a
NDA is submitted. The FDA may request additional information before accepting a
NDA for filing, in which case the application must be resubmitted with the
additional information. Once the submission has been accepted for filing, the
FDA has 180 days to review the application and respond to the applicant. The
review process is often significantly extended by FDA requests for additional
information or clarification. The FDA may refer the NDA to an appropriate
advisory committee for review, evaluation and recommendation as to whether the
application should be approved, but the FDA is not bound by the recommendation
of an advisory committee.
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If FDA evaluations of the NDA and the manufacturing facilities are
favorable, the FDA may give us either an approval letter or an approvable
letter. An approvable letter will usually contain a number of conditions that
must be met in order to secure final approval of the NDA and authorization of
commercial marketing of the drug for particular indications. The FDA may refuse
to approve the NDA or give us a non-approvable letter, outlining the
deficiencies in the submission and often requiring additional testing or
information. If regulatory approval of a product is granted, it will be limited
to particular disease states or conditions.
We and any of our contract manufacturers are also required to comply with
the applicable FDA current good manufacturing practice regulations. Good
manufacturing practice regulations include requirements relating to quality
control and quality assurance as well as the corresponding maintenance of
records and documentation. Manufacturing facilities are subject to inspection by
the FDA. These facilities must be approved before we can use them in commercial
manufacturing of our products. Our contract manufacturers or we may not be able
to comply with the applicable good manufacturing practice requirements and other
FDA regulatory requirements.
Outside the United States, our ability to market our products will also
depend on our receipt of marketing authorizations from the appropriate
regulatory authorities. The requirements governing the conduct of clinical
trials and marketing authorization vary widely from country to country. At
present, foreign marketing authorizations are applied for at a national level,
although within Europe procedures are available to companies wishing to market a
product in more than one European Union member state. If the regulatory
authority is satisfied that adequate evidence of safety, quality and efficacy
has been presented, a marketing authorization will be granted. This foreign
regulatory approval process, including those in Europe and Japan, involves all
of the risks associated with FDA clearance discussed above.
Employees
As of December 31, 2000, we had 37 full-time employees, 16 of whom were
involved in our drug discovery and preclinical programs, 12 of whom were engaged
in development programs, and nine of whom were involved in administrative
activities. In addition, we utilize part-time employees and outside contractors
and consultants as needed. Employees are required to execute a confidentiality
and assignment of trade secrets agreement. Our employees are not represented by
a labor union.
Scientific Advisory Board
We are advised by an international scientific advisory board currently
composed of eight members with expertise in the fields of statistics, molecular
biology, genetic research and medicine. We meet periodically with our scientific
advisory board to review and discuss specific projects with those members who
are experts in the subjects being discussed. In addition, we may consult
individual board members as to matters in their respective areas of expertise.
Our scientific advisory board currently is composed of the following
individuals:
Richard Boucher, M.D. and Benjamin R. Yerxa, Ph.D. are Co-Chairmen of
the Scientific Advisory Board. See "Management--Executive Officers and
Directors."
Dennis Ausiello, M.D. is Chief of Medicine at Massachusetts General
Hospital and Professor of Medicine at Harvard Medical School. He is an
internationally recognized expert in the cell biology of ATP receptors,
sodium ion channels and water channels.
Carol Basbaum, Ph.D. is Professor of Anatomy at the University of
California at San Francisco and is an expert in lung mucin production. Her
interests focus on both the biology of the mucin secretory cell in the lung
and the regulation of mucin gene expression. A particular interest has been
bacterial pathogen-mucin gene regulatory interactions.
Geoffrey Burnstock, D.Sc. is Director, Autonomic Neuroscience
Institute, and Professor, Department of Anatomy and Developmental Biology,
Royal Free Hospital School of Medicine. He
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originally conceived the idea of purinergic nerves and receptors for
extracellular adenine nucleotides. He is the leader of the purinergic
receptor field. He is the recipient of many international wards and is a
fellow of the Royal Society.
Mark Leppert, Ph.D. is Associate Professor, Eccles Institute of Human
Genetics, University of Utah. He is a geneticist/molecular biologist. He is
a central figure in the internationally recognized University of Utah human
genome effort. His particular interest is mapping human diseases to define
the molecular basis of human disease.
Lee Limbird, Ph.D. is Associate Vice Chancellor for Research,
Vanderbilt University Medical Center, Professor of Pharmacology and Chair,
Department of Pharmacology Vanderbilt University. Her research has focused
on the structure and function of G-protein coupled receptors with
particular emphasis on adrenergic receptors. A current interest is
delineation of the molecular basis of membrane targeting of receptors in
polarized cells. She was awarded the John Jacob Abel Award given to the
most outstanding young pharmacologist in 1987.
David Westfall, Ph.D. is Vice President, Academic Affairs, University
of Nevada-Reno and Professor of Pharmacology, University of Nevada School
of Medicine. He has been a leader in Physiological and pharmacological
studies of purinergic receptors for the last two decades. His research
includes a major interest in purinergic receptors in the nervous system and
on smooth muscle of the urinary tract.
Risk Factors
An investment in the shares of our common stock involves a substantial risk
of loss. You should carefully read this entire report and should give particular
attention to the following risk factors. You should recognize that other
significant risks may arise in the future, which we cannot foresee at this time.
Also, the risks that we now foresee might affect us to a greater or different
degree than expected. There are a number of important factors that could cause
our actual results to differ materially from those indicated by any forward-
looking statements in this document. These factors include, without limitation,
the risk factors listed below and other factors presented throughout this
document and any other documents filed by us with the Securities and Exchange
Commission.
IF OUR PRODUCTS FAIL IN CLINICAL STUDIES, WE WILL BE UNABLE TO OBTAIN FDA
APPROVAL AND WILL NOT BE ABLE TO SELL THOSE PRODUCTS.
To achieve profitable operations, we must, alone or with others,
successfully identify, develop, introduce and market proprietary products. Even
if we identify potential products, we will have to conduct significant
additional development activities and preclinical and clinical tests, and obtain
regulatory approval before our products can be commercialized. Product
candidates that may appear to be promising at early stages of development may
not successfully reach the market for a number of reasons. We have not submitted
any products for marketing approval by the United States Food and Drug
Administration (FDA) or any other regulatory body.
Generally, all of our product candidates are in research or preclinical
development, with only four, INS365 Respiratory, INS365 Ophthalmic, and INS316
Diagnostic, INS37217 Respiratory currently in clinical trials. The results of
preclinical and initial clinical testing of our products under development may
not necessarily indicate the results that will be obtained from later or more
extensive testing. Companies in the pharmaceutical and biotechnology industries
have suffered significant setbacks in advanced clinical trials, even after
obtaining promising results in earlier trials. Our ongoing clinical studies
might be delayed or halted for various reasons, including:
. the drug is not effective, or physicians think that the drug is not
effective;
. patients experience severe side effects during treatment;
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. patients die during the clinical study because their disease is too
advanced or because they experience medical problems that may or may
not relate to the drug being studied;
. patients do not enroll in the studies at the rate we expect;
. drug supplies are not sufficient to treat the patients in the studies;
or
. we decide to modify the drug during testing.
BECAUSE OUR PRODUCT CANDIDATES UTILIZE A NEW MECHANISM OF ACTION, OBTAINING
REGULATORY APPROVAL MAY BE DIFFICULT, EXPENSIVE AND PROLONGED, WHICH WOULD DELAY
ANY MARKETING OF OUR PRODUCTS.
We cannot apply for regulatory approval to market a product candidate until
we successfully complete pivotal clinical trials for the product. To complete
successful clinical trials, the products must meet the criteria for clinical
approval, or endpoints, which we establish for the product in the clinical
study.
Generally, we will establish these endpoints in consultation with the
regulatory authorities, following design guidelines on the efficacy, safety and
tolerability measures required for approval of products.
Because our existing product candidates utilize a new approach to the
treatment of respiratory and eye diseases, we may have trouble establishing
endpoints that the regulatory authorities agree sufficiently evaluate the
effectiveness of each product candidate. For this and other reasons, we could
encounter delays and increased expenses in our clinical trials if the regulatory
authorities determine that the endpoints established for a clinical trial do not
predict a clinical benefit, and the authorities will not approve the product for
marketing without further clinical trials. The regulatory authorities could
change their view on clinical trial design and establishment of appropriate
standards for efficacy, safety and tolerability and require a change in study
design, additional data or even further clinical trials before approval of a
product candidate.
After initial regulatory approval, regulatory authorities continue to
review a marketed product and its manufacturer. They may require us to conduct
long-term safety studies after approval. Discovery of previously unknown
problems through adverse event reporting may result in restrictions on the
product, including withdrawal from the market. Additionally, we and our officers
and directors could be subject to civil and criminal penalties.
IF PHYSICIANS AND PATIENTS DO NOT ACCEPT OUR PRODUCT CANDIDATES, THEY MAY NOT BE
COMMERCIALLY SUCCESSFUL.
Even if regulatory authorities approve our product candidates, those
products may not be commercially successful. Acceptance of and demand for our
products will depend largely on the following:
. acceptance by physicians and patients of our products as safe and
effective therapies;
. reimbursement of drug and treatment costs by third-party payors;
. safety, effectiveness and pricing of alternative products; and
. prevalence and severity of side effects associated with our products.
In addition, to achieve broad market acceptance of our product candidates,
in many cases we will need to develop, alone or with others, convenient methods
for administering product candidates. Physicians have administered our current
product candidates for the treatment or diagnosis of respiratory disorders,
INS365 Respiratory, INS316 Diagnostic and INS37217 Respiratory, using a jet
nebulizer, a device that generates and delivers a fine mist derived from a
liquid, which is inhaled into the lungs, in their respective clinical studies.
Although the use of a jet nebulizer is an effective and well accepted means for
administering products for inhalation
-18-
with respect to acute use and, to a lesser degree, chronic use, we believe more
convenient methods of delivery and administration, such as a hand-held
inhalation device, may be necessary in the case of INS365 Respiratory and
INS37217 Respiratory, to more fully address chronic use. Our testing of
prototype hand-held inhalation devices is at an early stage and we may not be
able to develop or find a convenient hand-held device that works in patients
with chronic bronchitis. Our current product candidate for the treatment of dry
eye disease, INS365 Ophthalmic, is applied from a vial containing a single dose
of medication. Patients may prefer to purchase the medication in a bottle
containing a sufficient quantity of medication for multiple doses. We have not
yet established a plan to develop a multi-dose formulation. Similar challenges
exist in identifying and perfecting convenient methods of administration for
many of our other product candidates.
WE INTEND TO RELY ON THIRD PARTIES TO DEVELOP, MARKET, DISTRIBUTE AND SELL OUR
PRODUCT CANDIDATES AND THOSE THIRD PARTIES MAY NOT PERFORM.
We do not yet have the ability to independently market, distribute or sell
our products and intend to rely on experienced third parties to perform, or
assist us in the performance of, all of those functions. We may not identify
acceptable partners or enter into favorable agreements with them. If third
parties do not successfully carry out their contractual duties or meet expected
deadlines, we will be unable to obtain required governmental marketing approvals
and will be unable to sell our products.
OUR DEPENDENCE ON COLLABORATIVE RELATIONSHIPS MAY LEAD TO DELAYS IN PRODUCT
DEVELOPMENT AND DISPUTES OVER RIGHTS TO TECHNOLOGY.
Our business strategy depends upon the formation of research
collaborations, licensing and/or marketing arrangements. We currently have
development collaborations with four collaborators, Genentech, Kissei, Santen
and Kirin. The termination of any collaboration may lead to delays in product
development and disputes over technology rights and may reduce our ability to
enter into collaborations with other potential partners. Genentech has the
right, by giving us 150 days prior notice, to terminate our collaboration.
Similarly, Kirin has the right to terminate our license agreement by giving us
180 days prior notice. If we do not maintain the Genentech, Kissei, Santen or
Kirin collaborations or establish additional research and development
collaborations or licensing arrangements it will be difficult to develop and
commercialize therapeutic or diagnostic products using our technology. Any
future collaborations or licensing arrangements may not be on terms favorable to
us. Our current or any future collaborations or licensing arrangements
ultimately may not be successful. Under our current strategy, and for the
foreseeable future, we do not expect to develop or market therapeutic or
diagnostic products on our own. As a result, we will continue to depend on
collaborators and contractors for the preclinical study and clinical development
of therapeutic products and for regulatory approval, manufacturing and marketing
of therapeutic and diagnostic products which result from our technology. The
agreements with collaborators typically will allow them some discretion in
electing whether to pursue such activities. If any collaborator were to breach
or terminate its agreement with us or otherwise fail to conduct collaborative
activities in a timely and successful manner, the preclinical or clinical
development or commercialization of product candidates or research programs
would be delayed or terminated. Any delay or termination in clinical development
or commercialization would delay or eliminate potential product revenues
relating to our research programs.
We intend to rely on Genentech, Kissei, Santen, Kirin and any future
collaborators for significant funding in support of our development efforts. If
Genentech, Kissei, Santen or Kirin reduces or terminates its funding, we will
need to devote additional internal resources to product development, scale back
or terminate certain research and development programs or seek alternative
collaborators.
Disputes may arise in the future over the ownership of rights to any
technology developed with collaborators. These and other possible disagreements
between us and our collaborators could lead to delays in the collaborative
development or commercialization of therapeutic or diagnostic products. Such
disagreement could also result in litigation or require arbitration to resolve.
-19-
IF WE ARE UNABLE TO CONTRACT WITH THIRD PARTIES FOR SYNTHESIS AND MANUFACTURING
OF PRODUCT CANDIDATES FOR PRECLINICAL TESTING AND CLINICAL TRIALS AND FOR LARGE
SCALE MANUFACTURING OF ANY OF OUR DRUG CANDIDATES, WE MAY BE UNABLE TO DEVELOP
OR COMMERCIALIZE PRODUCTS.
We have no experience or capabilities in large scale commercial
manufacturing of any of our product candidates or any experience or capabilities
in the manufacturing of pharmaceutical products generally. We do not generally
expect to engage directly in the manufacturing of products, but instead intend
to contract with others for these services. We have relied upon supply
agreements with third parties for the manufacture and supply or our product
candidates for purposes of preclinical testing and clinical trials. Although we
have previously received preclinical and clinical supplies of our product
candidates from several suppliers, we presently depend upon Yamasa Corporation
as the sole supplier of our supply of product candidates. If we are unable to
retain third party manufacturing on commercially acceptable terms, we may not be
able to commercialize products as planned. Our manufacturing strategy presents
the following risks:
. the manufacturing processes for most of our product candidates have
not been tested in quantities needed for commercial sales;
. delays in scale-up to commercial quantities and any change to a
manufacturer other than Yamasa Corporation could delay clinical
studies, regulatory submissions and commercialization of our products;
. manufacturers of our products are subject to the FDA's good
manufacturing practices regulations and similar foreign standards, and
we do not have control over compliance with these regulations by
third-party manufacturers;
. if we need to change to manufacturers other than Yamasa Corporation,
FDA and comparable foreign regulators would require new testing and
compliance inspections and the new manufacturers would have to be
educated in the processes necessary for the production of our product
candidates;
. without satisfactory long-term agreements with manufacturers, we will
not be able to develop or commercialize our product candidates as
planned or at all; and
. we may not have intellectual property rights, or may have to share
intellectual property rights, to any improvements in the manufacturing
processes or new manufacturing processes for our product candidates.
IF WE ARE UNABLE TO SUPPLY KISSEI AND SANTEN WITH SUFFICIENT QUANTITIES OF
MATERIALS WE MAY BREACH OUR AGREEMENTS WITH SUCH PARTIES.
We are currently a party to a development, license and supply agreement
with each of Kissei and Santen, under which we granted each a license to develop
and market INS365 Respiratory and INS365 Ophthalmic, respectively. Generally,
the agreements with Kissei and Santen will require us to supply such partners
with either sufficient quantities of materials or finished products, as
applicable, for the purpose of commercial distribution. We will need to
establish, alone or with third parties, a manufacturing process in relation to
each product. Our dependence upon third parties for the manufacture of products
may adversely affect our ability to develop and deliver products on a timely and
competitive basis.
Our inability to successfully manufacture commercial products could result
in our breach of the terms of our agreements with Kissei and Santen. Any of
these factors could delay our preclinical studies, clinical trials or
commercialization of our product candidates, entail higher costs and result in
our inability to effectively sell our product candidates.
-20-
IF OUR PATENT PROTECTION IS INADEQUATE, THE DEVELOPMENT AND ANY POSSIBLE SALES
OF OUR PRODUCT CANDIDATES COULD SUFFER OR COMPETITORS COULD FORCE OUR PRODUCTS
COMPLETELY OUT OF THE MARKET.
Our business and competitive position depends on our ability to continue to
develop and protect our products and processes, proprietary methods and
technology. Except for one patent covering new chemical compounds, most of our
patents are use patents containing claims covering methods of treating disorders
and diseases by administering therapeutic chemical compounds. Use patents, while
providing adequate protection for commercial efforts in the United States, may
afford a lesser degree of protection in European and possibly other countries
due to their particular patent laws. Besides our use patents, we have patents
covering pharmaceutical formulations of these chemical compounds. We also have
patent applications covering processes for large-scale manufacturing of these
chemical compounds. Many of the chemical compounds included in the claims of our
use patents, formulation patents and process applications were known in the
scientific community prior to our formation. None of our patents cover these
previously known chemical compounds themselves, which are in the public domain.
As a result, competitors may be able to commercialize products that use the same
chemical compounds used by us for the treatment of disorders and diseases not
covered by our use patents. In such a case, physicians, pharmacies and
wholesalers could possibly substitute these products for our products. Such
substitution would reduce any revenues received from the sale of our products.
We believe that there may be significant litigation in the pharmaceutical
and biotechnology industry regarding patent and other intellectual property
rights. A patent does not provide the patent holder with freedom to operate in a
way that infringes the patent rights of others. While we are not aware of any
patent that we are infringing, nor have we been accused of infringement by any
other party, other companies currently have or may acquire patent rights which
we might be accused of infringing. If we must defend a patent suit, or if we
choose to initiate a suit to have a third party patent declared invalid, we may
need to make considerable expenditures of money and management time in
litigation. A judgment against us in a patent infringement action could cause us
to pay monetary damages, require us to obtain licenses, or prevent us from
manufacturing or marketing the affected products. In addition, we may need to
initiate litigation to enforce our proprietary rights against others, or we may
have to participate in interference proceedings in the United States Patent and
Trademark Office (USTPO) to determine the priority of invention of any of our
technologies.
In general, the development of patent rights in pharmaceutical,
biopharmaceutical and biotechnology products to a degree sufficient to support
commercial efforts in these areas is typically uncertain and involves complex
legal and factual questions. For instance, while the USPTO has recently issued
guidelines addressing the requirements for demonstrating utility for
biotechnology inventions, USPTO examiners may not follow these guidelines in
examining patent applications. Such applications may have to be appealed to the
USPTO's Appeals Board for a final determination of patentability.
IF WE FAIL TO REACH MILESTONE OR OTHER OBLIGATIONS, THE UNIVERSITY OF NORTH
CAROLINA AT CHAPEL HILL AND OTHER LICENSORS MAY TERMINATE OUR AGREEMENTS WITH
THEM.
Our current technologies, discoveries and our original patents are based in
part on two exclusive licenses and one non-exclusive license from The University
of North Carolina at Chapel Hill (UNC). Generally, if we fail to meet milestones
under the respective UNC licenses, UNC may terminate the applicable license. In
addition, it may be necessary in the future for us to obtain additional licenses
from UNC or other third parties to develop future commercial opportunities or to
avoid infringement of third party patents. We do not know the terms on which
such licenses may be available, if at all.
Failure to license or otherwise acquire necessary technologies may reduce
or eliminate our ability to develop product candidates. Even if we acquire all
necessary licenses, if we breach any license provision, either intentionally or
unintentionally, we may lose our right to continued use of the licensed
technology.
-21-
BECAUSE WE RELY UPON TRADE SECRETS AND AGREEMENTS TO PROTECT SOME OF OUR
INTELLECTUAL PROPERTY, THERE IS A RISK THAT UNAUTHORIZED PARTIES MAY OBTAIN AND
USE INFORMATION THAT WE REGARD AS PROPRIETARY.
We rely upon the laws of trade secrets and non-disclosure agreements and
other contractual arrangements to protect our proprietary compounds, methods,
processes, formulations and other information for which we are not seeking
patent protection. We have taken security measures to protect our proprietary
technologies, processes, information systems and data, and we continue to
explore ways to further enhance security. However, despite these efforts to
protect our proprietary rights, unauthorized parties may obtain and use
information that we regard as proprietary. Employees, academic collaborators and
consultants with whom we have entered confidentiality and/or non-disclosure
agreements, may improperly disclose our proprietary information. In addition,
competitors may, through a variety of proper means, independently develop
substantially the equivalent of our proprietary information and technologies,
gain access to our trade secrets, or properly design around any of our patented
technologies.
BECAUSE ALL OF OUR PRODUCT CANDIDATES USE RELATED MECHANISMS OF ACTION, WE MAY
NOT BE ABLE TO COMMERCIALIZE OUR PRODUCTS IF THE MECHANISM OF ACTION IS NOT
EFFECTIVE.
Any products resulting from our product development efforts are not
expected to be available for sale for a number of years, if at all. Two of our
product candidates, INS365 Respiratory and INS37217 Respiratory, operate in a
similar manner. If the clinical results of one of the compounds is not
favorable, the results of the other compound may not be favorable. Moreover, we
have designed all of our product candidates to use related mechanisms of action.
If these mechanisms of action are not effective, we may not be able to
commercialize any of our product candidates. Even if all of our product
candidates prove effective, we may choose not to commercialize all of them.
IF WE CONTINUE TO INCUR OPERATING LOSSES FOR A PERIOD LONGER THAN ANTICIPATED,
OR IN AN AMOUNT GREATER THAN ANTICIPATED, WE MAY BE UNABLE TO CONTINUE OUR
OPERATIONS.
We have experienced significant losses since inception. We incurred net
losses of $14.6 million for the year ended December 31, 2000, $9.0 million for
the year ended December 31, 1999, and $7.5 million for the year ended December
31, 1998. As of December 31, 2000 our accumulated deficit was approximately
$47.9 million. We expect to incur significant additional operating losses over
the next several years and expect cumulative losses to increase substantially in
the near-term due to expanded research and development efforts, preclinical
studies and clinical trials. We expect that losses will fluctuate from quarter
to quarter and that such fluctuations may be substantial. Such fluctuations will
be affected by the following:
. timing of regulatory approvals and commercial sales of our product
candidates;
. the level of patient demand for our products;
. timing of payments to and from licensors and corporate partners; and
. timing of investments in new technologies.
No regulatory authorities have approved any of our product candidates for
marketing, and therefore, we are not generating any revenues from product sales.
To achieve and sustain profitable operations, we must, alone or with others,
develop successfully, obtain regulatory approval for, manufacture, introduce,
market and sell our products. The time frame necessary to achieve market success
is long and uncertain. We do not expect to generate product revenues for at
least the next few years. We may not generate sufficient product revenues to
become profitable or to sustain profitability. If the time required to achieve
profitability is longer than we anticipate, we may not be able to continue our
business.
-22-
IF WE ARE NOT ABLE TO OBTAIN SUFFICIENT ADDITIONAL FUNDING TO MEET OUR EXPANDING
CAPITAL REQUIREMENTS, WE MAY BE FORCED TO REDUCE OR ELIMINATE RESEARCH PROGRAMS
AND PRODUCT DEVELOPMENT.
We have used substantial amounts of cash to fund our research and development
activities. In the fiscal year ended December 31, 2000 our operating expenses
exceeded $20.0 million. We expect our capital and operating expenditures to
increase over the next several years as we expand our research and development
activities, address possible difficulties with clinical studies and prepare for
commercial sales. Many factors will influence our future capital needs. These
factors include:
. the progress of our research programs;
. the number and breadth of these programs;
. our ability to attract collaborators for our products;
. achievement of milestones under our existing collaborations with
Genentech, Kissei, Santen and Kirin;
. our ability to establish and maintain additional collaborations;
. progress by our collaborators: Genentech, Kissei, Santen and Kirin;
. the level of activities relating to commercialization rights we retain
in our collaborations;
. competing technological and market developments;
. the costs involved in enforcing patent claims and other intellectual
property rights; and
. the costs and timing of regulatory approvals.
We anticipate that our operating expenses will exceed $25.0 million over the
next twelve months. We also expect to purchase capital equipment at a cost of
approximately $2.0 million. Following the twelve-month period, we expect our
operating expenses to increase as we continue to develop our product candidates.
We intend to rely on Genentech, Kissei, Santen, Kirin, future collaborators and
the proceeds of our initial public offering for significant funding in support
of our development efforts. In addition, we may seek additional funding through
public or private equity offerings and debt financings. Additional financing may
not be available when needed. If available, such financing may not be on terms
favorable to us or our stockholders. Stockholders' ownership will be diluted if
we raise additional capital by issuing equity securities. If we raise funds
through collaborations and licensing arrangements, we may have to give up rights
to our technologies or product candidates which are involved in these future
collaborations and arrangements or grant licenses on unfavorable terms. If
adequate funds are not available, we would have to scale back or terminate
research programs and product development.
WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE WITH BIOTECHNOLOGY COMPANIES AND
ESTABLISHED PHARMACEUTICAL COMPANIES.
The biotechnology and pharmaceutical industries are intensely competitive and
subject to rapid and significant technological change. Our competitors in the
United States and elsewhere are numerous and include, among others, major
multinational pharmaceutical and chemical companies, specialized biotechnology
firms and universities and other research institutions. These competitors
include Abbott, Astra Zeneca, Boehringer Ingelheim, GlaxoSmithKline, and Pfizer.
Many of these competitors employ greater financial and other resources,
including larger research and development staffs and more effective marketing
and manufacturing organizations, than we or our collaborative partners.
Acquisitions of competing companies and potential competitors by large
pharmaceutical companies or others could enhance financial, marketing and other
resources available to such competitors. As a
-23-
result of academic and government institutions becoming increasingly aware of
the commercial value of their research findings, such institutions are more
likely to enter into exclusive licensing agreements with commercial enterprises,
including our competitors, to market commercial products. Our competitors may
develop technologies and drugs that are safer, more effective or less costly
than any we are developing or which would render our technology and future drugs
obsolete and non-competitive. The products of our competitors marketed to treat
chronic bronchitis include anti-inflammatory products, such as Azmacort(R) and
Beclovent(R), bronchodilators such as Atrovent(R) and Proventil(R), and
antibiotics such as Biaxin(R) and Zithromax(R). Pulmozyme(R), a Genentech
product, and TOBI(R) from Chiron are examples of products used to treat cystic
fibrosis. The main current treatments for dry eye disease involve artificial
tear replacement drops. In addition, alternative approaches to treating diseases
which we have targeted, such as gene therapy, may make our product candidates
obsolete. Our competitors may also be more successful in production and
marketing.
In addition, some of our competitors have greater experience than we do in
conducting preclinical and clinical trials and obtaining FDA and other
regulatory approvals. Accordingly, our competitors may succeed in obtaining FDA
or other regulatory approvals for drug candidates more rapidly than we do.
Companies that complete clinical trials, obtain required regulatory approvals
and commence commercial sale of their drugs before we do may achieve a
significant competitive advantage, including patent and FDA marketing
exclusivity rights that would delay our ability to market products. Drugs
resulting from our research and development efforts, or from our joint efforts
with our collaborative partners may not compete successfully with competitors'
existing products or products under development.
FAILURE TO HIRE AND RETAIN KEY PERSONNEL MAY HINDER OUR PRODUCT DEVELOPMENT
PROGRAMS AND OUR BUSINESS EFFORTS.
We depend on the principal members of management and scientific staff,
including Christy L. Shaffer, Ph.D., our President, Chief Executive Officer and
director; and Gregory J. Mossinghoff, our Senior Vice President and Chief
Business Officer. If either of these people leave us, we may have difficulty
conducting our operations. We have not entered into agreements with any of the
above principal members of our management and scientific staff that bind any of
them to a specific period of employment. Our future success also will depend in
part on our ability to attract, hire and retain additional personnel skilled or
experienced in the pharmaceutical industry. There is intense competition for
such qualified personnel. We may not be able to continue to attract and retain
such personnel.
OUR OPERATIONS INVOLVE A RISK OF INJURY FROM HAZARDOUS MATERIALS, WHICH COULD BE
VERY EXPENSIVE TO US.
Our research and development activities involve the controlled use of
hazardous materials and chemicals. We cannot completely eliminate the risk of
accidental contamination or injury from these materials. If such an accident
were to occur, we could be held liable for any damages that result and any such
liability could exceed our resources. In addition, we are subject to laws and
regulations governing the use, storage, handling and disposal of these materials
and waste products. The costs of compliance with these laws and regulations
could be substantial.
USE OF OUR PRODUCTS MAY RESULT IN PRODUCT LIABILITY CLAIMS FOR WHICH WE MAY NOT
HAVE ADEQUATE INSURANCE COVERAGE.
Clinical trials or manufacturing, marketing and sale of our potential
products by our collaborative partners may expose us to liability claims from
the use of those products. Although we carry clinical trial liability insurance,
we currently do not carry product liability insurance. We or our collaborators
may not be able to obtain or maintain sufficient or even any insurance. If we
can, it may not be at a reasonable cost. If we cannot or are unable otherwise to
protect against potential product liability claims, we may find it difficult or
impossible to commercialize pharmaceutical products we or our collaborators
develop. If claims or losses exceed our liability insurance coverage, we may go
out of business.
-24-
IF THIRD PARTY PAYORS WILL NOT PROVIDE COVERAGE OR REIMBURSE PATIENTS FOR ANY
PRODUCTS WE DEVELOP, OUR ABILITY TO DERIVE REVENUES WILL SUFFER.
Our success will depend in part on the extent to which government and
health administration authorities, private health insurers and other third party
payors will pay for our products. Reimbursement for newly approved health care
products is uncertain. In the United States and elsewhere, third party payors,
such as Medicare, are increasingly challenging the prices charged for medical
products and services. Government and other third party payors are increasingly
attempting to contain health care costs by limiting both coverage and the level
of reimbursement for new therapeutic products. In the United States, a number of
legislative and regulatory proposals aimed at changing the health care system
have been proposed in recent years. In addition, an increasing emphasis on
managed care in the United States has and will continue to increase pressure on
pharmaceutical pricing. While we cannot predict whether legislative or
regulatory proposals will be adopted or what effect those proposals or managed
care efforts, including those relating to Medicare payments, may have on our
business, the announcement and/or adoption of such proposals or efforts could
increase our costs and reduce or eliminate profit margins. Third party insurance
coverage may not be available to patients for any products we discover or
develop. If government and other third party payors do not provide adequate
coverage and reimbursement levels for our products, the market acceptance of
these products may be reduced. In various foreign markets, pricing or
profitability of medical products is subject to government control.
BECAUSE OUR MANAGEMENT WILL HAVE BROAD DISCRETION OVER THE USE OF THE PROCEEDS
FROM OUR INITIAL PUBLIC OFFERING, THE PROCEEDS MAY BE USED IN WAYS STOCKHOLDERS
DO NOT DEEM TO BE ADVISABLE.
Our management will retain broad discretion as to the allocation of the
proceeds for our initial public offering, including the timing and conditions of
the use of the proceeds. Our management may allocate the proceeds to uses that
stockholders do not deem advisable. If management spends the funds unwisely, we
may not have sufficient working capital to become profitable.
OUR EXISTING DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS HOLD A
SUBSTANTIAL AMOUNT OF OUR COMMON STOCK AND MAY BE ABLE TO PREVENT OTHER
STOCKHOLDERS FROM INFLUENCING SIGNIFICANT CORPORATE DECISIONS.
Our directors, executive officers and current 5% stockholders and their
affiliates beneficially own over 45% of the common stock. These stockholders, if
they act together, may be able to direct the outcome of matters requiring
approval of the stockholders, including the election of our directors and other
corporate actions such as our merger with or into another company, a sale of
substantially all of our assets and amendments to our amended and restated
certificate of incorporation. The decisions of these stockholders may conflict
with our interests or those of our other stockholders.
ANTI-TAKEOVER PROVISIONS IN OUR AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION AND BYLAWS, AND OUR RIGHT TO ISSUE PREFERRED STOCK, MAY DISCOURAGE
A THIRD PARTY FROM MAKING A TAKE-OVER OFFER THAT COULD BE BENEFICIAL TO US AND
OUR STOCKHOLDERS.
Our amended and restated certificate of incorporation and bylaws contain
provisions which could delay or prevent a third party from acquiring shares of
our common stock or replacing members of our board of directors. Our amended and
restated certificate of incorporation allows our board of directors to issue
shares of preferred stock. The Board can determine the price, rights,
preferences and privileges of those shares without any further vote or action by
the stockholders. As a result, our board of directors could make it difficult
for a third party to acquire a majority of our outstanding voting stock.
Our amended and restated certificate of incorporation provides that the
members of the board will be divided into three classes. Each year the terms of
approximately one-third of the directors will expire. Our bylaws will not permit
our stockholders to call a special meeting of stockholders. Under the bylaws,
only our President,
-25-
Chairman of the Board or a majority of the board of directors will be able to
call special meetings. The bylaws also require that stockholders give advance
notice to our Secretary of any nominations for director or other business to be
brought by stockholders at any stockholders' meeting. These provisions may delay
or prevent changes of control or management.
Further, we are subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law. Under this law, if anyone becomes an
"interested stockholder" in the company, we may not enter a "business
combination" with that person for three years without special approval.
These provisions could discourage a third party from making a take-over
offer and could delay or prevent a change of control.
OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AND YOUR INVESTMENT IN
OUR STOCK MAY DECLINE IN VALUE.
The market price of our common stock is likely to be highly volatile.
Factors that could cause volatility and could result in declines in the market
price of our common stock include among others:
. announcements made by us concerning results of our clinical trials
with INS365 Respiratory, INS365 Ophthalmic, INS316 Diagnostic,
INS37217 and any other product candidates;
. changes in government regulations;
. regulatory actions as a result of their therapeutic approach;
. changes in concerns of our collaborators, in particular our
collaborations with Genentech, Kissei, Santen and Kirin;
. developments concerning proprietary rights including patents by us or
our competitors;
. variations in our operating results; and
. litigation.
Extreme price and volume fluctuations occur in the stock market from time
to time and that can particularly affect the prices of biotechnology companies.
These extreme fluctuations are often unrelated to the actual performance of the
affected companies. These broad market fluctuations could result in significant
declines in the market price of our common stock.
FUTURE SALES BY OUR CURRENT STOCKHOLDERS MAY CAUSE OUR STOCK PRICE TO DECLINE.
Sales of our common stock by our current stockholders in the public market
could cause the market price of our stock to fall. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable, or at all. As
of December 31, 2000, there were 25,515,087 shares of common stock outstanding.
Of these outstanding shares of common stock, all of the 6,325,000 shares sold in
our initial public offering are freely tradable, without restriction under the
Securities Act of 1933, as amended, unless purchased by our "affiliates."
Existing stockholders, who hold the remaining 19,190,087 shares of common stock,
hold "restricted shares" which may be resold in the public market only if
registered or if there is an exemption from registration, such as Rule 144 under
the Securities Act.
-26-
Holders of 16,340,084 shares of common stock and options and warrants to
purchase 356,823 shares of common stock, held as of December 31, 2000, are
entitled to registration rights. Upon registration, these shares may be freely
sold in the public market.
We may issue additional shares:
. to employees, directors and consultants;
. in connection with corporate alliances;
. in connection with acquisitions; and
. to raise capital.
On February 28, 2001, we filed a registration statement on Form S-8, which
registered shares of common stock under our Amended and Restated 1995 Stock
Plan, as amended. The registration statement registered 3,004,220 shares of our
common stock that were issued or sold or may be issued and sold under such plan.
As a result of these factors, a substantial number of shares of our common
stock could be sold in the public market at any time.
Item 2. Properties.
The Company leases facilities that comprise approximately 17,500 square
feet in Durham, North Carolina adjacent to the Research Triangle Park, through
several leases. The leases expire in August 2003, May 2003 and December 2003 and
are renewable. The Company anticipates acquiring additional space to allow for
all potential expansionary needs over the next one to two years.
Item 3. Legal Proceedings.
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a vote of Security Holders
Not applicable.
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder
Matters.
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "ISPH" since August 3, 2000. The following table sets forth,
for the calendar periods indicated, the range of high and low sale prices for
the Common Stock of the Company on the Nasdaq National Market:
2000 High Low
---- ---- ---
Third Quarter (commencing $30.63 $13.50
August 3, 2000)
Forth Quarter $31.75 $18.00
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As of March 15, 2001, there were 114 record holders of the Common Stock,
with beneficial stockholders in excess of 400. On March 1, 2001, the last sale
price reported on the Nasdaq National Market for the Common Stock was $9.00 per
share.
The Company has neither paid nor declared dividends on its Common Stock
since its inception and does not plan to pay dividends in the foreseeable
future. Any earnings that the Company may realize will be retained to finance
the growth of the Company.
On August 2, 2000, the Securities and Exchange Commission declared a
Registration Statement on Form S-1, as amended (Registration No. 333-31174)
effective, registering 6,325,000 shares of our common stock. The aggregate net
proceeds after deduction of expenses were approximately $69.3 million. Through
December 31, 2000, all of the net proceeds of the offering were being
temporarily invested in interest bearing investment grade securities and
certificates of deposit which are classified as available for sale.
During the year ended December 31, 2000, we granted stock options to
employees, directors and consultants under our stock option plan covering an
aggregate of 748,995 shares of our common stock. The weighted average exercise
price of the stock options granted during the year ended December 31, 2000 was
$12.228 per share. During the year ended December 31, 2000, we sold 295,526
shares of our common stock to employees, directors and consultants upon the
exercise of outstanding stock options. The stock options exercised during the
year ended December 31, 2000 had exercise prices ranging from $0.1225 to $0.42
per share. In October 2000, a security holder exercised a warrant to purchase
shares of common stock. Under the terms of the warrant, the Company issued 8,197
shares of common stock to the security holder pursuant to a "net issue exercise"
in which the purchase price of the stock was paid by the cancellation of a
portion of the warrant.
The sale and issuance of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act by virtue of
Rule 701 in that they were offered and sold either pursuant to a written
compensatory benefit plan or pursuant to a written contract relating to
compensation or were deemed to be exempt from registration under the Securities
Act by virtue of Section 4(2) as a transactions not involving a public offering.
Appropriate legends were affixed to the stock certificates issued in these
transactions. The recipient either received adequate information about the
Company or had access, through employment or other relationships, to adequate
information.
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Item 6. Selected Financial Data
The selected statement of operations data and balance sheet data with r