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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)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______to_______.
Commission File No. 000-31135
INSPIRE PHARMACEUTICALS, INC.
(Exact name of Registrant as Specified in Its Charter)
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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: $52,760,995 at February 15, 2002 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 1, 2002.
Class Number of Shares
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Common Stock, $.001 par value 25,792,721
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 4, 2002 is incorporated by reference into Part
III of the Annual Report on Form 10-K.
Item 1. Business.
Overview
We discover and develop drugs 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 product
candidates in clinical trials are based on 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 have also begun to apply our expertise in
this field to other applications of other P2Y receptor subtypes as well as
advancing several non-P2Y programs. We currently have six product candidates in
clinical development:
. INS365 Ophthalmic for the treatment of dry eye disease;
. INS316 Diagnostic to aid in the diagnosis of lung cancer and lung
infection;
. INS37217 Respiratory for the treatment of cystic fibrosis;
. INS365 Respiratory for the treatment of chronic bronchitis;
. INS37217 Intranasal for upper respiratory disorders; and
. INS37217 Ophthalmic for the treatment of retinal disease.
We have entered into development and commercialization alliances with
Allergan Inc. ("Allergan"), Kissei Pharmaceuticals Co., Ltd., ("Kissei"),
Santen Pharmaceutical Co., Ltd. ("Santen") and Kirin Brewery Co., Ltd.
Pharmaceutical Division ("Kirin").
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 relating to the respiratory therapeutic uses. 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 ophthalmic 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. We initiated a
Phase III study in January 2001. 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 studies 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. In August 2000 we filed an
IND for INS37217 Intranasal for upper respiratory disorders. In June 2001 we
filed an IND for INS37217 Ophthalmic for the treatment of retinal disease. All
three of these early clinical programs involving INS37217 are currently ongoing.
Technology 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/or mucociliary clearance include chronic bronchitis,
allergic rhinitis, cystic fibrosis, dry eye disease and retinal disease.
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 by stimulating the release of natural tear components.
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, gritty 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
can also wash out the natural proteins and other components that keep an eye
healthy. There are currently no FDA 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. 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.
Retinal Disease
The retina is a layer of sensory tissue that captures and processes visual
information, and normally remains attached to the underlying retinal pigment
epithelium ("RPE"). Breaks or tears in the retina can lead to an influx of fluid
into the subretinal space between the retina and RPE, thereby creating a
retinal detachment. Delayed treatment of this condition can lead to
degeneration of light-sensing photoreceptor neurons in the retina and permanent
loss of visual acuity.
There are currently no pharmaceutical products approved for the treatment
of this type of retinal detachment. Relatively invasive surgical techniques are
now generally employed to reattach the retina, but these can lead to
significant patient morbidity as well as protracted periods of convalescence.
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.
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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 inhaled agent, which
could reduce the need for bronchoscopies.
Our market research, 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
optional component of routine annual physical examinations in Japan.
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, as well as
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 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 medicine to
treat a cystic fibrosis patient in the United States exceeds $35,000, and the
annual healthcare 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.
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 may 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
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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.
Upper Respiratory Disorders
Upper respiratory disorders such as viral upper respiratory tract
infections or "common cold," allergic rhinitis, and rhinosinusitis are
associated with an impairment in mucociliary clearance in the nasal passages.
Although the etiology of these disorders are varied, they share a common set of
nasal symptoms such as rhinorrhea, nasal congestion/blockage, and post-nasal
drip. In these conditions the mucous membranes of the nose and paranasal
sinuses become irritated, leading to symptoms. In some patients, this
irritation is sufficient to hinder the normal drainage of the sinuses into the
nasal cavity through the sinus ostia, resulting in blockage of the ostia that
may lead to additional impaired ciliary activity, intense pressure/pain, and
increased likelihood of infection.
Rhinosinusitis can be either viral or bacterial in origin. The only
available prescription treatments for rhinosinusitis are antibiotics.
Antibiotics are generally prescribed as a first-line treatment for
rhinosinusitis. Currently there are no prescription or non-prescription
therapies available that significantly facilitate drainage of the sinuses and
increase mucociliary clearance in the upper airways. A therapy that promoted
drainage of the sinuses would have the potential to relieve the pain, pressure
and congestion associated with the disease and may obviate the need for
antibiotics in some patients.
Colds are a common disorder prompting nearly 62 million physician visits
by adults and children in the United States annually. There are 23.7 million
cases of allergic rhinitis reported annually in the United States; 15.9 million
of those cases affect the population under the age of 45. Rhinosinusitis
affects approximately 37 million Americans, or 14% of the U.S. population; it
is more than twice as prevalent as asthma, and results in an estimated $2.4
billion yearly in direct medical costs. It is also a painful disease; prompting
16 million annual outpatient office visits in the U.S. and resulting in
significant impairment in patients' ability to function.
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 diseases that involve impairment of mucosal
hydration and/or mucociliary clearance on epithelial surfaces. Our principal
product candidates are:
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 can 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. In pre-clinical testing, our
product increased the secretions of natural tear components, which we
believe can help restore a natural
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corneal tear film, reduce dry eye symptoms, help prevent long-term
corneal damage, and improve ocular surface health in dry eye sufferers.
INS37217 Ophthalmic. We are developing INS37217 Ophthalmic as an
intra-ocular injection for retinal disease. We believe that our product
will be the first FDA approved product to help facilitate retinal
reattachment without the need for surgery or as an adjunct to surgery. We
believe our product may enhance the reabsorption of fluid across the RPE
and stimulate the removal of extraneous fluid from the subretinal space.
INS316 Diagnostic. We are developing INS316 Diagnostic as an inhaled
diagnostic drug to aid in the detection of lung cancer and lung
infection. Based on clinical studies, we believe that INS316 Diagnostic
can be an effective acute-use product to enhance the production of
adequate deep-lung specimens for diagnostic purposes. As such, we believe
our product may facilitate the diagnosis of lung cancer and lung
infection and potentially reduce the need for costly and invasive
bronchoscopies.
INS37217 Respiratory. We are developing INS37217 Respiratory as an
inhaled product for the treatment of cystic fibrosis. We believe our
product can be the first FDA approved product that mitigates the
underlying ion-transport defect in the airways of patients with cystic
fibrosis. By hydrating airways and stimulating mucociliary clearance, our
product may improve respiratory symptoms, reduce infections and enhance
the health status of patients with this disease and will be complementary
to other currently approved products.
INS365 Respiratory. We are developing INS365 Respiratory as an
inhaled product for the treatment of chronic bronchitis. We believe our
product can 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 may 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 Intranasal. We are developing INS37217 Intranasal as an
intranasal spray treatment for upper respiratory disorders in which
mucociliary clearance is impaired. We believe our product may relieve the
nasal symptoms associated with these disorders by facilitating drainage
of the nasal passages and sinuses and increasing mucosal clearance in the
upper airways.
Our Strategy
Our objective is to become a leading biopharmaceutical company focused on
discovering, developing and commercializing 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,
developing and commercializing therapies where current treatments are
ineffective and where large therapeutic market opportunities exist.
Establish Collaborative Relationships with Market Leaders while
Selectively Retaining Marketing Rights. In order to maximize global
return to us of late-stage development 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 for rights
primarily outside the United States so as to retain maximum economic
benefit to us. We plan to selectively retain partial or full
commercialization rights to our products in some limited indications in
certain countries, primarily the United States. An example is our
co-development and co-promotion options under the Allergan agreement for
dry eye disease that enables us to retain significant economic benefit in
this opportunity.
Develop New Products Outside our Proprietary P2Y Technology Platform.
Our research focus is to discover new pharmaceutical products that expand
beyond our P2Y receptor technology. We have internal programs and
sponsored research and development agreements with universities to
discover and develop new pharmaceutical products in nonmucosal disorders.
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.
================================================================================================================
Indication Product Candidate Development Status Corporate Partners
================================================================================================================
Ophthalmic
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Dry eye INS365 Ophthalmic Phase III underway in Santen (Asia);
U.S.; Phase I completed in Japan Allergan
(Worldwide, except Asia)
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Retinal disease INS37217 Phase I/II underway in U.S. None
Ophthalmic
- ----------------------------------------------------------------------------------------------------------------
Respiratory
- ----------------------------------------------------------------------------------------------------------------
Diagnostic aid for INS316 Diagnostic Phase III underway in U.S. Kirin (Asia);
lung disease Uncommitted outside Asia
- ----------------------------------------------------------------------------------------------------------------
Cystic fibrosis INS37217 Phase II planned to start in 2002 None
Respiratory
- ----------------------------------------------------------------------------------------------------------------
Chronic bronchitis INS365 Respiratory Phase I/II dose ranging Kissei (Japan); Uncommitted
underway in U.S.; Phase I outside Asia
completed in Japan
- ----------------------------------------------------------------------------------------------------------------
Upper Respiratory INS37217 Phase II planned to start in 2002 None
Disorders Intranasal
================================================================================================================
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations - Years Ended December 31, 2001,
2000 and 1999 -- Costs and Expenses" below for a discussion of the costs and
expenses associated with our research and development programs.
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 was initiated in
2001 in the United States. The Phase III program included two studies with
approximately 1,100 patients. The studies were placebo-controlled,
double-masked and designed to compare the safety and efficacy of two
concentrations of INS365 Ophthalmic to placebo. In January 2002, preliminary
efficacy results from the first Phase III study indicated that INS365
Ophthalmic did not meet the primary efficacy endpoint. Patient improvement on
INS365 was observed. However, patients on placebo showed improvement of similar
magnitude. A thorough analysis of the subgroups and secondary parameters from
this study is underway. The second Phase III study is ongoing, and efficacy
results are expected in the second quarter of 2002.
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
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IND with Japanese regulatory authorities and has begun Phase I testing in
Japan. In June 2001, we entered a joint license, development and marketing
agreement with Allergan, Inc. Allergan is a global healthcare company providing
eyecare and specialty pharmaceutical products worldwide. See "--Corporate
Collaborations."
INS37217 Ophthalmic for Retinal Disease
INS37217 Ophthalmic is being developed as an intra-ocular injection for
the treatment of retinal disease. INS37217 Ophthalmic is a second generation
P2Y2 receptor agonist. In numerous preclinical studies INS37217 Ophthalmic has
been shown to enhance the reabsorption of fluid across the RPE and thus
stimulate the removal of fluid from the subretinal space.
In 2001 we initiated a Phase I/II clinical study of INS37217 Ophthalmic.
The study was designed to evaluate the safety and ability to stimulate the
reabsorption of subretinal fluid and to facilitate reattachment in patients
suffering from retinal detachments. Once the Phase I/II study is completed,
which is expected in 2002, we will assess the next steps in the program based
on the study results.
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 300
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. 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. Based on these encouraging results
we initiated Phase III testing with INS316 Diagnostic in 2001. We expect
results of the study in 2003.
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 21 Asian countries and regions, including
Japan. See "--Corporate Collaborations." Kirin has an ongoing Phase I study in
Japan. Kirin is awaiting on our Phase III results in the United States before
moving ahead with further clinical development plans in Japan.
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. In 2001 we initiated a Phase I/II
study which is ongoing, and results are expected in the first half of 2002. We
intend to initiate a Phase II program in 2002. We intend to develop INS37217
Respiratory for cystic fibrosis as a chronic use agent in an inhaled delivery
form.
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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.
INS365 Respiratory for Chronic Bronchitis
INS365 Respiratory is being developed as an inhaled form for the treatment
of chronic bronchitis. We have completed five Phase I/II 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. 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.
In February 2001 we initiated a Phase II clinical study in patients with
chronic bronchitis. In April 2001 we suspended enrollment of the Phase II
program due to dosing and protocol design issues. An additional Phase I/II
dose-ranging trial is currently underway. Plans for reinitiation of the Phase
II trial are currently under review, though this trial is not expected to begin
in 2002.
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.
See "--Corporate Collaborations." 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. Kissei is
awaiting the results of our Phase I/II dose-ranging trial before moving ahead
with further clinical programs.
INS37217 Intranasal for Upper Respiratory Disorders
INS37217 Intranasal is being developed to treat upper respiratory tract
disorders that are characterized by impaired mucociliary clearance and nasal
symptoms. We believe that increasing mucociliary clearance in the nose and
sinuses with INS37217 Intranasal may be beneficial for treating a variety of
upper respiratory conditions. Clinical studies with other P2Y2 agonists such as
INS316 have already shown that these agents open ion channels in the nasal
mucosa that hydrates the surface. We expect that INS37217 Intranasal will also
stimulate mucociliary clearance in the nasal passages and sinuses.
We have recently completed a Phase I study of INS37217 Intranasal in
healthy subjects and in patients with a history of chronic rhinitis. The study
was designed to evaluate the tolerability of INS37217 and the potential to
improve mucociliary clearance in the upper airways. We plan to initiate the
Phase II program in 2002.
Corporate Collaborations
Allergan, Inc.
In June 2001, we entered into a joint license, development and marketing
agreement with Allergan to develop and commercialize two novel therapeutic
treatments for dry eye, INS365 Ophthalmic and Restasis(R). Under the terms of
the agreement, Allergan obtained an exclusive license to develop and
commercialize INS365 Ophthalmic worldwide, with the
8
exception of Japan and nine other Asian countries covered by Inspire's agreement
with Santen. In return, Inspire will receive up to $39 million in up-front and
milestone payments, a co-promotion option for INS365 Ophthalmic in the United
States and royalty payments based on net sales. In addition, Inspire can receive
royalties on global net sales of Allergan's Restasis(R), excluding sales in
Japan, Taiwan, Korea, Hong Kong and Peoples Republic of China markets. The
agreement also provides for potential co-promotion by Inspire of INS365
Ophthalmic and Restasis(R) and one or more of Allergan's other marketed products
in the United States.
We have established a joint development committee with Allergan to oversee
the joint development programs and a joint commercial committee to establish
the brand strategies and manage the relationship. Under the terms of the
agreement, we provide bulk active drug substance through the end of Phase III.
After Phase III, Allergan is responsible for obtaining or manufacturing all of
its bulk active drug substance requirements and for all commercial supply of
product.
We are responsible for conducting, in collaboration with Allergan, the
Phase III clinical trials for INS365 Ophthalmic for dry eye and for United
States new drug application ("NDA") filing and approval. Allergan is
responsible for all other development activities under the agreement, including
all development outside the United States and in their territories, and for
ex-United States regulatory submissions, filings and approvals relating to
products. Allergan 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. Either Allergan or we may terminate the agreement in
the event of a material breach of the agreement. In addition, Allergan has the
right, by giving us 180 days prior notice, to terminate the agreement at any
time. If Allergan breaches the agreement or terminates the agreement early,
other than for our breach, Allergan's license will terminate. Allergan must
provide us with all data and information relating to our product, and Allergan
must assign or permit us to cross-reference all regulatory filings and
approvals.
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 in 1998, 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 are obligated to supply Kissei with its requirements of INS365
Respiratory bulk drug substance reimbursed at 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.
9
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 in December 1998,
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 net sales of licensed
products. No milestone payments were received under the Santen Agreement during
2001 or 1999. During 2000, the Company received a milestone payment under the
Santen Agreement of $500,000 based on achievement of a regulatory milestone by
Santen.
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. 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 21
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 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.
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 June 2001, Genentech notified us that they were
terminating the agreement and returned to us all rights for use of INS365
Respiratory and our other related P2Y2 agonists at no charge. The decision to
return the product rights was based on a strategic review by Genentech of its
overall development portfolio. We received in excess of $16 million in equity
and cash payments during our collaboration.
10
Discovery
Our scientists have specific expertise and proprietary knowledge relating
to the design and synthesis of P2Y receptor agonists and antagonists, and we
have invested in state-of-the-art equipment and laboratory space for performing
synthetic chemistry, determination of compound structure and receptor location
and function identification. Our discovery effort is focused on conducting
studies using cell-based scientific tests that measure biological activities
caused by stimulation or blocking of P2Y receptors, to identify new compounds
that specifically and selectively bind to members of the P2Y receptor family.
The 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.
We obtain access to chemical libraries through our own proprietary
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 NDA
filings.
We use sponsored research agreements to investigate specific biological
processes to augment our technology platform. We have sponsored research at
major universities, The University of North Carolina at Chapel Hill, Columbia
University, University of Miami and Cardiff University.
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, 2001, we owned or licensed patent rights consisting of 27 issued
U.S. 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 U.S. 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 report and as encompassed by our
11
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, uses and/or processes which may
compete with our product candidates. Accordingly, there can be no assurance
that our patent applications will result in patents 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 circumvent in order to practice our inventions.
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, Yamasa Corporation in Choshi, Japan, for the development stage
production of INS316, INS365 and INS37217. We have already obtained clinical
trial grade material of these compounds from Yamasa. In addition, we expect the
same company will supply commercial quantities of INS316, INS365 and INS37217
for both respiratory and ophthalmic applications. We believe Yamasa is capable
of producing sufficient quantities for commercial purposes within current good
manufacturing practices. Should Yamasa not be able to supply us with active
drug substance, we have identified an alternative supplier as backup. We
currently obtain all of our bulk active ingredient for INS316, INS365 and
INS37217 from Yamasa, but the first two are also available from other fine
chemical manufacturers. 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."
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), Flovent(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.
12
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.
The current prescription and non-prescription treatments for dry eye
disease include artificial tear replacement therapy or lubricant drops. To our
knowledge, INS365 Ophthalmic and Restasis(R) are the only prescription
pharmacological agents in late-stage clinical trials for dry eye. We are aware
of early clinical trials with various other potential products as possible
alternative modes of therapy.
There are no prescription therapies available to treat colds, allergic
rhinitis or rhinosinusitis, which significantly increase mucociliary clearance.
Other therapies that are used to treat the symptoms of colds, allergic rhinitis
or rhinosinusitis include antihistamines, antibiotics, decongestants and
anti-inflammatory steroids. There are numerous antihistamines and decongestants
on the market. Two marketed anti-inflammatory steroidal agents are Flonase(R)
and Nasonex(R). We believe that other intra-nasal steroids are in development.
There are also antivirals in clinical development to treat colds, including
Picovir(R).
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.
13
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, 2001, we had 56 full-time employees, 20 of whom were
involved in our drug discovery and preclinical programs, 22 of whom were
engaged in development programs, and 14 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 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 awards 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.
14
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 U.S. Food and Drug
Administration (FDA) or any other regulatory body.
Generally, all of our product candidates are in research or preclinical
development, with only six, INS365 Ophthalmic, INS316 Diagnostic, INS37217
Respiratory, INS365 Respiratory, INS37217 Intranasal, and INS37217 Ophthalmic
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;
. the drug effect is not statistically significant compared to placebo;
. patients experience severe side effects during treatment;
. 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.
15
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 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. INS37217 Intranasal is administered through a nasal mist pump.
Patients may find the pump difficult to operate. 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. INS37217 Ophthalmic is administered through an intraocular
injection. Patients may prefer to a have a sustained delivery device. We have
not yet established a plan for a sustained delivery device. 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 to some extent upon the formation of
research collaborations, licensing and/or marketing arrangements. We currently
have development collaborations with four collaborators, Allergan, Kissei,
Santen and Kirin. The
16
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. Allergan has the right, by giving
us 180 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 Allergan, 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 Allergan, Kissei, Santen, Kirin and any future
collaborators for significant funding in support of our development efforts. If
Allergan, 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.
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 manufacturer 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.
17
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.
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.
Two of our six current clinical development programs depend on two
exclusive licenses and one non-exclusive license from The University of North
Carolina at Chapel Hill. 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.
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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.
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 at least two years, if at all. Six of our
product candidates, INS365 Ophthalmic, INS365 Respiratory, INS37217
Respiratory, INS316 Diagnostic, INS37217 Intranasal and INS37217 Ophthalmic
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 $23.1 million for the year ended December 31, 2001, $14.6 million for
the year ended December 31, 2000 and $9.0 million for the year ended December
31, 1999. As of December 31, 2001 our accumulated deficit was approximately
$71.0 million. We expect to incur additional significant operating losses over
the next several years and expect cumulative losses to increase 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.
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, 2001 our
operating expenses exceeded $30.0 million. We expect our capital and operating
expenditures to exceed
19
our revenue over the next several years as we conduct 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
Allergan, Kissei, Santen and Kirin;
. our ability to establish and maintain additional collaborations;
. progress by our collaborators: Allergan, 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 in
2002. We also expect to purchase capital equipment at a cost of approximately
$1.5 million in 2002. We intend to rely on Allergan, 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, Alcon, Astra Zeneca, Boehringer Ingelheim, Chiron, Genentech,
GlaxoSmithKline, Novartis, and Pfizer. Most 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
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), Beclovent(R) and Flovent(R), bronchodilators such as
Atrovent(R), Proventil(R) and Serevent(R), and antibiotics such as Biaxin(R)
and Zithromax(R). Pulmozyme(R) and TOBI(R) are examples of products used to
treat cystic fibrosis. The main current treatments for dry eye disease involve
artificial tear replacement drops. The main current treatments for colds,
allergic rhinitis and rhinosinusitis include antihistamines, antibiotics,
decongestants and anti-inflammatory steroids. Our competitors market
anti-inflammatory steroidal agents, such as Flonase(R) and Nasonex(R). 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'
20
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, Chief Business
Officer and director. If either of these people leaves 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.
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.
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 37% of the common stock as of February 15,
2002. 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.
21
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, 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 HAS BEEN HIGHLY VOLATILE AND YOUR INVESTMENT IN OUR
STOCK MAY DECLINE IN VALUE.
The market price of our common stock has been highly volatile. Factors
that have caused volatility and could cause additional volatility in the market
price of our common stock include among others:
. announcements made by us concerning results of our clinical trials
with INS365 Ophthalmic, INS37217 Ophthalmic, INS316 Diagnostic,
INS37217 Respiratory, INS365 Respiratory, INS37217 Intranasal 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 Allergan, 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 sometimes 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, 2001, there were 25,751,468 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."
The remaining common stock 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. Similarly, all of the 3,004,220 shares of our common
stock that were registered pursuant to our registration statement on Form S-8
are, or will be, freely tradable in accordance with such registration statement.
22
We may issue additional shares:
. to employees, directors and consultants;
. in connection with corporate alliances;
. in connection with acquisitions; and
. to raise capital.
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.
We lease facilities that comprise approximately 24,630 square feet in
Durham, North Carolina adjacent to the Research Triangle Park, through several
leases. The leases expire in October 2002, August 2003, May 2003 and December
2003 and are renewable.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
23
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our 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 our
common stock on the Nasdaq National Market:
2000 High Low
---- ---- ---
Third Quarter (commencing August 3, 2000) $30.63 $13.50
Fourth Quarter $31.75 $18.00
2001
----
First Quarter $24.31 $ 6.00
Second Quarter $15.22 $ 6.63
Third Quarter $13.72 $ 6.99
Fourth Quarter $15.17 $ 8.00
As of March 1, 2002, there were 123 record holders of our common stock,
with beneficial stockholders in excess of 400. On March 1, 2002, the last sale
price reported on the Nasdaq National Market for our common stock was $2.27 per
share.
We have not paid or declared dividends on our common stock since our
inception and do not plan to pay dividends on our common stock in the
foreseeable future. Any earnings that we may realize will be retained to
finance our growth.
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 from the sale of such shares after deduction of expenses were
approximately $69.3 million. Through December 31, 2001, we have used
approximately $25.1 million of the net proceeds of the offering as follows:
Discovery and research programs $ 20,035,000
General and administrative expenses 3,883,000
Purchase of equipment 685,000
Payment of debt 529,000
------------
Total $ 25,132,000
============
Except with respect to the compensation of our officers and the
reimbursement of director expenses included in discovery and research programs
and general and administrative expenses, all of the net proceeds of the
offering which have been used to date were payable to parties other than our
directors, officers or their associates of such persons, persons owning ten
percent or more of any class of our equity securities, or our affiliates.
Through December 31, 2001, all of the remaining net proceeds of the offering
were being invested in interest bearing investment grade securities and
certificates of deposit which are classified as available for sale.
24
Item 6. Selected Financial Data.
The selected statement of operations data and balance sheet data with
respect to the years ended December 31, 2001, 2000, 1999, 1998 and 1997 set
forth below are derived from our financial statements which have been audited
by PricewaterhouseCoopers LLP, independent accountants. The selected financial
data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in Item 7 below, and our financial statements and the notes thereto
contained in Item 8 below. Historical results are not necessarily indicative of
our future results.
(In thousands, except per share amounts)
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