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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

  For Fiscal Year Ended December 31, 2003

or

  From the transition period from                     to                     

Commission file number 000-31255

ISTA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

15279 Alton Parkway, Suite 100, Irvine, California 92618

(Address of principal executive offices)

(949) 788-6000

(Registrant’s telephone number)

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

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value

(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ¨

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

As of June 30, 2003, the aggregate market value of the Registrant’s voting stock held by non-affiliates was approximately $22,053,000.

As of March 17, 2004 there were 17,456,678 shares of Common Stock outstanding.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes  ¨  No  x

DOCUMENTS INCORPORATED BY REFERENCE

None.

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ISTA PHARMACEUTICALS, INC.

PART I

References in this Annual Report on Form 10-K to “ISTA”, “we”, “our”, “us” or the “Company” refer to ISTA Pharmaceuticals, Inc. This Form 10-K and the documents incorporated herein by reference contain forward-looking statements based on expectations, estimates and projections as of the date of this filing. Actual results may differ materially from those expressed in forward-looking statements. See Item 7 of Part II – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward-Looking Statements.”

Item 1: Business

Overview

ISTA was founded to discover, develop and market new remedies for diseases and conditions of the eye. Vitrase^® (ovine hyaluronidase), is a proprietary drug we are developing for the treatment of vitreous hemorrhage, for use as a spreading agent to facilitate the dispersion and absorption of other drugs, and for the treatment of diabetic retinopathy. We are also developing other late-stage products, including Istalol^™ (timolol) for the treatment of glaucoma, Xibrom^™ (bromfenac) for the treatment of ocular inflammation, and Caprogel^® (aminocaproic acid) for the treatment of hyphema.

In December 2001, we announced our strategic plan to transition from a development-stage organization to a specialty pharmaceutical company, with a primary focus on ophthalmology. We intend to execute this plan by continuing to advance products currently under development, and by acquiring complementary products, either already marketed or in late-stage development.

We continue to take significant steps to scale up our marketing and manufacturing capabilities, in order to further enhance our ability to execute our strategic plan. We entered into two key manufacturing agreements for the supply of commercial quantities of Vitrase^® from Cardinal Health and Istalol^™ and Xibrom^™ from Bausch & Lomb Incorporated. We also added two senior management executives to bolster our financial, business and human resource capabilities: Lauren P. Silvernail, our Chief Financial Officer and Vice President, Corporate Development, and Kathleen McGinley, our Vice President, Human Resources and Corporate Services.

Vitrase^® for the treatment of vitreous hemorrhage

In October 2002, we submitted to the U.S. Food and Drug Administration (“FDA”) a New Drug Application (“NDA”) for Vitrase^® (ovine hyaluronidase) for the treatment of vitreous hemorrhage. On April 3, 2003, the FDA issued an approvable letter citing issues primarily related to the sufficiency of the efficacy data submitted with the NDA for Vitrase^® for the treatment of vitreous hemorrhage. The FDA requested additional analysis of the existing data and an additional confirmatory clinical study based upon that analysis. We have submitted information to the FDA in response to its non-clinical comments contained in the approvable letter and are continuing to assess and discuss with the agency the clinical issues raised in the approvable letter. Based upon these discussions, we will determine the next appropriate steps in the approval process of Vitrase^® for the treatment of vitreous hemorrhage.

Vitrase^® for use as a spreading agent

In August 2003, we submitted to the FDA a second NDA for Vitrase^® for use as a spreading agent to facilitate the dispersion and absorption of other drugs. The FDA granted “priority review” status for this NDA in August 2003 and accepted the NDA for filing and review in October 2003. In February 2004, the FDA notified us that it was extending the Prescription Drug User Fee Act (“PDUFA”) action date 90 days to May 5, 2004. Based upon current discussions with the FDA, we believe that any remaining issues, and the FDA review, can be addressed within the revised time frame. The product submitted in the second NDA is the same formulation as the product submitted in the original NDA. The dose used as a spreading agent is different than the dose used for injection into the back of the eye. With respect to the second Vitrase^® NDA, we are pursuing the development of additional package configurations for different doses of the product to facilitate product utilization, improve profit margins and

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aid in third-party reimbursement. Upon approval of the second Vitrase^® NDA, we intend to submit supplemental filings with the FDA with respect to such additional package and dosage configurations.

Other Product Candidates

In May 2002, we acquired substantially all of the assets of AcSentient, Inc., which included United States marketing rights for two ophthalmic products and worldwide rights for a third. The products with United States rights included Istalol^™, a new once-a-day formulation of timolol for the treatment of glaucoma, and Xibrom^™, a topical non-steroidal anti-inflammatory compound for the treatment of ocular inflammation. We also received worldwide marketing rights for Caprogel^®, a novel compound for the treatment of hyphema. Our rights to Istalol^™ and Xibrom^™ are licensed from Senju Pharmaceuticals Co., Ltd., a Japanese pharmaceutical company, and our rights to Caprogel^® are licensed from the Eastern Virginia Medical School.

The NDA for Istalol^™ was submitted to the FDA in September 2002 and was accepted for review in November 2002. We received an approvable letter from the FDA for Istalol^™ in July 2003, and we expect FDA approval of Istalol^™ in the first half of 2004. We completed our Phase III studies of Xibrom^™ and announced initial results of our clinical studies in March 2004. Based on the initial results of our Phase III studies, we anticipate submitting a NDA for Xibrom^™ in the second quarter of 2004. We are currently conducting feasibility studies for the reformulation and commercialization of Caprogel^®. We anticipate incurring additional research and development expenses in connection with the final development of Xibrom^™ and Caprogel^®, and if these compounds are approved for sale in the United States, we expect to incur significant marketing and sales expenses. In addition, we will also be responsible for certain milestone payments to Senju in connection with the marketing approval in the United States for these compounds.

Our Strategy

Our objective is to build a specialty pharmaceutical company focused on serious diseases and conditions of the eye. We intend to capitalize on our management’s collective experience developing and commercializing ophthalmic products with goals to:

Follow-On Public Offering

On November 12, 2003, we completed a follow-on public offering of 4,000,000 shares of common stock at an offering price of $9.50 per share with gross proceeds of $38,000,000. Net proceeds, after a 6% underwriters discount and other offering expenses, were $35,169,000. Additional expenses relating to the follow-on public offering, other than the underwriters discount, were approximately $551,000. The managing underwriters for the offering were Thomas Weisel Partners LLC, Jefferies & Company, Inc., RBC Capital Markets and Roth Capital Partners. The shares of common stock sold in this offering were registered on Form S-2, as amended (File No. 333-109576).

Anatomy of the Eye

The human eye is approximately one inch in diameter and functions much like a camera. The eye incorporates a lens system (the cornea and the lens) that focuses light, a variable aperture system (the iris) that controls the amount of light passing through the eye and a film (the retina) that records the image. The cornea, lens and iris

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operate to focus light rays on the retina, which contains the receptors that transmit images through the optic nerve to the brain.

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

Product Development Programs

We have four product candidates covering six indications in clinical development. The following is a summary of our clinical product candidates:

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Vitrase^®

We are developing Vitrase^®, a proprietary formulation of ovine hyaluronidase, for the treatment of vitreous hemorrhage, for use as a spreading agent, and for diabetic retinopathy. The term hyaluronidase describes a group of naturally occurring enzymes that can digest certain forms of carbohydrate molecules called proteoglycans. When injected into the vitreous humor, Vitrase^® breaks down the proteoglycan matrix, causing the vitreous humor to liquefy. We believe that this also results in the separation of the vitreous humor from the retina and that, together, these effects are beneficial for the treatment of vitreous hemorrhage and diabetic retinopathy. Vitrase^® may be administered directly into the vitreous humor through a single-dose injection. The procedure is performed in several minutes in an ophthalmologist’s office and is virtually painless due to the application of a topical anesthetic. Vitrase^® can also be injected into connective tissue, where it modifies the permeability of such tissue through the hydrolysis of hyaluronic acid, thereby decreasing the viscosity of the cellular cement and promoting diffusion of injected fluids or localized transudates or exudates, thus facilitating their absorption.

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

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

An alternative to watchful waiting is a surgical procedure called a vitrectomy, in which the vitreous humor and hemorrhage are surgically removed and replaced with a balanced salt solution. There are serious risks associated with a vitrectomy, including both cataract formation and possible loss of vision associated with retinal detachment. These risks contribute to the limited use of vitrectomy as an initial treatment option for vitreous hemorrhage patients.

Vitrase^® is being developed to promote clearance when injected into a blood-filled vitreous humor by causing the vitreous humor to liquefy and the blood to settle to the bottom of the eye. Vitrase^® may also stimulate the cells responsible for engulfing and breaking down the blood, accelerating the reabsorption of the blood. This would clear the path for light to reach the retina and may enable the patient to regain vision. In addition, clearing the hemorrhage permits the retinal specialist to visualize, diagnose and treat the underlying cause of the vitreous hemorrhage.

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

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Market Opportunity. Based on data compiled by Business Genetics, Inc., we believe that approximately 450,000 cases of vitreous hemorrhage occur each year in the United States, a total of 400,000 cases occur each year in the five largest European markets and 190,000 cases occur each year in Japan. Approximately 60% of all of these cases are due to diabetic retinopathy, 15% are due to trauma and 25% are due to other factors. As a result of the typical progression of the disease, we believe Vitrase^®, if approved, is unlikely to be used in all cases of vitreous hemorrhage. Based on data compiled for us by The Wilkerson Group, we believe that approximately half of all cases are candidates for treatment using Vitrase^®.

Clinical/Regulatory Status. In October 1998, the FDA granted fast-track designation for Vitrase^® for the treatment of vitreous hemorrhage. The FDA’s provision for “fast-track” designated drugs, such as Vitrase^®, provides for early submission of completed sections of the NDA. In January 2002, as a part of our rolling NDA for Vitrase^® for the treatment of vitreous hemorrhage, we submitted the pre-clinical pharmacology and toxicology section.

We have completed two Phase III clinical trials of Vitrase^® for the treatment of vitreous hemorrhage. These trials were prospective, randomized, parallel, placebo-controlled and double-masked studies. We conducted one of the trials, our North America trial, in the United States, Mexico and Canada with an enrollment of 750 patients. We conducted the other trial in Europe, Brazil, Australia and South Africa with an enrollment of 556 patients. Patients enrolled in the studies were monitored through 2003. We contracted with CroMedica Global, Inc. in connection with the North America trial and Covance Clinical Periapproval Services, Inc. in connection with the Europe, Brazil, Australia and South Africa trial to provide certain management and support services, including initiation visits with prospective candidates, site management, data accumulation, drug supply management and site audits.

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

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

In March 2002, we announced the preliminary results for our Phase III clinical studies of Vitrase^® for the treatment of vitreous hemorrhage. The data from the two Phase III studies did not show a statistically significant improvement in the primary (surrogate) endpoint. However, further analysis has shown that for the 55 IU dose of Vitrase^®, in both studies, there was a clinically meaningful and statistically significant decrease in the density of vitreous hemorrhage and a statistically significant difference in the proportion of patients with an improvement in best-corrected visual acuity at one and two months, which extended to the three-month post-treatment visit in the study conducted outside North America. Based on these improvements in visual function, and our review and discussions with the FDA regarding the data from the two studies, we submitted the clinical section and the chemistry, manufacturing and controls (“CMC”) section of the NDA for Vitrase^® for the treatment of vitreous hemorrhage in October 2002. The FDA accepted those sections of the Vitrase^® NDA for review in December

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2002, along with the pre-clinical pharmacology and toxicology section that was submitted in January 2002. On April 3, 2003, the FDA issued an approvable letter in which the FDA cited issues primarily related to the sufficiency of the efficacy data submitted with the NDA for Vitrase^®. The FDA requested additional analysis of the existing data and an additional confirmatory clinical study based upon that analysis. We have submitted information to the FDA in response to its non-clinical comments contained in the approvable letter and are continuing to assess and discuss with the agency the clinical issues raised in the approvable letter. Based upon these discussions, we will determine the next appropriate steps in the approval process of Vitrase^® for the treatment of vitreous hemorrhage.

Spreading Agent. Hyaluronidase has been found to be a spreading or diffusing substance, which modifies the permeability of connective tissue through the hydrolysis of hyaluronic acid, a polysaccharide found in the intercellular ground substance of connective tissue, and of certain specialized tissues, such as the umbilical cord and vitreous humor. Hyaluronidase temporarily decreases the viscosity of the cellular cement and promotes diffusion of injected fluids or of localized transudates or exudates, thus facilitating their absorption.

When no spreading factor is present, material injected subcutaneously spreads very slowly, but hyaluronidase causes rapid spreading, provided local interstitial pressure is adequate to furnish the necessary mechanical impulse. Such an impulse is normally initiated by injected solutions. The rate of diffusion is proportionate to the amount of enzyme, and the extent is proportionate to the volume of solution.

Market Opportunity. Based on data compiled in reports published by the American Academy of Ophthalmology, we estimate that a previously marketed hyaluronidase product was used in approximately 750,000 ophthalmic surgery cases annually, when it was commercially available.

Clinical/Regulatory Status. In August 2003, we submitted to the FDA a second NDA for Vitrase^® for use as a spreading agent to facilitate the dispersion and absorption of other drugs. The FDA granted “priority review” status for this NDA in August 2003 and accepted the NDA for filing and review in October 2003. In February 2004, the FDA notified ISTA that it was extending the PDUFA action date 90 days to May 5, 2004. The product submitted in the second NDA is the same formulation as the product submitted in the original Vitrase^® NDA for the treatment of vitreous hemorrhage. The dose used as a spreading agent is different than the dose used for injection into the posterior region of the eye. With respect to the second Vitrase^® NDA, we are pursuing the development of additional package configurations for different doses of the product to facilitate product utilization, improve profit margins and aid in obtaining appropriate third-party reimbursement. Upon approval of the second Vitrase^® NDA, we intend to submit supplemental filings with the FDA with respect to such additional package configurations.

Diabetic Retinopathy. Abnormal changes and/or damage to the blood vessels in the eye due to diabetes are known as diabetic retinopathy. Diabetic retinopathy is a progressive disease consisting of two stages, nonproliferative and proliferative. Nonproliferative diabetic retinopathy is the first stage of diabetic retinopathy and occurs when the retinal blood vessels swell and leak fluid and small amounts of blood into the eye.

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

Market Opportunity. Diabetes continues to be a major healthcare problem in the United States, and we project it to continue growing rapidly in many regions outside the United States. Eye disease is commonly associated with diabetes. Based on our market research, we believe that nearly eight million individuals in the United States have been diagnosed with diabetes, four to six million have some form of diabetic retinopathy, and that the majority of individuals with diabetic retinopathy are in the nonproliferative stage of the disease. We believe that these people are potential candidates for treatment using Vitrase^®.

Clinical/Regulatory Status. We have completed a 60 patient pilot Phase II clinical trial in Mexico City to evaluate the safety and efficacy of a single-dose injection of Vitrase^® to cause a detachment of the vitreous humor from the retina and the impact on slowing the progression of diabetic retinopathy over a one-year period.

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The continued development of Vitrase^® for the treatment of diabetic retinopathy will be dependent upon a number of factors including, among others, the FDA’s evaluation of the Vitrase^® NDA for the treatment of vitreous hemorrhage and for use as a spreading agent, the successful completion of any additional clinical trials for the diabetic retinopathy indication and the continuing assessment of the market opportunity for this indication as compared to other product opportunities we may be pursuing at the time.

Istalol^™ (timolol)

Istalol^™ is our once-daily, topical solution of timolol, a beta-blocking agent for the treatment of glaucoma. The product was developed by Senju in Japan. In May 2002, as part of the AcSentient asset acquisition, we acquired marketing rights for Istalol^™ in the United States.

Glaucoma is a disease that gradually reduces eyesight without warning and often without symptoms. Vision loss is caused by damage to the optic nerve. Glaucoma is a chronic disease that must be treated for life. Currently, its causes are not well understood and there is no cure.

Market Opportunity. According to prescription data compiled by NDC Health, we estimate that the United States pharmaceutical market for the treatment of glaucoma exceeds $1.1 billion per year. According to data compiled by NDC Health, we estimate the U.S. ophthalmic beta-blocker market exceeds $170 million per year, with over 4.4 million prescriptions written annually.

Clinical/Regulatory Status. Senju submitted a NDA for Istalol^™ to the FDA in September 2002 that was accepted for review in November 2002. The NDA is based on data from a Phase I clinical study and a multi-center Phase III clinical trial completed in the United States. In July 2003, the FDA issued an approvable letter with respect to the Istalol^™ NDA citing issues related to manufacturing methods and controls. No additional clinical studies were requested. We believe the issues cited by the FDA are addressable, and we are currently seeking qualification of an additional manufacturing site. In December 2003, we submitted documents to the FDA seeking to qualify Bausch & Lomb as an alternate manufacturer of Istalol^™. We expect FDA approval of Istalol^™ in the first half of 2004.

In the clinical trials, Istalol^™ has shown efficacy and safety comparable to timolol maleate, which is the leading beta-blocker to treat glaucoma in the United States. Advantages of Istalol^™ include enhanced corneal penetration and once-daily administration. Third-party formulations of timolol currently on the market are twice-daily solutions or gel formulations, which are known to cause blurring of patients’ vision.

Xibrom^™ (bromfenac)

Xibrom^™ is a topical non-steroidal anti-inflammatory compound for the treatment of ocular inflammation. The product was developed by Senju in Japan. Senju launched Xibrom^™ in Japan in 2000, and we believe its rapid sales growth in Japan is principally due to its superior potency and twice-daily dosing regimen, as compared to the requirement of four doses-per-day for most other anti-inflammatory products on the Japanese market. In May 2002, as part of our AcSentient asset acquisition, we acquired marketing rights for Xibrom^™ in the United States.

Market Opportunity. According to prescription data compiled for us by IMS Health, we estimate that the current global ophthalmic anti-inflammatory and allergies markets to be approximately $500 million and $630 million per year, respectively. Currently in the U.S., we estimate that there are over 5.4 million prescriptions written annually for topical ophthalmic anti-inflammatory agents.

Clinical/Regulatory Status. Phase I, Phase II and Phase III clinical studies of Xibrom^™ have been completed in Japan and the product has been approved and was launched in 2000 in Japan. In December 2003, we completed enrollment of our Phase III clinical studies in the United States and announced initial results of our clinical studies in March 2004. In two double-masked, placebo-controlled U.S. Phase III studies conducted under a single protocol, a statistically significant proportion of patients treated with Xibrom^™ achieved treatment success as compared to placebo. Treatment success was defined as the complete absence of ocular inflammation. In one study involving 296 patients at 20 study sites, more Xibrom^™ -treated patients cleared their ocular inflammation at 15 days when

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compared to patients receiving placebo at a rate of 62.6% versus 39.8%, respectively. In a second U.S. study, which involved 231 patients at 19 study sites, the rates of ocular inflammation clearance at the primary endpoint of 15 days were 65.8% for Xibrom^™ -treated patients and 47.9% for patients receiving placebo. Statistical significance in each trial reached a p value of less than 0.01. Our analyses showed that the Xibrom^™ treatment effect was evident as early as day three in both trials. The primary endpoint for both studies was the proportion of patients with complete absence of ocular inflammation, as measured by an assessment of immune cells in the anterior chamber of the eye and cellular debris. For each trial, the secondary efficacy analysis of inflammation clearance in patients only on assigned treatment (with no other medications administered) also showed a statistically significant benefit for Xibrom^™ treatment at 15 days versus placebo. In the 20-site study, the rates of clearance were 57.6% for Xibrom^™ and 23.5% for placebo. In the 19-site study, the rates of clearance were 62.0 % for Xibrom^™ and 31.5 % for placebo. Both studies, when analyzed separately, also showed that Xibrom^™ was well tolerated with a very low incidence of ocular adverse events. The efficacy and safety findings were consistent with results of previous studies conducted in Japan by Senju.

Caprogel^® (aminocaproic acid)

Caprogel^® is a new topical gel formulation of amniocaproic acid for treating hyphema. In May 2002, as part of our AcSentient asset acquisition, we acquired AcSentient’s worldwide marketing rights for Caprogel^®. The product is licensed from the Eastern Virginia Medical School.

Hyphema is a term used to describe bleeding in the anterior chamber, the space between the cornea and the iris, of the eye. It occurs when blood vessels in the iris bleed and leak into the clear aqueous fluid and typically results from trauma to the eye. Hyphemas are usually characterized by pooling of blood in the anterior chamber that may be visible to the naked eye. The red blood cells of very small hyphemas are visible only with magnification. Even the slightest amount of blood in the anterior chamber will cause decreased vision when mixed in the clear aqueous fluid.

Some of the symptoms of hyphema are decreased vision, depending on the amount of blood in the eye, pooling of blood in the anterior chamber and elevated intraocular pressure. A doctor will assess visual acuity, measure intraocular pressure and examine the eye with a split lamp microscope and ophthalmoscope.

The treatment is dependent on the cause and severity of the hyphema. Frequently, the blood is reabsorbed over a period of days to weeks. During this time, the doctor will carefully monitor the intraocular pressure for signs of the blood preventing normal flow of the aqueous fluid through the eye’s angle structures. If the eye pressure becomes elevated, eye drops may be prescribed to control it. The pupils are also evaluated to rule out damage to the iris. In some cases, a procedure is performed to irrigate the blood from the anterior chamber to prevent secondary complications such as glaucoma and bloodstains on the cornea.

Market Opportunity. Based on data compiled for us by Milliman U.S.A., we believe that hyphema affects an estimated 50,000 patients per year in the United States and currently there is no available pharmaceutical agent approved for its treatment.

Clinical/Regulatory Status. We are currently conducting feasibility studies for the reformulation and commercialization of Caprogel^®. Once completed, and if these studies yield promising results, we intend to pursue further clinical development of Caprogel^® consistent with such studies’ results. However, the timing and scope for our development of Caprogel^® may change based on a number of factors, including, among others, our assessment, from time to time, of this product’s clinical results, market potential, other product opportunities and our corporate priorities. Caprogel^® has received an orphan drug designation for the treatment of hyphema from the FDA, which may result in us receiving a seven year market exclusivity privilege with respect to Caprogel^®, if approved.

Other Product Candidates

We continually evaluate new opportunities for complementary product candidates and, if and when appropriate, intend to pursue such opportunities through further product acquisitions and related development activities. Our

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ability to execute on such opportunities in some circumstances will be dependent, in part, upon our ability to raise additional capital on commercially reasonable terms.

Collaborations

Collaboration With Allergan

In March 2000, we began a collaboration with Allergan, Inc. with respect to the development and commercialization of Vitrase^® worldwide (other than in Mexico until April 2004 and Japan) for ophthalmic uses for the posterior region of the eye, a supply agreement for Vitrase^® and a stock purchase agreement for $10.0 million of our Series D preferred stock. These shares of Series D preferred stock were subsequently converted into 102,407 shares of our common stock. Allergan is a leading provider of eye care and specialty pharmaceutical products throughout the world. A joint operating committee has been constituted and consists of an equal number of members from each company who will oversee development, regulatory and marketing activities with respect to Vitrase^® for ophthalmic uses in the posterior region of the eye, as more fully described below.

Under the terms of our agreements with Allergan:

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Collaboration With Otsuka

In December 2001, we began a collaboration with Otsuka Pharmaceutical Co., Ltd. with respect to the commercialization of Vitrase^® in Japan for ophthalmic uses in the posterior region of the eye, including a license agreement for the clinical development, regulatory approval, marketing, sale and distribution of Vitrase^®, a supply agreement for Vitrase^® and a securities purchase agreement for 84,567 shares of our common stock for the aggregate purchase price of $4.0 million. Otsuka is part of the Otsuka Group, headquartered in Tokyo, Japan and has a diverse portfolio including ophthalmic, central nervous system, cardiovascular, circulatory, gastro-intestinal, respiratory, oncological and dermatological products.

Under the terms of our agreements with Otsuka:

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approval of Vitrase^® for the treatment of vitreous hemorrhage in Japan. To date, we have not earned this milestone payment from Otsuka and we cannot guarantee that we will earn or receive this milestone payment in the future.

Collaboration With Senju

In May 2002, we expanded our late-stage product portfolio, acquiring three promising therapeutic products with ophthalmic applications from AcSentient. The costs associated with this acquisition were approximately $1.7 million. Two of the three products, Istalol^™ and Xibrom^™, were products developed by Senju. As a result of this acquisition, we began a collaboration with Senju including individual license agreements for the commercialization of Istalol^™ and Xibrom^™ in the United States. These license agreements were originally executed between Senju and AcSentient. The full rights and obligations of AcSentient under both license agreements were transferred to us as a part of the acquisition agreement between us and AcSentient, with such transfer approved by Senju.

Under the terms of our agreements with Senju: