Attached files

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EX-23.1 - CONSENT OF BDO USA, LLP - Insys Therapeutics, Inc.dex231.htm
EX-10.5 - 2011 EQUITY INCENTIVE PLAN - Insys Therapeutics, Inc.dex105.htm
EX-10.6 - 2011 NON-EMPLOYEE DIRECTORS' STOCK AWARD PLAN - Insys Therapeutics, Inc.dex106.htm
EX-10.7 - 2011 EMPLOYEE STOCK PURCHASE PLAN - Insys Therapeutics, Inc.dex107.htm
EX-10.15 - SUPPLY AGREEMENT - Insys Therapeutics, Inc.dex1015.htm
Table of Contents

As filed with the Securities and Exchange Commission on August 16, 2011

Registration No. 333-173154

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 6

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Insys Therapeutics, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware
  2834
  51-0327886

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

10220 South 51st Street, Suite 2

Phoenix, AZ 85044-5231

(602) 910-2617

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Michael L. Babich

President and Chief Executive Officer

Insys Therapeutics, Inc.

10220 South 51st Street, Suite 2

Phoenix, AZ 85044-5231

(602) 910-2617

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

Matthew T. Browne, Esq.

Charles S. Kim, Esq.

Sean M. Clayton, Esq.

Cooley LLP

4401 Eastgate Mall

San Diego, CA 92121

(858) 550-6000

 

Cheston J. Larson, Esq.

Divakar Gupta, Esq.

Matthew T. Bush, Esq.

Latham & Watkins LLP

12636 High Bluff Drive, Suite 400

San Diego, CA 92130

(858) 523-5400

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

  ¨   Accelerated filer   ¨

Non-accelerated filer

  x  (Do not check if a smaller reporting company)   Smaller reporting company   ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of securities to be registered  

Proposed

maximum

aggregate
offering price(1)

  Amount of
registration fee

Common Stock, $0.0002145 par value per share

  $55,000,000   $6,386(2)

 

 

 

(1) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act. Includes the offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.
(2) Previously paid.

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.

 

 

PROSPECTUS    SUBJECT TO COMPLETION, DATED AUGUST 16, 2011   

LOGO

             Shares

Common Stock

 

 

This is an initial public offering of Insys Therapeutics, Inc. We are offering              shares of common stock. We currently estimate that the initial public offering price of our common stock will be between $             and $             per share.

We have filed an application for our common stock to be listed on the Nasdaq Global Market under the symbol “INRX.”

 

 

Investing in our common stock involves risk. See “Risk Factors” beginning on page 11.

 

       Per Share      Total  

Initial price to public

       $                    $              

Underwriting discounts and commissions

       $                    $              

Proceeds, before expenses, to Insys Therapeutics, Inc.

       $                    $              

We have granted to the underwriters an option to purchase up to             additional shares of common stock to cover over-allotments, if any, exercisable at any time until 30 days after the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares on or about                     , 2011.

 

 

 

Wells Fargo Securities   JMP Securities

 

 

Oppenheimer & Co.

Prospectus dated                     , 2011.


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     11   

Special Note Regarding Forward-Looking Statements

     50   

Use of Proceeds

     52   

Dividend Policy

     52   

Capitalization

     53   

Dilution

     55   

Unaudited Pro Forma Condensed Consolidated Financial Information

     57   

Selected Financial Data

     64   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     66   

Business

     86   

Management

     115   

Compensation Discussion and Analysis

     122   

Certain Relationships and Related Party Transactions

     145   

Principal Stockholders

     151   

Description of Capital Stock

     153   

Shares Eligible for Future Sale

     157   

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders of Our Common Stock

     159   

Underwriting

     163   

Legal Matters

     169   

Experts

     169   

Where You Can Find More Information

     169   

Index to Consolidated Financial Statements

     F-1   

 

 

You should rely only on the information contained in this prospectus and in any free writing prospectus that we may provide to you in connection with this offering. Neither we nor any of the underwriters has authorized anyone to provide you with information different from, or in addition to, that contained in this prospectus or any such free writing prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. Neither we nor any of the underwriters is making an offer to sell or seeking offers to buy these securities in any jurisdiction where or to any person to whom the offer or sale is not permitted. The information in this prospectus is accurate only as of the date on the front cover of this prospectus and the information in any free writing prospectus that we may provide you in connection with this offering is accurate only as of the date of that free writing prospectus. Our business, financial condition, results of operations and future growth prospects may have changed since those dates.

For investors outside the United States: neither we nor any of the underwriters has done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any such free writing prospectus outside of the United States.

 

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PROSPECTUS SUMMARY

This summary highlights information contained in other parts of this prospectus. Because it is only a summary, it does not contain all of the information that you should consider before investing in shares of our common stock and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. You should read the entire prospectus carefully, especially “Risk Factors” and our financial statements and the notes to these financial statements, before deciding to buy shares of our common stock.

Overview

We are a specialty pharmaceutical company that develops and seeks to commercialize innovative pharmaceutical products that target the unmet needs of cancer patients, with an initial focus on cancer-supportive care. We have assembled a product pipeline targeting cancer-supportive care and cancer therapy that we believe can be developed cost efficiently and, if approved, commercialized through a targeted commercial organization. Our supportive care product candidates include Subsys, a proprietary, fast-acting sublingual fentanyl spray for the treatment of breakthrough cancer pain, or BTCP, and our family of dronabinol product candidates for the treatment of chemotherapy-induced nausea and vomiting, or CINV, and appetite stimulation in AIDS patients. Subsys and our generic Dronabinol SG Capsule product candidates are both under review for marketing approval by the U.S. Food and Drug Administration, or FDA. We are also developing proprietary cancer therapeutics, the most advanced of which is LEP-ETU, an improved formulation of paclitaxel, the active ingredient in the cancer drugs Taxol and Abraxane.

We focus our research and development efforts on product candidates that utilize innovative formulations to address the clinical shortcomings of existing commercial pharmaceutical products. We intend to build a capital-efficient commercial organization to market Subsys and our other proprietary products, if approved. We expect to utilize an incentive-based sales model similar to that employed by Sciele Pharma, Inc. and other companies previously led by members of our board, including our founder and Executive Chairman.

The National Cancer Institute estimates that as of January 1, 2008, there were approximately 12.0 million people in the United States who had been previously diagnosed or were living with cancer. Debilitating side effects and symptoms such as pain, nausea and vomiting are prevalent in cancer patients and generally are caused by their disease as well as the radiation or chemotherapy treatment regimens intended to eradicate or inhibit the progression of the cancer. These side effects, among others, can impact a patient’s quality of life and ability to tolerate cancer treatment regimens. We believe effective supportive care is an important component in the treatment of cancer that is not adequately addressed by existing marketed therapies. By focusing on supportive care products, we believe we can contribute to the improvement of cancer patient outcomes and survival rates.

We are led by a management team and board of directors with substantial experience founding and managing pharmaceutical and related companies. Our founder and Executive Chairman, Dr. John N. Kapoor, has held executive management and board positions at Sciele Pharma and OptionCare, Inc., among others. Dr. Kapoor has also had significant experience with cancer-supportive care products, including Marinol, while he was Chairman of Unimed Pharmaceuticals, Inc. Our President and Chief Executive Officer, Michael L. Babich, has board and management experience at Alliant Pharmaceuticals, Inc. and EJ Financial Enterprises, Inc. Our Director of Scientific Development, Dr. Daniel D. Von Hoff, is a renowned oncologist and a founder of ILEX Oncology, Inc. Dr. Von Hoff previously led the development of several approved cancer and cancer-supportive care therapies including drugs such as Campath, Camptosar and Clofarabine. Our Chief Medical Officer, Dr. Larry Dillaha, previously served as the Chief Medical Officer of Sciele Pharma. We intend to leverage the

 

 

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experience of our management team to build Insys into a leading specialty pharmaceutical company focused on commercializing innovative therapies that address unmet medical needs of cancer patients.

Our Product Candidates

The following table summarizes certain information regarding our most advanced product candidates:

 

Franchise

 

Product Candidate

   Regulatory
Pathway
     

Indication

 

Status

Spray  

Subsys

   505(b)(2)        BTCP in Opioid-Tolerant
Patients
  NDA Accepted;
PDUFA goal
date January 4,
2012

Dronabinol

  Dronabinol SG Capsule    ANDA     CINV and Appetite Stimulation
in Patients with AIDS
  ANDA
Submitted
3
 

Dronabinol RT Capsule

 

   sANDA1   }     Pending4
  Dronabinol Oral Solution    505(b)(2)1     CINV and Appetite Stimulation
in Patients with AIDS
2
  Pre-Phase 35
 

Dronabinol Inhalation Device

 

   505(b)(2)1       Preclinical
  Dronabinol IV Solution    505(b)(2)1       Preclinical
           

Oncology

  LEP-ETU    TBD       Metastatic Breast Cancer2   Phase 2

 

1 

Anticipated regulatory pathway

2 

Initial targeted indication

3 

Abbreviated New Drug Application, or ANDA, under expedited review

4 

Supplemental ANDA, or sANDA, expected to be filed in the first quarter of 2012, assuming approval of Dronabinol SG Capsule ANDA in the third quarter of 2011

5 

End-of-Phase 2 meeting completed; planning to initiate pivotal bioequivalence study

Subsys

Subsys is a proprietary, single-use product that delivers fentanyl, an opioid analgesic, in seconds for transmucosal absorption underneath the tongue. In March 2011, we submitted a New Drug Application, or NDA, to the FDA for Subsys for the treatment of BTCP in opioid-tolerant patients. The FDA notified us in May 2011 that it had accepted the NDA for review and initially assigned a Prescription Drug User Fee Act, or PDUFA, goal date of January 4, 2012 for its review of the NDA. BTCP is characterized by sudden, often unpredictable, episodes of intense pain which can peak in severity at three to five minutes despite background pain medication. Subsys is the only transmucosal product to show statistically significant pain relief when measuring the sum of pain intensity difference at five minutes in a Phase 3 BTCP clinical trial using fentanyl. We believe this product is further differentiated by ease and speed of administration relative to the most widely-prescribed treatment alternatives. BTCP occurs in 50 to 90% of patients with cancer pain based on industry publications. According to IMS Health, transmucosal immediate-release fentanyl, or TIRF, products generated $440 million in U.S. sales in 2010. We believe this market has the potential to expand if faster-acting and more convenient products such as Subsys are approved by the FDA and this product class is more effectively promoted to oncologists and pain specialists. We currently plan to market Subsys in the United States, if approved, through a targeted sales force of approximately 50 to 75 representatives.

Dronabinol Product Family

We are developing a portfolio of dronabinol product candidates for the treatment of CINV and appetite stimulation in patients with AIDS, as well as other indications where dronabinol could have

 

 

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potential therapeutic benefits. Dronabinol, the active ingredient in Marinol, is a synthetic cannabinoid whose chemical name is delta-9-tetrahydrocannabinol, or THC. In 2010, dronabinol products generated approximately $142 million in U.S. sales. Our portfolio consists of two product candidates intended to be generic equivalents to Marinol in addition to three proprietary formulations, including Dronabinol Oral Solution. We believe our family of dronabinol products, if approved, has the potential to capture a broader share of the CINV market, which, according to IMS Health, generated $1.9 billion in U.S. sales in 2010.

We produce dronabinol active pharmaceutical ingredient, or API, for our product candidates at our U.S.-based, state-of-the-art manufacturing facility, which we believe provides us with a significant competitive advantage. We believe that this facility has the capacity to supply sufficient commercial quantities of the API for our dronabinol product candidates for the foreseeable future. In May 2011, we entered into a supply and distribution agreement with Mylan Pharmaceuticals Inc., or Mylan, for the distribution of Dronabinol SG and RT Capsules within a defined geographic area.

Dronabinol SG Capsule.    Dronabinol SG Capsule, the most advanced product candidate in our dronabinol family, is a dronabinol soft gelatin capsule intended to be a generic equivalent to Marinol. In June 2010, we submitted an amendment to our ANDA to the FDA for this product candidate. If approved, we intend to commercialize Dronabinol SG Capsule with the aim of generating near-term cash flows to help fund the commercialization of Subsys and the development of our proprietary dronabinol and other product candidates, as well as validating our dronabinol supply chain and internal manufacturing capabilities.

Dronabinol RT Capsule.    Dronabinol RT Capsule is a proprietary dronabinol soft gel capsule that is stable at room temperature. We intend to submit an sANDA to the FDA for Dronabinol RT Capsule following the approval of Dronabinol SG Capsule. We believe Dronabinol RT Capsule, if approved, would offer convenience advantages to distributors, pharmacies and patients, as product labeling for Marinol requires storage at refrigerated temperatures.

Dronabinol Oral Solution.    Dronabinol Oral Solution is a proprietary synthetic THC in an oral liquid formulation which may offer advantages, including more consistent bioavailability, faster onset of action and more flexible dose titration. We have completed an end-of-Phase 2 meeting with the FDA and plan to initiate a pivotal bioequivalence study for this product candidate in the second half of 2011. Marinol is characterized by a highly variable bioavailability and an onset of action that ranges from 30 minutes to one hour. In our Phase 1 clinical trial, Dronabinol Oral Solution demonstrated a more reliable absorption profile and rapid onset of action as compared to Marinol. We believe these product attributes, coupled with increased acceptance of THC as a therapeutic alternative, could result in Dronabinol Oral Solution capturing market share and potentially expanding the market for dronabinol-based products.

Cancer Therapeutics

In addition to our cancer-supportive care products, we intend to develop proprietary cancer therapeutics targeting limitations of existing commercial products.

LEP-ETU.    LEP-ETU, our most advanced proprietary cancer therapeutic, is a proprietary NeoLipid liposomal, or microscopic membrane-like structure created from lipids, formulation that incorporates paclitaxel. LEP-ETU recently completed a successful Phase 2 clinical trial of 70 patients with metastatic breast cancer. We are developing this product candidate to improve efficacy and reduce paclitaxel-related side effects. According to IMS Health, paclitaxel products generated $393 million in U.S. sales in 2010.

 

 

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Our Strategy

Our goal is to become a leading specialty pharmaceutical company focused on commercializing and developing innovative therapies that address unmet medical needs of cancer patients. Key elements of our strategy are to:

 

   

Obtain FDA approval of Subsys.

 

   

Build a capital-efficient commercial organization to market Subsys and complementary products.

 

   

Obtain FDA approval of Dronabinol SG Capsule and Dronabinol RT Capsule, and commercialize these products through our May 2011 distribution agreement with Mylan.

 

   

Develop innovative dronabinol formulations to expand usage of synthetic THC for CINV and appetite stimulation in AIDS patients, as well as other indications.

 

   

Advance clinical development of LEP-ETU for the treatment of cancer.

 

   

Add commercial products or product candidates to our portfolio that complement our core competencies.

Risks Associated with Our Business

Our business and our ability to execute our business strategy are subject to a number of risks that you should be aware of before you decide to buy our common stock. In particular, you should consider the following risks, which are discussed more fully in “Risk Factors:”

 

   

We have not had commercial sales of any of our product candidates and may never become profitable.

 

   

We are highly dependent on the success of Subsys, Dronabinol SG Capsule and our other product candidates, and we cannot give any assurance that any of these product candidates will receive regulatory approval or acceptable Drug Enforcement Administration, or DEA, classification, or be successfully commercialized.

 

   

We face significant competition from both branded and generic products, and our operating results will suffer if we fail to compete effectively.

 

   

We are subject to numerous complex regulations and failure to comply with these regulations, or the cost of compliance with these regulations, may harm our business.

 

   

The anticipated development of a Risk Evaluation and Mitigation Strategies, or REMS, program for Subsys could cause significant delays in the approval process and would add additional layers of regulatory requirements that could significantly impact our ability to commercialize Subsys and dramatically reduce its market potential.

 

   

We have recently taken a number of significant actions aimed at growing our business and will need to further increase the size and complexity of our organization in the future, and we may experience difficulties in managing our growth and executing our growth strategy.

 

   

If we are unable to establish sales and marketing capabilities or execute on our sales and marketing strategy, including through our distribution agreement with Mylan, we may not be able to effectively market and sell any of our products, if approved, and generate product revenue.

 

   

We produce our dronabinol API internally and may encounter manufacturing failures that could delay the preclinical and clinical development or regulatory approval of our dronabinol product candidates, or their commercial production if approved.

 

 

 

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We rely on third parties to manufacture our product candidates, supply API and conduct our clinical trials.

 

   

If we fail to attract and keep management and other key personnel, as well as our board members, we may be unable to successfully develop or commercialize our product candidates and implement our business plan.

 

   

We may not be able to obtain and enforce patent rights or other intellectual property rights that cover our product candidates and are of sufficient breadth to prevent third parties from competing against us.

 

   

Our founder, Executive Chairman and principal stockholder can individually control our direction and policies, and his interests may be adverse to the interests of our stockholders.

Corporate Information

We were incorporated as Oncomed Inc. in Delaware in June 1990, and subsequently changed our name to NeoPharm, Inc. On October 29, 2010, we entered into an Agreement and Plan of Merger with Insys Therapeutics, Inc., a Delaware corporation, and ITNI Merger Sub Inc., our wholly-owned subsidiary and a Delaware corporation. On November 8, 2010, pursuant to the Agreement and Plan of Merger, ITNI Merger Sub Inc. merged with and into Insys Therapeutics, Inc., and Insys Therapeutics, Inc. survived as our wholly-owned subsidiary. We refer to this transaction herein as the Merger. Following the Merger, our wholly-owned subsidiary, Insys Therapeutics, Inc., changed its name to Insys Pharma, Inc. and we changed our name to Insys Therapeutics, Inc. In connection with the Merger, all of the outstanding shares of common stock of Insys Pharma prior to the Merger were exchanged for 319,667 shares of our common stock and 14,864,607 shares of our newly-created convertible preferred stock. Each share of our convertible preferred stock is convertible into 0.57 shares of our common stock. As a result of the Merger, 95% of our common stock on an as-converted basis was held by the then-existing stockholders of Insys Pharma.

Our principal executive offices are located at 10220 South 51st Street, Suite 2, Phoenix, Arizona and our telephone number is (602) 910-2617. Our corporate website address is www.insysrx.com. We do not incorporate the information contained on, or accessible through, our website into this prospectus, and you should not consider it part of this prospectus.

For convenience in this prospectus, “Insys,” “we,” “us,” and “our” refer to Insys Therapeutics, Inc. and its subsidiaries taken as a whole, unless otherwise noted. We have applied for registration of the trademark “Insys Therapeutics, Inc.” in logo format, along with the trademarks “Insys” and “Subsys” with the United States Patent and Trademark Office. The trademark “Insys Therapeutics, Inc” in logo format is officially registered on the Principal Register of the United States Patent and Trademark Office. The trademark “Subsys” is allowed and will be eligible for registration on the Principal Register after it is used in commerce. This prospectus also contains trademarks and tradenames of other companies, and those trademarks and tradenames are the property of their respective owners.

 

 

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The Offering

 

Common stock offered

             shares (or              shares if the underwriters’ over-allotment option is exercised in full)

 

Common stock to be outstanding after this offering

             shares (or              shares if the underwriters’ over-allotment option is exercised in full)

 

Use of proceeds from this offering

We intend to use the net proceeds from this offering to fund the commercialization of Subsys and Dronabinol SG Capsule, if approved; to fund the development of Dronabinol RT Capsule, Dronabinol Oral Solution, Dronabinol Inhalation Device, LEP-ETU and our other early-stage product candidates; for potential product licensing and acquisitions; and for working capital and for other general corporate purposes. Please see the section entitled “Use of Proceeds.”

 

Risk factors

You should read the “Risk Factors” section of this prospectus for a discussion of certain of the factors to consider carefully before deciding to purchase any shares of our common stock.

 

Proposed Nasdaq Global Market symbol

INRX

The number of shares of our common stock that will be outstanding after this offering is based on              shares outstanding as of June 30, 2011 (after giving effect to the conversion of our convertible preferred stock outstanding as of such date into an aggregate of 8,528,860 shares of our common stock and the conversion of $             million in aggregate principal amount of notes and accrued interest thereon owed to trusts controlled by our Executive Chairman and principal stockholder into              shares of common stock, assuming a conversion date of                     , 2011 and an initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, both of which will occur automatically immediately prior to the closing of this offering), and excludes:

 

   

540,102 shares of our common stock issuable upon the exercise of outstanding options as of June 30, 2011 under our equity incentive plans, with a weighted average exercise price of $9.76 per share;

 

   

1,079,133 shares of our common stock issuable upon the exercise of outstanding options as of June 30, 2011 under the Insys Pharma, Inc. equity incentive plan, with a weighted average exercise price of $1.83 per share; and

 

   

3,000,000 shares of our common stock reserved for future issuance under our 2011 equity incentive plan, 2011 non-employee directors’ stock award plan and 2011 employee stock purchase plan, each of which will become effective upon the signing of the underwriting agreement for this offering.

Unless otherwise stated, all information contained in this prospectus assumes:

 

   

the conversion of all of our outstanding convertible preferred stock into an aggregate of 8,528,860 shares of common stock automatically immediately prior to the closing of this offering;

 

   

the conversion of $             million in aggregate principal amount of notes and accrued interest thereon owed to trusts controlled by our Executive Chairman and principal stockholder into              shares of common stock, assuming a conversion date of                     , 2011 and an initial

 

 

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public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, immediately prior to the closing of this offering;

 

   

the filing of our amended and restated certificate of incorporation and adoption of our amended and restated bylaws, which will occur upon the closing of this offering; and

 

   

no exercise of the underwriters’ over-allotment option to purchase additional shares.

The information in this prospectus also reflects a 1-for-61 reverse stock split of our common stock that was effected on July 14, 2011.

 

 

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Summary Financial Data

The following tables set forth our summary financial data. The summary financial data for the years ended December 31, 2010, 2009 and 2008 are derived from our audited financial statements appearing elsewhere in this prospectus. The statement of operations data for the six months ended June 30, 2011 and 2010 and the selected balance sheet data as of June 30, 2011 have been derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. The unaudited financial statements have been prepared on a basis consistent with our audited financial statements included in this prospectus and include, in our opinion, all adjustments, consisting only of normal recurring adjustments, necessary to state fairly our financial position as of June 30, 2011 and results of operations for the six months ended June 30, 2011 and 2010. You should read this summary financial data in conjunction with the financial statements and related notes and the information under the headings “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Unaudited Pro Forma Condensed Consolidated Financial Information” appearing elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results.

On October 29, 2010, we entered into an Agreement and Plan of Merger with Insys Therapeutics, Inc., a Delaware corporation, and ITNI Merger Sub Inc., our wholly-owned subsidiary and a Delaware corporation. On November 8, 2010, pursuant to the Agreement and Plan of Merger, ITNI Merger Sub Inc. merged with and into Insys Therapeutics, Inc., and Insys Therapeutics, Inc. survived as our wholly-owned subsidiary. We refer to this transaction as the Merger. Following the Merger, our wholly-owned subsidiary, Insys Therapeutics, Inc., changed its name to Insys Pharma, Inc. and we changed our name to Insys Therapeutics, Inc. In connection with the Merger, all of the outstanding shares of common stock of Insys Pharma prior to the Merger were exchanged for 319,667 shares of our common stock and 14,864,607 shares of our newly-created convertible preferred stock. Each share of our convertible preferred stock is convertible into 0.57 shares of our common stock. As a result of the Merger, 95% of our common stock on an as-converted basis was held by the then-existing stockholders of Insys Pharma. Since Insys Pharma is the acquiring entity for accounting purposes, the financial statements for all periods up to and including the November 8, 2010 Merger date are the financial statements of the entity that is now our subsidiary, Insys Pharma. The financial statements for all periods subsequent to the November 8, 2010 Merger date are the consolidated financial statements of Insys Therapeutics, Inc. and Insys Pharma. However, for all periods, the financial statements are labeled “Insys Therapeutics, Inc.” financial statements. In addition, the audited financial statements of NeoPharm for the years ended December 31, 2009 and 2008 and the unaudited financial statements for the nine months ended September 30, 2010 and 2009 are also included in this prospectus.

The summary unaudited pro forma condensed consolidated statement of operations data for the six months ended June 30, 2011 and for the year ended December 31, 2010 below is based on the historical consolidated statements of operations of Insys Therapeutics, Inc. and NeoPharm, giving effect to the Merger, the conversion of our convertible preferred stock outstanding as of June 30, 2011 and December 31, 2010 into 8,528,860 shares of our common stock, the issuance after each period presented of additional notes payable to trusts controlled by our Executive Chairman and principal stockholder, and the conversion of the resulting $             million in aggregate principal amount of notes and actual accrued interest thereon through                     , 2011 owed to trusts controlled by our Executive Chairman and principal stockholder into              shares of common stock, assuming an initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, as if such transactions had occurred on January 1, 2010. The unaudited pro forma condensed consolidated statement of operations data is based on the estimates and assumptions set forth in the notes to the unaudited pro forma condensed consolidated financial statements. Please see the section entitled “Unaudited Pro Forma Condensed Consolidated Financial Information.” These estimates and assumptions are preliminary and subject to change, and have been made solely for the

 

 

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purposes of developing such pro forma information. The summary unaudited pro forma condensed consolidated statement of operations data is not necessarily indicative of the combined results of operations to be expected in any future period or the results that actually would have been realized had the entities been a single entity during the period presented.

 

    Pro Forma     Actual     Pro Forma     Actual  
    Six Months Ended June 30,     Year Ended December 31,  
   

    2011    

    2011     2010    

    2010    

    2010     2009     2008  
   

(In thousands, except share and per share data)

 

Statement of Operations Data:

             

Revenues

  $      $      $      $      $      $      $   

Operating expenses:

             

Research and development

    3,807        3,807        5,240        13,244        10,428        8,982        14,729   

General and administrative

    4,595        4,595        2,015        5,265        3,539        4,504        10,221   

Loss on settlement of vendor dispute

                                              1,104   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    8,402        8,402        7,255        18,509        13,967        13,486        26,054   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations:

    (8,402     (8,402     (7,255     (18,509     (13,967     (13,486     (26,054

Other income

    102        102        26        1,532        797        31        780   

Interest income (expense), net.

           (888     (473     57        (1,148     (999     (1,913

Income tax benefit

                                575                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (8,300     (9,188     (7,702     (16,920     (13,743     (14,454     (27,187
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss allocable to preferred stockholders

           8,414        7,425               13,144        13,932        26,205   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss allocable to common stockholders

  $ (8,300   $ (774   $ (277   $ (16,920   $ (599   $ (522   $ (982
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per common share

  $        $ (0.99   $ (0.87   $                   $ (1.54   $ (7.05   $ (19.09
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding, basic and diluted(1)

      784,020        319,423          388,449        74,063        51,438   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Please see Note 2 to our audited financial statements appearing elsewhere in this prospectus for an explanation of the method used to calculate the net loss per common share and the number of common shares used in the computation of historical per share amounts.

 

 

 

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     As of June 30, 2011  
     Actual     Pro Forma      Pro Forma
As Adjusted(1)
 
     (Unaudited)  
     (In thousands)  

Balance Sheet Data:

       

Cash and cash equivalents

   $ 17      $                    $                

Total current assets

     1,524        

Total assets

     14,644        

Total current liabilities

     46,381        

Total liabilities

     48,779        

Total stockholders’ equity (deficit)

     (34,135     

 

(1) A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, total current assets, total assets and total stockholders’ equity by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The pro forma balance sheet data as of June 30, 2011 above gives effect to (1) the filing of our amended and restated certificate of incorporation which will occur upon the closing of this offering, (2) the conversion of our convertible preferred stock outstanding as of such date into 8,528,860 shares of our common stock, which will occur automatically immediately prior to the closing of this offering, (3) the issuance of an additional $             million in aggregate principal amount of notes payable to trusts controlled by our Executive Chairman and principal stockholder subsequent to June 30, 2011 and (4) the conversion of $             million in aggregate principal amount of notes and accrued interest thereon owed to trusts controlled by our Executive Chairman and principal stockholder into              shares of common stock, assuming a conversion date of                     , 2011 and an initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, immediately prior to the closing of this offering, which amount includes the $             million in aggregate principal amount of notes issued subsequent to June 30, 2011 and accrued interest on all notes payable through                     , 2011. The pro forma as adjusted balance sheet data as of June 30, 2011 above gives further effect to our receipt of the estimated net proceeds from the sale of shares of common stock by us in this offering at an assumed initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

 

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RISK FACTORS

An investment in shares of our common stock involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information appearing elsewhere in this prospectus, before deciding to invest in our common stock. The occurrence of any of the following risks could have a material adverse effect on our business, financial condition, results of operations and future growth prospects. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Financial Position

We have not had commercial sales of any of our product candidates and may never become profitable.

We have accumulated a large deficit since inception that has primarily resulted from the significant research and development expenditures we have made. We expect that our losses will continue to be substantial for at least the short term and that our operating and general and administrative expenses will be significant and increase as we transition to a public company and in connection with our planned research and development and commercialization efforts, including our anticipated creation of a commercial organization. For the six months ended June 30, 2011 and the year ended December 31, 2010, we had a consolidated net loss of $9.2 million and $13.7 million, respectively. As of June 30, 2011, we had a consolidated accumulated deficit of $94.9 million.

Our ability to become profitable depends upon our ability to generate significant continuing revenues. To generate revenues, we must succeed, either alone or with others, in developing, obtaining regulatory approval and acceptable DEA classification for, and manufacturing, selling and marketing, our product candidates, and in particular, Subsys and Dronabinol SG Capsule.

To date, our product candidates have not generated any revenues from commercial sales, and we do not know if or when we will generate any such revenue. Our ability to generate revenue depends on a number of factors, including, but not limited to:

 

   

achievement of regulatory approval and acceptable DEA classification for our product candidates, and in particular for Subsys, Dronabinol SG Capsule and Dronabinol RT Capsule;

 

   

successfully manufacturing commercial quantities of our product candidates at acceptable cost levels if regulatory approvals are obtained;

 

   

successful sales, distribution and marketing of our products, if approved, including execution on our plans to build a capital-efficient commercial organization and successful partnering with third parties;

 

   

successful completion of formulation development, preclinical studies and clinical trials for our product candidates, including Dronabinol Oral Solution, Dronabinol Inhalation Device, Dronabinol IV Solution and LEP-ETU.

Because of the numerous risks and uncertainties associated with our development efforts and other factors, we are unable to predict when we will generate revenues or become profitable, if ever. Even if we do achieve profitability, we may not be able to sustain or increase profitability on an ongoing basis.

We have significant and increasing cash burn and may require additional funding.

Our operations have consumed substantial amounts of cash since inception. Our cash flow used for operating activities for the six months ended June 30, 2011 and the year ended December 31, 2010 was $7.7 million and $15.0 million, respectively. We expect our operating and general and administrative expenses and cash used for operations to continue to be significant and increase substantially as we transition to a public company and in connection with our planned research, development and commercialization efforts, including our anticipated creation of a commercial organization. We believe

 

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that the net proceeds from this offering and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund our operations through at least the next 12 months. We have based these estimates, however, on assumptions that may prove to be wrong, and we could spend our available financial resources much faster than we currently expect. Further, we may need to raise additional capital following this offering to fund our operations and continue to conduct clinical trials to support potential regulatory approval of marketing applications.

The amount and timing of our future funding requirements will depend on many factors, including, but not limited to:

 

   

the timing of FDA approval and DEA classification of Subsys, Dronabinol SG Capsule and our other product candidates, if at all;

 

   

the timing and amount of revenue from sales of any of our product candidates, if approved, or revenue from grants or other sources;

 

   

the rate of progress and cost of our clinical trials and other product development programs for our dronabinol product candidates, LEP-ETU product candidate and any other product candidates that we may develop, in-license or acquire;

 

   

costs of establishing or outsourcing sales, marketing and distribution capabilities;

 

   

costs and timing of completion of outsourced commercial manufacturing supply arrangements for each product candidate;

 

   

costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights associated with our product candidates;

 

   

costs of operating as a public company;

 

   

the effect of competing technological and market developments;

 

   

our ability to acquire or in-license products and product candidates, technologies or businesses;

 

   

personnel, facilities and equipment requirements; and

 

   

the terms and timing of any collaborative, licensing, co-promotion or other arrangements that we may establish.

Raising additional funds by issuing securities or through licensing or lending arrangements may cause dilution to you, restrict our operations or require us to relinquish proprietary rights.

We may need to raise additional funds to finance future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. We cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that we raise additional capital by issuing equity securities or convertible debt, your ownership will be diluted. Any future debt financing into which we enter may impose upon us covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, redeem our stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any borrowings under any future debt financing will need to be repaid, which creates additional financial risk for us, particularly if our business or prevailing financial market conditions are not conducive to paying-off or refinancing our outstanding debt obligations. In addition, if we raise additional funds through corporate collaboration and licensing arrangements, it may be necessary to relinquish potentially valuable rights to our product candidates, or grant licenses on terms that are not favorable to us.

If we are unable to raise additional capital when required or on acceptable terms, we may be required to significantly delay, scale back or discontinue one or more of our product development

 

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programs or commercialization efforts, or other aspects of our business plan. We also may be required to relinquish, license or otherwise dispose of rights to product candidates or products that we would otherwise seek to develop or commercialize ourselves on terms that are less favorable than might otherwise be available. In addition, our ability to achieve profitability or to respond to competitive pressures would be significantly limited.

Risks Related to Our Business and Industry

We are highly dependent on the success of Subsys, Dronabinol SG Capsule and our other product candidates, and we cannot give any assurance that any of these product candidates will receive regulatory approval or acceptable DEA classification, or be successfully commercialized.

We currently have no drug products for sale and, to date, we have not successfully commercialized any products. We have expended significant time, resources and effort on the development of our product candidates, and our future results of operations depend heavily on our ability to obtain regulatory approval and acceptable DEA classification, if applicable, for and successfully commercialize our product candidates. Moreover, we do not have internal new drug discovery capabilities, and our primary focus is on developing improved formulations and delivery methods for existing FDA-approved products. In the near-term, we are highly dependent on our ability to obtain regulatory approval for Dronabinol SG Capsule and Subsys.

There can be no guarantee that the FDA will accept any of our submissions and approve any of our product candidates on our anticipated timelines, or at all, including our Dronabinol SG Capsule ANDA and NDA for Subsys. As part of PDUFA, the FDA has a goal to review and act on a percentage of all submissions in a given time frame. The general review goal for a drug application is 10 months for a standard application and six months for a priority review application. The FDA’s review goals are subject to change, and it is unknown whether the review of our NDA filing for Subsys, or a filing for any of our other product candidates, will be completed within the FDA’s review goals or will be delayed. Moreover, the duration of the FDA’s review may depend on the number and types of other NDAs that are submitted to the FDA around the same time period. In addition, the FDA may identify new or additional deficiencies related to our submissions. These deficiencies could require us to take a number of actions that could have a material adverse impact on our operations and business plan, including requiring us to undertake additional time-consuming and expensive clinical trials and manufacturing and testing activities, which could cause significant delay in the review and potential approval of our product candidates, or prevent us from receiving approval at all. Moreover, with respect to Dronabinol SG Capsule, any requirement by the FDA to produce additional test batches could result in significant increased costs and also prevent or significantly delay the potential approval of Dronabinol SG Capsule. In addition, the success of Dronabinol SG Capsule is also important in terms of generating near-term cash flows to help fund the commercialization of Subsys and the development of our proprietary dronabinol and other product candidates, validate our dronabinol supply chain and internal manufacturing capabilities, and allow us to file a supplement to our ANDA for our Dronabinol RT Capsule product candidate.

If we do not obtain regulatory approval and acceptable DEA classification, if applicable, for and successfully commercialize our product candidates, and in particular for Dronabinol SG Capsule or Subsys, on our anticipated timelines or at all, we may be unable to generate sufficient revenues to sustain and grow our business, our reputation would be harmed, our competitive position would be compromised, and our business, financial condition and results of operations will be materially adversely affected. In addition, delays in obtaining regulatory approval for any of our product candidates increases the chances that our competition will produce and obtain regulatory approval for competing products before us, which would likely have a material negative impact upon our competitive position and ability to generate revenue from sales of any approved products. This in turn could have a material adverse effect on our ability to execute on our business plan, develop our other product candidates or achieve or maintain profitability.

 

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With respect to Dronabinol SG Capsule, prior to 2008, the FDA issued two “major deficiency” letters citing various deficiencies relating to our ANDA for our hard gelatin capsule formulation of this product candidate. In response to the FDA’s request, we made new registration batches of soft gelatin capsules and performed a new bioequivalence study. This study was completed and data from this study along with responses to other deficiencies was submitted to the FDA in the form of a major amendment in June 2010. On October 15, 2010, we received a letter from the FDA expressing the need for clarifications related to bioequivalence and we responded to this letter on November 15, 2010. In December 2010, we received a quality deficiency “minor” letter from the FDA requesting information and clarification regarding the raw material components, composition of the three proposed dosage strengths and container closure components, to which we responded in January 2011. Separately in January 2011, we received another deficiency letter from the FDA related to labeling comments to which we also responded in January 2011. On February 10, 2011, we submitted an electronic Final Product Label in response to a request from the FDA. On March 8, 2011, we submitted a labeling amendment in response to an additional request from the FDA. The labeling comments and requests from the FDA related to revisions to our proposed labeling components for consistency with Marinol labeling and certain formatting changes. On July 7, 2011, the FDA notified us of three “telephone” deficiencies to our ANDA for Dronabinol SG Capsule. The “telephone” deficiencies we received related to the request for revised shell formulation information, a blank batch record and a filing by the holder of the Subsys drug master file. The shell formulation information had previously been submitted to the FDA by our third party manufacturer and the holder of the Subsys drug master file had previously submitted the requested filing. On July 11, 2011, we notified the FDA of the prior submissions, and we responded to the FDA’s request for the blank batch record. We believe our response has adequately addressed all the deficiencies. There can be no assurance, however, that the FDA will approve the Dronabinol SG Capsule ANDA based on our response, and the FDA may identify additional deficiencies related to our ANDA. As a general matter, amendments to ANDAs submitted in response to major deficiency letters or amendment requests are given the same review priority as original, non-reviewed ANDAs by the Office of Generic Drugs, or OGD. They are generally placed into the 180-day queue and reviewed in accordance with OGD’s first in-first reviewed procedures. In contrast, ANDA amendments submitted in response to minor FDA deficiency letters or amendment requests are generally given a higher priority review than major amendments because they often mean an ANDA is close to approval and should, therefore, be given priority. The FDA generally reviews minor amendments within 30 to 60 days. As a general matter, “telephone” deficiencies primarily relate to administrative or minor technical issues, and the FDA endeavors to review responses to “telephone” deficiencies upon receipt. Any failure to adequately respond to the FDA’s requests and deficiency notifications could delay approval of Dronabinol SG Capsule and have a material adverse effect on our business plan.

We face significant competition from both branded and generic products, and our operating results will suffer if we fail to compete effectively.

Our industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. We face competition from many different sources, including pharmaceutical and biotechnology companies, specialty pharmaceutical and generic drug companies, drug delivery companies, academic institutions, government agencies and private and public research institutions, many of which have significantly greater financial, technical and other resources than us.

If Subsys receives regulatory approval, it will compete against numerous branded and generic products already being marketed and potentially those which are or will be in development. In the BTCP market, physicians often treat BTCP with a variety of short-acting opioid medications, including morphine, morphine and codeine derivatives and fentanyl. Some currently marketed products against which we will likely directly compete include Cephalon, Inc.’s Fentora and Actiq, BioDelivery Sciences International’s Onsolis, Nycomed International Management GmbH’s Instanyl and ProStrakan Group plc’s Abstral. Some generic fentanyl products against which we will compete are marketed by TEVA Pharmaceuticals USA and Watson Pharmaceuticals, Inc. In addition, we are aware of numerous companies developing other treatments and technologies for rapid delivery of opioids to treat BTCP,

 

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including transmucosal, transdermal, nasal spray, inhaled delivery systems and sublingual delivery systems, among others. For example, Archimedes Pharma Ltd.’s Lazanda, a fentanyl nasal spray solution which has been approved in Europe and in the United States. Additionally, we are aware of companies with product candidates in late stage development for BTCP, including AcelRx Pharmaceuticals, Inc.’s ARX-02 and Akela Pharma Inc.’s Fentanyl TAIFUN, both of which are Phase 3 ready. If these treatments and technologies are successfully developed and approved, they could represent significant additional competition to Subsys. We also expect that sales and marketing efforts for other fentanyl products will increase if and when a classwide REMS program is approved by the FDA, which could make it more difficult for us to compete with a smaller and lower cost sales force.

With respect to our dronabinol product candidates, and in particular our generic Dronabinol SG Capsule, the market in which we will compete is challenging in part because generic products generally do not benefit from patent protection. If any of our dronabinol product candidates, and in particular Dronabinol SG Capsule, receive the requisite regulatory approval and acceptable DEA classification and are marketed, the competition from generic products which we will encounter may have an effect on our product prices, market share, revenues and profitability. We or our distributor may not be able to differentiate any products that we may market from those of our competitors, successfully develop or introduce new products that are less costly or offer better performance than those of our competitors, or offer purchasers of our products payment and other commercial terms as favorable as those offered by our competitors. In addition, there are a number of established therapies and products already commercially available and under development by other companies that treat the indications for which we are developing dronabinol products and with which our product candidates will compete if approved. If we receive regulatory approval and acceptable DEA classification for our dronabinol product candidates, these product candidates will compete against therapies and products such as Abbott Laboratories’ Marinol, Marinol generics and Valeant Pharmaceutical International Inc.’s Cesamet. Moreover, Par Pharmaceutical Companies Inc. markets an approved generic version of Marinol and we believe that other companies are pursuing regulatory approval for generic dronabinol products. We cannot give any assurance that any such other companies will not obtain regulatory approval or acceptable DEA classification for, or commercialize their generic dronabinol products on a more rapid timeline or more successfully than us.

Moreover, our products will compete with non-synthetic cannabinoid drugs, including therapies such as GW Pharmaceuticals plc’s Sativex, especially in many countries outside of the United States where non-synthetic cannabinoids are legal and in the United States if non-synthetic cannabinoids are legalized. The DEA’s proposed rule issued on November 1, 2010, if finalized, would classify naturally-derived dronabinol derived from plant material as a Schedule III controlled substance if part of an approved ANDA. In addition, literature has been published arguing the benefits of natural cannabis, or marijuana, over dronabinol, and there are a number of states that have already enacted laws legalizing medicinal marijuana. Irrespective of its potential medical applications, there is some support in the United States for legalization of marijuana. We also cannot assess the extent to which patients utilize marijuana illegally to alleviate CINV, instead of using prescribed therapies such as approved dronabinol products. Furthermore, in the treatment of CINV, physicians typically offer conventional anti-nausea drugs prior to initiating chemotherapy, such as sanofi-aventis’ Anzemet, Eisai Inc./Helsinn Group’s Aloxi, Roche Holding AG’s Kytril, MonoSol Rx’s Zuplenz and GlaxoSmithKline plc’s Zofran and its generic equivalents, as well as Neurokinin 1 receptor antagonists on the market including ProStrakan’s SANCUSO and Merck & Co., Inc.’s Emend. To the extent that our proprietary dronabinol products compete in a broader segment of the CINV market, we will also face competition from these products.

Additionally, we are aware of companies with product candidates in late stage development for CINV, including A.P. Pharma’s APF530, which has received a Complete Response Letter from the FDA, Aphios Corp.’s Zindol, which is in Phase 2/3 development, Roche Holding/Helsinn Group’s netupitant, which is in Phase 3 development, and Tesaro’s Rolapitant, which is in Phase 2 development. If these products are successfully developed and approved over the next few years, they could represent significant competition for our dronabinol family of product candidates, if any are approved.

 

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Our LEP-ETU product candidate, if approved for the treatment of metastatic breast cancer or other cancer indications, will compete with the leading taxanes currently on the market, including those with formulations that specifically incorporate paclitaxel as the active ingredient such as Bristol-Myers Squibb’s Taxol and its generic equivalents and Celgene Corporation’s Abraxane, as well as other taxanes, such as sanofi-aventis’ Taxotere. Furthermore, LEP-ETU could face future competition, if approved, from Cornerstone Pharmaceuticals’ new formulation of paclitaxel known as EmPac, which is undergoing preclinical studies. In addition, LEP-ETU would compete with other cytotoxic agents beyond the taxane class, including capecitabine, gemcitabine, ixabepilone and navelbine. Additionally, there are numerous biotechnology and pharmaceutical companies that currently have extensive development efforts and resources within oncology. Abbott Laboratories, Amgen Inc., AstraZeneca PLC., Bayer AG, Biogen Idec Inc., Eisai Co., Ltd., F. Hoffmann- LaRoche Ltd., Johnson and Johnson, Merck and Co., Inc., Novartis AG, Onyx Pharmaceuticals Inc., Pfizer Inc., sanofi-aventis and Takeda Pharmaceutical Co. Ltd., are among some of the leading companies researching and developing new compounds in oncology.

We will also face competition from third parties in obtaining allotments of fentanyl and dronabinol under applicable DEA annual quotas, recruiting and retaining qualified personnel, establishing clinical trial sites and enrolling patients in clinical trials, and in identifying and acquiring or in-licensing new products and product candidates.

New developments, including the development of other drug technologies and delivery methods, occur in the pharmaceutical and life sciences industries at a rapid pace. Compared to us, many of our potential competitors have substantially greater:

 

   

research and development resources, including personnel and technology;

 

   

regulatory experience;

 

   

drug development, clinical trial and drug marketing and commercialization experience;

 

   

experience and expertise in intellectual property rights;

 

   

name recognition; and

 

   

capital resources.

As a result of these and other factors, our competitors may obtain FDA approval of their products more rapidly than us or may obtain patent protection or other intellectual property rights that limit our ability to develop or commercialize our product candidates. Our competitors may also develop products that are more effective, better tolerated, subject to fewer or less severe side effects, more useful, more widely-prescribed or accepted, or less costly than ours. If we receive regulatory approvals for our products, sales and marketing efficiency are likely to be significant competitive factors. Our plan is to build a commercial organization without using third-party sales or marketing channels in the United States for most of our proprietary product candidates if approved, and there can be no assurance that we can develop these capabilities in a manner that will be capital efficient and competitive with the sales and marketing efforts of our competitors, especially since some or all of those competitors could expend greater economic resources than we do and/or employ third-party sales and marketing channels.

We are subject to numerous complex regulations and failure to comply with these regulations, or the cost of compliance with these regulations, may harm our business.

The research, testing, development, manufacturing, quality control, approval, labeling, packaging, storage, recordkeeping, promotion, advertising, marketing, distribution, possession and use of our product candidates, among other things, are subject to regulation by numerous governmental authorities in the United States and elsewhere. The FDA regulates drugs under the Federal Food, Drug and Cosmetic Act, or FDC Act, and implementing regulations. Noncompliance with any applicable regulatory requirements can result in refusal to approve products for marketing, warning letters, product recalls or seizure of products, total or partial suspension of production, prohibitions or

 

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limitations on the commercial sale of products or refusal to allow the entering into of federal and state supply contracts, fines, civil penalties and/or criminal prosecution. Additionally, the FDA and comparable governmental authorities have the authority to withdraw product approvals that have been previously granted. Moreover, the regulatory requirements relating to our products may change from time to time and it is impossible to predict what the impact of any such changes may be.

We are developing product candidates that are controlled substances as defined in the Controlled Substances Act of 1970, or CSA, which establishes, among other things, certain registration, production quotas, security, recordkeeping, reporting, import, export and other requirements administered by the DEA. The DEA regulates controlled substances as Schedule I, II, III, IV or V substances. Schedule I substances by definition have high potential for abuse, no currently accepted medical use in the United States and lack accepted safety for use under medical supervision, and may not be marketed or sold in the United States. Except for research and industrial purposes, a pharmaceutical product may be listed as Schedule II, III, IV or V, with Schedule II substances considered to present the highest risk of abuse and Schedule V substances the lowest relative risk of abuse among such substances. Fentanyl is listed by the DEA as a Schedule II substance under the CSA. Dronabinol in sesame oil and encapsulated in a soft gelatin capsule in the form previously approved by the FDA for the commercial sale of Marinol is currently listed by the DEA as a Schedule III substance under the CSA. Dronabinol in bulk or other product forms is currently classified by the DEA as a Schedule I substance under the CSA. If the FDA approves formulations of dronabinol which differ from Marinol, the DEA will have to make a scheduling determination and place the products in a schedule other than Schedule I in order for such products to be marketed to patients in the United States.

The manufacture, shipment, storage, sale and use, among other things, of controlled substances that are pharmaceutical products are subject to a high degree of regulation. For example, generally all Schedule II substance prescriptions, such as prescriptions for fentanyl, must be written and signed by a physician, physically presented to a pharmacist and may not be refilled without a new prescription.

The DEA also conducts periodic inspections of certain registered establishments that handle controlled substances. Facilities that conduct research, manufacture, distribute, import or export controlled substances must be registered to perform these activities and have the security, control and inventory mechanisms required by the DEA to prevent drug loss and diversion. Failure to maintain compliance, particularly non-compliance resulting in loss or diversion, can result in regulatory action that could have a material adverse effect on our business, results of operations, financial condition and prospects. The DEA may seek civil penalties, refuse to renew necessary registrations, or initiate proceedings to restrict, suspend or revoke those registrations. In certain circumstances, violations could lead to criminal proceedings.

Individual states also have controlled substances laws. Though state controlled substances laws often mirror federal law, because the states are separate jurisdictions, they may separately schedule our product candidates as well. While some states automatically schedule a drug when the DEA does so, other states schedule drugs through rulemaking or a legislative action. State scheduling may delay commercial sale of any product for which we obtain federal regulatory approval and adverse scheduling could have a material adverse effect on the commercial attractiveness of such product. We or our partners must also obtain separate state registrations, permits or licenses in order to be able to obtain, handle, and distribute controlled substances for clinical trials or commercial sale, and failure to meet applicable regulatory requirements could lead to enforcement and sanctions by the states in addition to those from the DEA or otherwise arising under federal law.

The anticipated development of a REMS program for Subsys could cause significant delays in the approval process and would add additional layers of regulatory requirements that could significantly impact our ability to commercialize Subsys and dramatically reduce its market potential.

Section 505-1 of the FDC Act permits the FDA to require sponsors to submit a proposed REMS program to ensure the safe use of the drugs in question following commercial approval. A REMS program

 

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is a strategic safety program that the FDA requires to ensure that the benefits of a drug continue to outweigh its risks. In determining whether a REMS program is necessary, the FDA must consider the size of the population likely to use the drug, the seriousness of the disease or condition to be treated, the expected benefit of the drug, the duration of treatment, the seriousness of known or potential adverse events, and whether the drug is a new molecular entity. A REMS program may be required to include various elements, such as a medication guide, patient package insert, a communication plan, elements to assure safe use, and an implementation system, and must include a timetable for assessment of the REMS program. Elements to assure safe use can restrict the prescribing, sale and distribution of drug products.

In September 2007 and in December 2007, the FDA issued a safety alert to healthcare professionals and consumers concerning recent reports of deaths and other adverse events in patients using approved TIRF products. The FDA has determined that TIRF products will be required to have a REMS program to ensure that the benefits of the drugs continue to outweigh the serious risks of overdose, abuse, misuse, addiction and serious complications due to medication errors. A classwide REMS program is being developed jointly by all manufacturers and IND application holders of TIRF products, and we participate actively in this program. This REMS program is expected to be a single shared program across the TIRF class of products. We expect that the FDA will approve a classwide REMS program in the second half of 2011. In addition, we continue to pursue a REMS program specific to our company as a potential alternative to the classwide REMS program.

There can be no assurance that the FDA will approve the classwide REMS program or our alternative individual REMS program that we submitted as part of our NDA submission on our anticipated timeline, or at all. Delays in the REMS program approval process could result in significant delays in the approval process for Subsys. In addition, as part of the REMS program relating to Subsys, the FDA could require significant restrictions, such as restrictions on the prescribing, distribution and patient use of the product, which could significantly impact our ability to effectively commercialize Subsys and dramatically reduce its market potential.

We have recently taken a number of significant actions aimed at growing our business and will need to further increase the size and complexity of our organization in the future, and we may experience difficulties in managing our growth and executing our growth strategy.

Our management and personnel, systems and facilities currently in place may not be adequate to support our business plan and future growth. In November 2010, we completed the Merger, which resulted in Insys Pharma becoming our wholly-owned subsidiary. Prior to the Merger, Insys Pharma in September 2009 obtained assets which have given us the ability to manufacture our supply of dronabinol API internally through our manufacturing facility in Texas. Both of these transactions have significantly increased the complexity of our business operations. We recently expanded our management team and board of directors. In addition, we grew the number of our full-time employees from 12 as of December 31, 2009 to 28 as of July 15, 2011, due in large part to the Merger and subsequent organic growth. We will need to further expand our managerial, operational, financial and other resources, and build a sales force and marketing infrastructure, in order to manage and fund our future operations and clinical trials, continue our research and development activities, and commercialize our product candidates, if approved.

Our need to effectively manage our operations, growth and various projects requires that we:

 

   

continue to improve our operational, financial and management controls and reporting systems and procedures;

 

   

attract and retain sufficient numbers of talented employees;

 

   

manage our clinical trials effectively;

 

   

manage our internal dronabinol production operations effectively and in a cost effective manner;

 

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manage our development efforts effectively while carrying out our contractual obligations to licensors, contractors and other third parties; and

 

   

continue to improve our facilities.

In addition, historically, we have utilized and continue to utilize the services of part-time outside consultants to perform a number of tasks for us, including tasks related to accounting and finance, clinical trial management, regulatory affairs, formulation development and other drug development functions. For example, in addition to seeking advice from our scientific advisory board, we utilize consultants for tasks such as state licensing procurement and accounting and book-keeping services. Our growth strategy may also entail expanding our use of consultants to implement these and other tasks going forward. Because we rely on consultants for certain functions of our business, we will need to be able to effectively manage these consultants to ensure that they successfully carry out their contractual obligations and meet expected deadlines. There can be no assurance that we will be able to manage our existing consultants or find other competent outside consultants, as needed, on economically reasonable terms, or at all. If we are not able to effectively expand our organization by hiring new employees and expanding our use of consultants, we may be unable to successfully implement the tasks necessary to further develop and commercialize our product candidates and, accordingly, may not achieve our research, development and commercialization goals.

If we are unable to establish sales and marketing capabilities or execute on our sales and marketing strategy, we may not be able to effectively market and sell any approved products and generate product revenue.

We do not currently have an organization for the sales, marketing and distribution of pharmaceutical products, and we must build this organization, make arrangements with third parties or rely on current distribution partners to perform these functions in order to commercialize any products we successfully develop and for which we obtain regulatory approvals and acceptable DEA classifications, if applicable.

If Dronabinol SG Capsule or Dronabinol RT Capsule is approved, we intend to distribute these products through Mylan pursuant to our May 2011 supply and distribution agreement. In the event that Mylan fails to adequately commercialize these product candidates, if approved or because it lacks adequate financial or other resources, decides to focus on other initiatives or otherwise, our business, financial condition, results of operations and prospects would be harmed. In addition, our agreement with Mylan may be terminated early by either party under certain circumstances. If Mylan terminated its agreement with us, we may not be able to secure an alternative distributor on a timely basis or at all, in which case we may be required to commercialize Dronabinol SG Capsule or Dronabinol RT Capsule on our own which would be costly and require significant time and resources. In such an event, our ability to generate revenues from the sale of Dronabinol SG Capsule or Dronabinol RT Capsule, if approved, would be materially harmed.

If Subsys or our other proprietary dronabinol product candidates are approved, we expect to utilize an incentive-based sales model to market those products similar to that employed at Sciele Pharma and other companies previously led by members of our board, including our founder and Executive Chairman. Under this model, we expect to maintain a smaller and lower cost commercial organization than many of our competitors, which could hinder our efforts to broadly market any products that we are able to commercialize as compared to our competitors. The establishment of a commercial organization may be costly and time consuming and could delay any product launch. We cannot be certain that we will be able to successfully develop these capabilities on the economic terms we currently anticipate, if at all. If we are unable to establish our sales and marketing capabilities or any other capabilities as currently anticipated, we will need to consider alternatives, such as entering into arrangements with third parties to market and sell such products. Such an arrangement would likely result in significantly greater sales and marketing expenses or lower revenues than currently estimated in our business plan.

 

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Moreover, although we expect to rely on a sales model similar to that employed at companies previously led by members of our board of directors, we cannot assure you that we will be able to effectively implement such a model to market our products.

To the extent we receive the requisite approvals to market our product candidates internationally, we plan to enter into arrangements with third parties to market and sell our products as opposed to building an international commercial organization. We currently possess limited sales and marketing resources and may not be successful in establishing our own commercial organization for the United States or in establishing arrangements with third parties for international sales on acceptable terms, if at all.

We produce our dronabinol API internally and may encounter manufacturing failures that could delay the preclinical and clinical development or regulatory approval of our dronabinol product candidates, or their commercial production if approved.

Any performance failure on the part of our internal dronabinol API manufacturing operations could delay the preclinical and clinical development or regulatory approval of our dronabinol product candidates, and harm our reputation. Our internal manufacturing operations may encounter difficulties involving, among other things, production yields, regulatory compliance, quality control and quality assurance, obtaining DEA quotas which allow us to produce dronabinol in the quantities needed to execute on our business plan, as well as shortages of qualified personnel. Approval of our dronabinol product candidates could be delayed, limited or denied if the FDA does not approve and maintain the approval of our manufacturing processes and facilities. In addition, we may encounter difficulties with the manufacturing processes required to manufacture commercial quantities of dronabinol or the quantities needed for our preclinical studies or clinical trials. We are especially prone to such difficulties because we have no experience producing dronabinol in commercial quantities. Such difficulties could result in delays in our preclinical studies, clinical trials and regulatory submissions, in the commercialization of our product candidates if approved, or, in the recall or withdrawal of approved products from the market. If we fail to produce the required commercial quantities or quantities needed for our preclinical studies and clinical trials on a timely basis and upon terms that we find acceptable, we may be unable to meet demand for any of our product candidates that may receive approval, and could lose potential revenue.

We are only aware of two other manufacturers that are able to produce dronabinol in the United States. We are aware of only five manufacturers that hold Drug Master Files for the production of dronabinol in the United States. Because dronabinol is a controlled substance, inability to manufacture dronabinol in the United States would have a material adverse effect on our business given the regulatory restrictions associated with obtaining authorization to import and transport controlled substances into the United States. Moreover, we believe dronabinol is difficult to produce and if there was any problem in manufacturing it internally, we may not be able to identify a third party to manufacture it for us in a cost effective manner, if at all.

We must comply with current good manufacturing practices, or cGMP, enforced by the FDA through its facilities inspection program and review of submitted technical information. In addition, we must obtain and maintain necessary DEA and state registrations, and must establish and maintain processes to assure compliance with DEA and state requirements governing, among other things, the storage, handling, security, recordkeeping and reporting for controlled substances. We must also apply for and receive a quota for these products. Any failure to comply with these requirements may result in penalties, including fines and civil penalties, suspension of production, suspension or delay in product approvals, product seizure or recall, operating restrictions, criminal prosecutions or withdrawal of product approvals, any of which could significantly and adversely affect our business. If the safety of any drug product or component is compromised due to a failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize the affected product candidate, and we may be held liable for any injuries sustained as a result. Any of these factors could cause a delay or termination of preclinical studies and clinical trials, regulatory

 

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submissions, approvals or commercialization of our product candidates if approved, entail higher costs or result in our being unable to effectively commercialize our approved products. Certain changes in our dronabinol API manufacturing processes or procedures, including a change in the location where the material is manufactured, generally require prior FDA, or foreign regulatory authority, review and/or approval. We may need to conduct additional preclinical studies and clinical trials to support approval of such changes. This review and approval process may be costly and time-consuming, and could delay or prevent the launch of a product candidate.

We have no internal manufacturing capabilities other than for our dronabinol API, and if we fail to develop and maintain supply and manufacturing relationships with various third parties, we may be unable to develop or commercialize many of our product candidates.

We rely on a number of third parties for the development of our product candidates and their commercialization, if approved. Our ability to develop and commercialize many of our product candidates depends, in part, on our ability to successfully obtain the API (or starting materials for the API, as the case may be) and outsource most if not all of the aspects of their manufacturing at competitive costs, in accordance with regulatory requirements and in sufficient quantities for clinical testing and eventual commercialization. If we fail to develop and maintain supply relationships with these third parties, we may be unable to develop or commercialize our product candidates.

Manufacturers and suppliers are subject to regulatory requirements covering, among other things, manufacturing, testing, quality control and recordkeeping relating to our product candidates, and are subject to ongoing inspections by FDA, DEA and other regulatory agencies. We purchase the fentanyl API utilized in connection with Subsys and the starting materials for our dronabinol API from several third parties. We do not have long-term agreements with any of these parties, but rather purchase material on a purchase order basis. Moreover, some of the starting material for our dronabinol API is difficult to procure and produce. Our ability to obtain fentanyl API and the starting materials for our dronabinol API in sufficient quantities and quality, and on a timely basis, is critical to the successful completion of our related preclinical studies and clinical trials and the timeliness of their commercial sale. There is no assurance that these suppliers will continue to produce the materials in the quantities and quality and at the times they are needed, if at all, especially in light of the fact that we intend to significantly increase our orders for these materials in the near future, if approved. Moreover, the replacement of any of these suppliers, particularly the supplier of the starting material for our dronabinol API that is difficult to produce, could lead to significant delays and increase in our costs.

Our Dronabinol SG Capsule is manufactured and packaged by Catalent Pharma Solutions, and we have contracted with Mylan for the distribution of our Dronabinol SG Capsule. Our Subsys sub-component manufacturing is performed by AptarGroup, Inc., with the final fill, assembly and packaging of Subsys performed by DPT Lakewood, LLC, or DPT. We have contracts in place with Catalent Pharma Solutions, Mylan, AptarGroup and DPT. If there are problems relating to the equipment utilized to manufacture Subsys, we will be responsible for fixing or replacing that equipment. Any requirement to do so could result in unexpected costs and expenses and delay the production of this product candidate which could in turn negatively impact our business and development efforts.

The manufacture of pharmaceutical products generally requires significant expertise and capital investment, often including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up and validating initial production. These problems can include difficulties with production costs and yields, quality control, including stability of the product, quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. We cannot assure you that any such issues relating to the manufacture of any of our products will not occur in the future. Additionally, our manufacturers may experience manufacturing difficulties due to resource constraints or as a result of labor disputes or unstable political environments. If our manufacturers were to encounter any of these difficulties, or otherwise fail to comply with their

 

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contractual obligations, our ability to commercially launch any approved product candidates or provide any product candidates for preclinical studies or clinical trials could be jeopardized. Any delay or interruption in our ability to commercialize approved product candidates will result in the loss of potential revenues and could adversely affect our ability to gain market acceptance for these products. In addition, any delay or interruption in the supply of preclinical study or clinical trial supplies could delay the completion of those studies or trials, increase the costs associated with maintaining our programs and, depending upon the period of delay, require us to commence new studies or trials at additional expense or terminate studies or trials completely.

Moreover, the facilities used by our third-party manufacturers must be approved by the applicable regulatory authorities. We do not control the manufacturing processes of third-party manufacturers and are currently completely dependent on them. If any of our third-party manufacturers cannot successfully manufacture product that conforms to our specifications and the applicable regulatory authorities’ strict regulatory requirements, they will not be able to secure or maintain regulatory approval for the manufacturing facilities. In addition, we have no control over the ability of third-party manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or any other applicable regulatory authorities do not approve these facilities for the manufacture of our product candidates or if they withdraw any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market any approved product candidates.

Failures by the third-party suppliers or manufacturers could materially adversely affect our business and delay or impede the development and commercialization of our product candidates, and could have a material adverse effect on our business, results of operations, financial condition and prospects. And in the event we need to replace a current supplier or manufacturer, we cannot assure you that we would be able to do so on a timely basis or in a cost effective manner, or at all.

If we fail to attract and keep management and other key personnel, as well as our board members, we may be unable to successfully develop or commercialize our product candidates and implement our business plan.

Our ability to compete in the highly competitive biotechnology and pharmaceuticals industries depends upon our ability to attract and retain highly qualified managerial, scientific, medical and other personnel. We are highly dependent on our management, scientific and medical personnel, as well as our board members, including our founder and Executive Chairman, Dr. John N. Kapoor, our President and Chief Executive Officer, Michael L. Babich, our Director of Scientific Development, Dr. Daniel D. Von Hoff, and our Chief Medical Officer, Dr. Larry Dillaha. The loss of the services of any of these individuals could delay or prevent the development and commercialization of our product candidates and negatively impact our ability to successfully implement our business plan. If we lose the services of any of these individuals, we may not be able to find suitable replacements on a timely basis or at all, and our business would likely be harmed as a result. We do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. We employ all of our executive officers and key personnel on an at-will basis and their employment can be terminated by us or them at any time, for any reason and without notice. In order to retain valuable employees at our company, in addition to salary and cash incentives, we provide incentive stock options that vest over time. The value to employees of stock options that vest over time will be significantly affected by movements in our stock price that are beyond our control, and may at any time be insufficient to counteract offers from other companies.

We may not be able to attract or retain qualified management and other key personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in the Phoenix, Arizona area where we are headquartered and nearby geographic locales such as Southern California. Our industry has experienced a high rate of turnover of management personnel in recent years. As such, we could have difficulty attracting experienced

 

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personnel to our company and may be required to expend significant financial resources in our employee recruitment and retention efforts. Many of the other biotechnology and pharmaceutical companies with whom we compete for qualified personnel have greater financial and other resources, different risk profiles and longer histories in the industry than we do. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high quality candidates than that which we have to offer. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will impede significantly the achievement of our business objectives, our ability to raise additional capital and our ability to implement our business strategy.

In addition, we have scientific and clinical advisors who assist us in formulating our development and clinical strategies. These advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. In addition, our advisors may have arrangements with other companies to assist those companies in developing products or technologies that may compete with ours.

Our short operating history as a combined company and the recent additions to our management team and board of directors make it difficult to evaluate our business and prospects and may increase the risk of your investment.

In November 2010, we completed the Merger, which resulted in Insys Pharma becoming our wholly-owned subsidiary. We therefore have a short operating history as a combined company. Moreover, our business has had limited operations in the several years immediately prior to the Merger. Our Chief Executive Officer joined Insys Pharma in 2007 and was appointed as our Chief Executive Officer in March 2011. Our Chief Financial Officer was promoted to that position from Corporate Controller in March 2011. Our Chief Medical Officer joined Insys Pharma in April 2010. Our Director of Scientific Development started working with us in December 2010. Moreover, several members of our board of directors joined us in March 2011. In addition, we have not yet demonstrated an ability to obtain regulatory approval for or commercialize any product candidate. Consequently, any predictions about our future performance may not be as accurate as they could be if we had a history of successful development and commercialization of pharmaceutical products or if our management team and board or directors had been with us and working together for a longer period of time.

Failure to obtain or maintain Schedule III classification for any of our dronabinol product candidates would substantially limit our ability to produce and commercialize any such product candidates.

The DEA generally regulates dronabinol as a Schedule I controlled substance, except in the case of the FDA-approved Marinol product and its generics, which are Schedule III controlled substances. Schedule I controlled substances have high potential for abuse, no currently accepted medical use in the United States and lack accepted safety for use under medical supervision and may not lawfully be commercially sold or marketed to patients. After the initial FDA approval of Marinol in 1985, the DEA scheduled dronabinol in sesame oil and encapsulated in a soft gelatin capsule as a Schedule II substance. In 1999, the DEA promulgated a regulation that reclassified this formulation as a Schedule III controlled substance. This regulation directly corresponds to the product characteristics of Marinol, whose sponsor had petitioned the DEA for the scheduling change. DEA regulations currently limit the formulation of FDA-approved dronabinol products that are classified in Schedule III. Specifically, classification in Schedule III is limited to “dronabinol (synthetic) in sesame oil and encapsulated in a soft gelatin capsule in” an FDA-approved product. There is a possibility that some generic versions of Marinol would not meet these specific conditions, and therefore, would not be classified as a Schedule III substance, but rather would be considered as Schedule I products until otherwise scheduled for marketing. Currently, several products are the subject of ANDAs under review by the FDA, including our application for Dronabinol SG Capsule. On November 1, 2010, the DEA issued a Notice of Proposed Rulemaking concerning the listing of approved drug products containing dronabinol in Schedule III. The DEA proposed rulemaking would

 

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amend the scheduling regulations to expand the Schedule III listing of dronabinol to include formulations having naturally-derived dronabinol and in hard gelatin capsules. If this ruling is allowed, it may increase the number of generics approved as we believe there are active ANDAs which utilize naturally-derived dronabinol and hard gelatin capsule technology. The DEA may ultimately schedule Dronabinol SG Capsule and Dronabinol RT Capsule, if approved, under a schedule other than Schedule III. These product candidates are also subject to regulation by state-controlled substance authorities. We cannot assure you that Dronabinol SG Capsule and Dronabinol RT Capsule, if approved, will be classified as Schedule III substances, in the timeline that we currently anticipate, or at all.

In addition, because the DEA currently regulates the scheduling of dronabinol on a product-specific basis as opposed to regulating all dronabinol-containing products under one schedule, we believe that the DEA will also need to make individual scheduling decisions with respect to our proprietary dronabinol product candidates if approved, based on, among other factors, assessments of the drug abuse potential for each of our formulations. Therefore, even if the DEA agrees to classify Dronabinol SG Capsule under Schedule III, because our other proprietary dronabinol product candidates will, if approved, represent novel dosage forms, and in the case of the Dronabinol Inhalation Device, a novel route of administration for dronabinol, the DEA may determine that stricter scheduling controls than those applicable to Schedule III controlled substances are appropriate for the additional product candidates. In fact, these product candidates will likely default to Schedule I until the DEA completes a scheduling action for them. Moreover, there may be significant delay in the issuance of DEA’s scheduling decisions with respect to our products following FDA approval, if such approval is granted. Even with FDA approval, we will not be able to market any of our controlled substance products until the DEA has issued a scheduling decision with respect to each drug product.

Because the restrictions on the manufacture, sale, distribution, prescribing, and dispensing of Schedule II substances are greater than for Schedule III substances, failure to obtain Schedule III classification for our dronabinol product candidates could significantly impact our anticipated ability to produce and commercialize any such dronabinol products and would have a material adverse effect on our business and ability to generate revenue. For example, Schedule II drugs or substances generally may not be dispensed without the written prescription of a practitioner, and prescriptions for these drugs or substances may not be refilled. Although the DEA regulates the frequency of Schedule III prescription refills, physicians may call in the prescriptions and they may be refilled. A failure by the DEA to respond favorably to our classification petition before, or in a timely manner after, FDA approval of our dronabinol product candidates, and in particular our Dronabinol SG Capsule product candidate, or a refusal by the DEA to grant our request to schedule our dronabinol product candidates under Schedule III, if approved by the FDA, would have an adverse impact on our ability to promptly or effectively commercialize such products.

Even if we obtain regulatory approvals and acceptable DEA classifications for our fentanyl and dronabinol product candidates or any other product candidate, if those products do not achieve broad market acceptance among physicians, patients, hospitals, healthcare payors and the medical community, we will likely generate limited revenues from sales of those products.

Even if our product candidates receive regulatory approval and acceptable DEA classification, if applicable, they may not gain market acceptance among physicians, patients, healthcare payors, the medical community and other third parties. Coverage and reimbursement of our product candidates by third-party payors, including government payors, generally is also necessary for commercial success. The degree of market acceptance of any of our approved products will depend on a number of factors, including:

 

   

the clinical indications for which the product is approved;

 

   

our ability to provide acceptable evidence of safety and efficacy, and acceptance by physicians and patients of the product as a safe and effective treatment;

 

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the relative convenience and ease of administration, and with respect to Dronabinol RT Capsule, our expectation that this product will be preferred over cool or refrigerated storage versions of dronabinol;

 

   

pricing and cost effectiveness;

 

   

a final REMS program applicable to Subsys;

 

   

the prevalence and severity of any adverse side effects;

 

   

warnings or limitations contained in a product’s FDA-approved labeling;

 

   

the DEA and state scheduling classification;

 

   

our ability to maintain compliance with regulatory requirements;

 

   

the availability of alternative treatments, and the perceived advantages of one product over alternative treatments;

 

   

the effectiveness of our sales, marketing and distribution strategies, particularly the targeted commercial organization we anticipate building and the efforts of our distribution partners, including Mylan; and

 

   

our ability to obtain sufficient third-party coverage or reimbursement.

Our ability to successfully sell generic products in particular, such as Dronabinol SG Capsule if approved, depends in large part on the acceptance of those products by third parties such as wholesalers, pharmacies, physicians and patients. Although the brand-name products generally have been marketed safely for many years prior to the introduction of a generic alternative, there is a possibility that one of our generic products could produce an unanticipated clinical side effect, or be considered less effective or less convenient, or otherwise inferior, to the branded product, which could result in an adverse effect on our ability to achieve acceptance by third parties.

In addition, fentanyl and dronabinol treatments can be costly to third-party payors and patients. Accordingly, hospitals and physicians may resist prescribing our products and third-party payors and patients may not purchase our products due to cost. If any of our product candidates are approved and receive acceptable DEA classifications but do not achieve an adequate level of acceptance by physicians, patients, hospitals, healthcare payors and the medical community, we may not generate sufficient revenue from these products and we may not become or remain profitable.

Furthermore, the potential market for dronabinol products may not expand as anticipated or may even decline based on numerous factors, including the introduction of superior alternative products and regulatory action negatively impacting the dronabinol market. Moreover, even if we obtain regulatory approval for our dronabinol product candidates and they are successfully commercialized, there is no guarantee that introduction of improved formulations of dronabinol will result in expansion of the dronabinol market or permit us to gain share in that market or maintain or increase any market share we may capture. New dronabinol products that we introduce could potentially replace our then currently marketed dronabinol products, thus not impacting the overall size of the market or increasing our overall share of that market. If we are unable to expand the market for the medical use of dronabinol or gain, maintain or increase market share in that market, this failure would have a material adverse effect on our ability to execute on our business plan and ability to generate revenue.

Even if our Dronabinol SG Capsule is approved by the FDA and classified as a Schedule III substance by the DEA, the FDA may not conclude that our planned approach for regulatory approval for Dronabinol RT Capsule is appropriate and may require us to provide additional data prior to approval.

If our Dronabinol SG Capsule is approved by the FDA and classified as a Schedule III substance by the DEA, we intend to submit an sANDA for a dronabinol soft gel formulation that is stable at room

 

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temperature, or Dronabinol RT Capsule. If the FDA does not allow us to pursue the sANDA pathway, we may be required to conduct additional clinical trials, provide additional data and information, and meet additional standards for regulatory approval. If this were to occur, the time and financial resources required to obtain FDA approval for Dronabinol RT Capsule, and the complications and risks associated with this product candidate, may increase. Moreover, the inability to obtain regulatory approval of Dronabinol RT Capsule through an sANDA would likely delay our ability to market this product on the timeline anticipated, and potentially result in competitors’ products reaching the market more quickly than our product candidate, which could materially adversely impact our competitive position and prospects. Even if we are allowed to pursue regulatory approval via an sANDA, we cannot assure you that Dronabinol RT Capsule will receive the requisite approvals and acceptable DEA classification for commercialization.

If the FDA does not conclude that certain of our product candidates satisfy the requirements for the Section 505(b)(2) regulatory approval pathway, or if the requirements for such product candidates under Section 505(b)(2) are not as we expect, the approval pathway for those product candidates will likely take significantly longer, cost significantly more and entail significantly greater complications and risks than anticipated, and in either case may not be successful.

We are developing several proprietary dronabinol product candidates, including Dronabinol Oral Solution, Dronabinol Inhalation Device and Dronabinol IV Solution, for which we intend to seek FDA approval through the Section 505(b)(2) regulatory pathway. In addition, we have submitted an NDA for approval of Subsys under Section 505(b)(2) of the FDC Act. Section 505(b)(2), if applicable to us under the FDC Act would allow an NDA we submit to FDA to rely in part on data in the public domain or the FDA’s prior conclusions regarding the safety and effectiveness of approved compounds, which could expedite the development program for our product candidates by potentially decreasing the amount of clinical data that we would need to generate in order to garner FDA approval. If the FDA does not allow us to pursue the Section 505(b)(2) regulatory pathway as anticipated, we may need to conduct additional clinical trials, provide additional data and information, and meet additional standards for regulatory approval. If this were to occur, the time and financial resources required to obtain FDA approval for these product candidates, and complications and risks associated with these product candidates, would likely substantially increase. We would likely need to obtain substantially more additional funding than currently anticipated, which could result in significant dilution to the ownership interests of our then existing stockholders to the extent we issue equity securities or convertible debt. We cannot assure you that we would be able to obtain such additional financing on terms acceptable to us, if at all. Moreover, inability to pursue the Section 505(b)(2) regulatory pathway would likely result in new competitive products reaching the market more quickly than our product candidates, which would likely materially adversely impact our competitive position and prospects. Even if we are allowed to pursue the Section 505(b)(2) regulatory pathway, we cannot assure you that our product candidates will receive the requisite approvals for commercialization.

In addition, notwithstanding the approval of a number of products by the FDA under Section 505(b)(2) over the last few years, certain brand-name pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA’s interpretation of Section 505(b)(2) is successfully challenged, the FDA may be required to change its 505(b)(2) policies and practices, which could delay or even prevent the FDA from approving any NDA that we submit under Section 505(b)(2). In addition, the pharmaceutical industry is highly competitive, and Section 505(b)(2) NDAs are subject to special requirements designed to protect the patent rights of sponsors of previously approved drugs that are referenced in a Section 505(b)(2) NDA. These requirements may give rise to patent litigation and mandatory delays in approval of our NDAs for up to 30 months or longer depending on the outcome of any litigation. It is not uncommon for a manufacturer of an approved product to file a citizen petition with the FDA seeking to delay approval of, or impose additional approval requirements for, pending competing products. If successful, such petitions can significantly delay, or even prevent, the approval of the new product. However, even if the FDA

 

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ultimately denies such a petition, the FDA may substantially delay approval while it considers and responds to the petition. In addition, even if we are able to utilize the Section 505(b)(2) regulatory pathway, there is no guarantee this would ultimately lead to accelerated drug development or earlier approval.

Moreover, even if our product candidates are approved under Section 505(b)(2), the approval may be subject to limitations on the indicated uses for which the products may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the products.

Annual DEA quotas on the amount of dronabinol allowed to be produced in the United States and our specific allocation of dronabinol by the DEA could significantly limit the clinical development of our dronabinol product candidates as well as the production or sale of any dronabinol product candidates for which we obtain regulatory approval.

Dronabinol, a Schedule I substance, is subject to the DEA’s production and procurement quota scheme. The DEA establishes annually an aggregate quota for the amount of dronabinol that may be produced in the United States based on the DEA’s estimate of the quantity needed to meet legitimate scientific and medicinal needs. This limited aggregate amount of dronabinol that the DEA allows to be produced in the United States each year is allocated among individual companies, who must submit applications annually to the DEA for individual production and procurement quotas. We are required to obtain an annual quota from the DEA in order to manufacture and produce dronabinol. The DEA may adjust aggregate production quotas and individual production and procurement quotas from time to time during the year and has substantial discretion in deciding whether or not to make such adjustments. The DEA’s aggregate production quota for dronabinol was 312.5 kilograms for each of 2005, 2007, 2008 and 2009. The aggregate production quota for 2006 was 338 kilograms and for 2010 was 264 kilograms. For 2011, this aggregate production quota was increased to 393.0 kilograms. For 2011, we were allocated what we believe is a sufficient quantity of dronabinol to meet our currently anticipated testing and production needs through 2011. However, we may need additional amounts of dronabinol in future years to implement our business plan.

In terms of the allocation of our dronabinol quota for 2011, a significant portion will be used for our planned production of Dronabinol SG and Dronabinol RT Capsules, if approved. Because we are allocated a finite amount of dronabinol for 2011, changes in the amount of dronabinol used for a certain purpose will impact other parts of our business plan utilizing dronabinol.

We do not know what amounts of dronabinol other companies developing dronabinol product candidates may have requested for 2011 or will request in future years. The DEA, in assessing factors such as medical need, abuse potential and other policy considerations, may have chosen to set the aggregate dronabinol quota for 2011 lower than the total amount requested by the companies, and may do so in the future. Though companies are permitted to petition the DEA to increase the aggregate quota for dronabinol in a given year after it is initially established, there is no guarantee the DEA would act promptly or favorably upon such a petition. The success of our business plan will depend in part on our being able to expand the overall market for the medical use of dronabinol by introducing new dronabinol formulations, and to sell significant amounts of our approved dronabinol products. In order to do so, we will need to receive from the DEA significantly increased allotments of dronabinol quotas over time and likely an increase in the aggregate annual quota. Any delay or refusal by the DEA in establishing quotas necessary for us to execute on our business plan could negatively impact our preclinical studies and clinical trials, as well as our ability to sell any approved products, which would in turn have a material adverse effect on our business, our ability to execute on our business plan, our financial position and results of operations, our prospects, and our ability to generate revenue to fund the development of our other product candidates.

 

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Clinical trials for our product candidates are expensive, time consuming, uncertain and susceptible to change, delay or termination.

Clinical trials are very expensive, time consuming and difficult to design and implement. Even if the results of our clinical trials are favorable, we estimate that the clinical trials for a number of our product candidates will continue for several years and may take significantly longer than expected to complete. In addition, we, the FDA, an Institutional Review Board, or other regulatory authorities, including state and local, may suspend, delay or terminate our clinical trials at any time, or the DEA could suspend or terminate the registrations and quota allotments we require in order to procure and handle controlled substances, for various reasons, including:

 

   

lack of effectiveness of any product candidate during clinical trials;

 

   

discovery of serious or unexpected toxicities or side effects experienced by study participants or other safety issues;

 

   

slower than expected rates of subject recruitment and enrollment rates in clinical trials;

 

   

difficulty in retaining subjects who have initiated a clinical trial but may withdraw at any time due to adverse side effects from the therapy, insufficient efficacy, fatigue with the clinical trial process or for any other reason;

 

   

delays or inability in manufacturing or obtaining sufficient quantities of materials for use in clinical trials, in particular obtaining sufficient quantities of dronabinol and fentanyl due to regulatory and manufacturing constraints;

 

   

inadequacy of or changes in our manufacturing process or product formulation;

 

   

delays in obtaining regulatory authorization to commence a study, or “clinical holds” or delays requiring suspension or termination of a study by a regulatory agency, such as the FDA, before or after a study is commenced;

 

   

DEA-related recordkeeping, reporting, or security violations at a clinical site, leading the DEA or state authorities to suspend or revoke the site’s controlled substance license and causing a delay or termination of planned or ongoing studies;

 

   

changes in applicable regulatory policies and regulations;

 

   

delays or failure in reaching agreement on acceptable terms in clinical trial contracts or protocols with prospective clinical trial sites;

 

   

uncertainty regarding proper dosing;

 

   

unfavorable results from ongoing clinical trials and preclinical studies;

 

   

failure of our contract research organizations, or CROs, or other third-party contractors to comply with all contractual and regulatory requirements or to perform their services in a timely or acceptable manner;

 

   

failure by us, our employees, our CROs or their employees to comply with all applicable FDA, DEA or other regulatory requirements relating to the conduct of clinical trials or the handling, storage, security and recordkeeping for controlled substances;

 

   

scheduling conflicts with participating clinicians and clinical institutions;

 

   

failure to design appropriate clinical trial protocols;

 

   

insufficient data to support regulatory approval;

 

   

inability or unwillingness of medical investigators to follow our clinical protocols;

 

   

difficulty in maintaining contact with subjects during or after treatment, which may result in incomplete data; or

 

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regulatory concerns with cannabinoid or opioid products generally and the potential for abuse of the drugs.

Generally, there is a high rate of failure for drug candidates proceeding through clinical trials. We may suffer significant setbacks in our clinical trials similar to the experience of a number of other companies in the pharmaceutical and biotechnology industries, even after receiving promising results in earlier trials. Further, even if we view the results of a clinical trial to be positive, the FDA or other regulatory authorities may disagree with our interpretation of the data. In the event that that the FDA does not approve our NDA for Subsys or our ANDA for Dronabinol SG Capsule, or we abandon or are delayed in our clinical development efforts related to our other dronabinol and fentanyl product candidates, LEP-ETU or any of our other product candidates, we may not be able to generate sufficient revenues or obtain financing to continue our operations or become profitable, we may not be able to execute on our business plan effectively, our reputation in the industry and in the investment community would likely be significantly damaged and our stock price would likely decrease significantly.

The results of preclinical studies and clinical trials are not necessarily predictive of future results, and our current product candidates may not have favorable results in later studies or trials.

Companies frequently suffer significant setbacks in advanced clinical trials, even after earlier clinical trials have shown promising results. Favorable results in our early studies or trials may not be repeated in later studies or trials, including continuing preclinical studies and large-scale clinical trials, and our product candidates in later stage trials may fail to show desired safety and efficacy despite having progressed through earlier trials. Preclinical data and limited clinical results for our product candidates may differ from results from studies in larger numbers of subjects drawn from more diverse populations treated for longer periods of time. Preclinical data also may not predict the ability of the product candidates to achieve or sustain the desired effects in the intended population or to do so safely. Unfavorable results from ongoing preclinical studies or clinical trials could result in delays, modifications or abandonment of ongoing or future clinical trials. In addition, we may report top-line data from time to time, which is based on a preliminary analysis of key efficacy and safety data, and is subject to change following a more comprehensive review of the data related to the applicable clinical trial. Any of our planned later stage clinical trials may not be successful for a variety of reasons, including the clinical trial designs, the failure to recruit or enroll a sufficient number of suitable subjects, undesirable side effects and other safety concerns, and the inability to demonstrate efficacy or safety.

We rely on third parties to conduct and oversee our clinical trials. If these third parties do not meet our deadlines or otherwise conduct the trials as required we may not be able to obtain regulatory approval for or commercialize our product candidates when expected or at all.

We rely on third-party CROs to conduct and oversee our clinical trials. For example, for our proprietary LEP-ETU product candidate, we contracted with Excel Life Sciences based out of India to serve as our master CRO for our Phase 2 clinical trial in metastatic breast cancer. We also intend to engage a CRO to conduct our Dronabinol Oral Solution pivotal bioequivalence study.

We also rely upon various medical institutions, clinical investigators and contract laboratories to conduct our trials in accordance with our clinical protocols and all applicable regulatory requirements, including the FDA’s good clinical practice regulations and DEA and state regulations governing the handling, storage, security and recordkeeping for controlled substances. These CROs and third parties play a significant role in the conduct of these trials and the subsequent collection and analysis of data from the clinical trials. We rely heavily on these parties for the execution of our clinical and preclinical studies, and control only certain aspects of their activities.

If any of our clinical trial sites terminate their involvement in one of our clinical trials for any reason, we may experience the loss of follow-up information on patients enrolled in our ongoing clinical trials unless we are able to transfer the care of those patients to another qualified clinical trial site. In addition,

 

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principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive cash or equity compensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts of interest, the integrity of the data generated at the applicable clinical trial site may be questioned by the FDA.

We conducted clinical trials outside the United States and the FDA may not accept data from any such trial. Furthermore we may choose to conduct additional trials in any of our product lines outside the United States and the FDA may not accept data from such trials.

We have conducted and may in the future choose to conduct one or more of our clinical trials outside the United States. For example, our Phase 3 Subsys safety trial was conducted at 46 sites in the United States and 10 sites in India. In addition, we have conducted a Phase 2 clinical trial in India on patients with metastatic breast cancer for LEP-ETU. In addition, though we are not conducting this trial, we are currently providing the dronabinol API for and paying certain monitoring fees in connection with an ongoing Phase 3 clinical trial of 492 patients for the use of dronabinol in the treatment of multiple sclerosis, or MS, in the United Kingdom. Although the FDA may accept data from clinical trials conducted outside the United States, acceptance of such study data by the FDA is subject to certain conditions. For example, the study must be well designed and conducted and performed by qualified investigators in accordance with ethical principles. The study population must also adequately represent the U.S. population, and the data must be applicable to the U.S. population and U.S. medical practice in ways that the FDA deems clinically meaningful. The FDA has advised us that the patient population in which our clinical studies are conducted should be representative of the population for whom we intend to label the product in the United States. In addition, such studies would be subject to the applicable local laws and FDA acceptance of the data would be dependent upon its determination that the studies also complied with all applicable U.S. laws and regulations. There can be no assurance the FDA will accept data from trials conducted outside of the United States. If the FDA does not accept any such data, that would likely result in the need for additional trials, which would be costly and time-consuming and delay aspects of our business plan.

We are subject to uncertainty relating to healthcare reform measures and reimbursement policies which, if not favorable to our product candidates, could hinder or prevent our product candidates’ commercial success.

Our ability to commercialize any approved product candidates successfully will depend in part on the extent to which governmental authorities, private health insurers and other third-party payors establish appropriate coverage and reimbursement levels for our product candidates and related treatments. As a threshold for coverage and reimbursement, third-party payors generally require that drug products have been approved for marketing by the FDA. Third-party payors are increasingly imposing additional requirements and restrictions on coverage and limiting reimbursement levels for medical products. For example, federal and state governments reimburse covered prescription drugs at varying rates below average wholesale price. These restrictions and limitations influence the purchase of healthcare services and products. Legislative proposals to reform healthcare or reduce costs under government insurance programs may result in lower reimbursement for our product candidates or exclusion of our product candidates from coverage and reimbursement programs. The cost containment measures that healthcare payors and providers are instituting and the effect of any healthcare reform could significantly reduce our revenues from the sale of any approved product. We cannot provide any assurances that we will be able to obtain third-party coverage or reimbursement for our product candidates in whole or in part.

In the United States, there have been a number of legislative and regulatory changes to the healthcare system in ways that could affect our future revenues and profitability and the future revenues and profitability of our potential customers. For example, the Medicare Part D prescription drug benefit allows beneficiaries to obtain prescription drug coverage from private sector plans, which can limit the number of prescription drugs that are covered in each therapeutic category and class on their formularies. If our products are not widely included on the formularies of these plans, our ability to

 

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market our products to the Medicare population could be harmed. The State Medicaid programs also generally provide reimbursement for our commercial products, at reimbursement rates that are below the published average wholesale price and that vary from state to state. In return for including pharmaceutical products in the Medicaid programs, manufacturers have agreed to pay a rebate to state Medicaid agencies that provide reimbursement for those products. Pursuant to the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010, or PPACA, an increase in the Medicaid rebate rate from 15.1 to 23.1% became effective on January 1, 2010, and the volume of rebated drugs has been expanded to include beneficiaries in Medicaid managed care organizations, effective as of March 23, 2010. The PPACA also includes a 50% discount on brand name drugs for Medicare Part D participants in the coverage gap. The law also revises the definition of “average manufacturer price” for reporting purposes (effective October 1, 2010), which could increase the amount of the Medicaid drug rebates paid to states once the provision is effective.

The PPACA is expected to substantially impact the U.S. pharmaceutical industry and how health care is financed by both governmental and private insurers. Some of the specific PPACA provisions, among other things:

 

   

establish annual, non-deductible fees on any entity that manufactures or imports certain branded prescription drugs and biologics, beginning 2011;

 

   

increase minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program, retroactive to January 1, 2010, to 23.1% and 13.0% of the average manufacturer price, or AMP, for branded and generic drugs, respectively;

 

   

redefine a number of terms used to determine Medicaid drug rebate liability, including average manufacturer price and retail community pharmacy, effective October 2010;

 

   

extend manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations, effective March 23, 2010;

 

   

expand eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals beginning April 2010 and by adding new mandatory eligibility categories for certain individuals with income at or below 133.0% of the Federal Poverty Level beginning 2014, thereby potentially increasing manufacturers’ Medicaid rebate liability;

 

   

establish a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research;

 

   

require manufacturers to participate in a coverage gap discount program, under which they must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs being covered under Medicare Part D, beginning 2011; and

 

   

increase the number of entities eligible for discounts under the Public Health Service pharmaceutical pricing program, effective January 2010.

There also have been, and likely will continue to be, legislative and regulatory proposals at the federal and state levels directed at containing or lowering the cost of healthcare. We cannot predict the initiatives that may be adopted in the future. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare costs to contain or reduce costs of healthcare may adversely affect one or more of the following:

 

   

our ability to set a price that we desire for our products;

 

   

our ability to generate revenues and achieve profitability;

 

   

the future revenues and profitability of our potential customers, suppliers and collaborators; and

 

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the availability of capital.

In certain foreign markets, the pricing of prescription drugs is subject to government control and reimbursement may, in some cases, be unavailable. In the United States, given recent federal and state government initiatives directed at lowering the total cost of healthcare, Congress and state legislatures will likely continue to focus on healthcare reform, the cost of prescription drugs and the changes to the Medicare and Medicaid programs. While we cannot predict the full outcome of any such legislation, it may result in decreased reimbursement for prescription drugs, which may further exacerbate industry-wide pressure to reduce prescription drug prices. This could harm our ability to market our products and generate revenues. It is also possible that other proposals having a similar effect will be adopted.

If we fail to comply with healthcare regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected.

In addition to FDA and DEA restrictions on the marketing of pharmaceutical products and federal and state restrictions on distributing and prescribing these products, several other types of state and federal laws have been applied to protect individually identifiable health information and restrict certain marketing practices in the pharmaceutical and medical device industries. These healthcare laws include The Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HIPAA, and fraud and abuse statutes such as the anti-kickback and false claims statutes.

HIPAA mandates, among other things, standards relating to the privacy and security of individually identifiable health information, which require the adoption of administrative, physical and technical safeguards to protect such information. In addition, many states have enacted comparable laws addressing the privacy and security of health information, some of which are more stringent then HIPAA. Failure to comply with these laws, where applicable, can result in the imposition of significant civil and criminal penalties. The costs of compliance with these laws and potential liability associated with failure to do so could adversely affect our business.

The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or, in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Our practices may not, in all cases, meet all of the criteria for safe harbor protection from anti-kickback liability.

Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid. In addition, HIPAA created federal criminal laws that prohibit executing a scheme to defraud any health care benefit program or making false statements relating to health care matters. Recently, several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly providing free product to customers with the expectation that the customers would be reimbursed by federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the company’s marketing of the product for unapproved, and thus non-reimbursable, uses. There are also federal “sunshine” laws that require transparency regarding financial arrangements with health care providers, such as the reporting and disclosure requirements imposed by PPACA on drug manufacturers regarding any “transfer of value” made or distributed to prescribers and other health care providers.

 

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Sanctions under these laws may include civil monetary penalties, exclusion of a manufacturer’s products from reimbursement under government programs, criminal fines and imprisonment.

The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Some states, such as California, Massachusetts and Vermont, also mandate implementation of corporate compliance programs to ensure compliance with these laws.

Because of the breadth of these laws and the fact that their provisions are open to a variety of interpretations, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Moreover, recent health care reform legislation has strengthened these laws. For example, PPACA amends the intent requirement of the federal anti-kickback and criminal health care fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the federal false claims laws. We also expect there will continue to be federal and state laws and/or regulations, proposed and implemented, that could impact our operations and business. The extent to which future legislation or regulations, if any, relating to health care fraud abuse laws and/or enforcement, may be enacted or what effect such legislation or regulation would have on our business remains uncertain. Any government challenge of our business practices could have a material adverse effect on our business, financial condition and results of operations.

Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, provide accurate information to the FDA, comply with applicable manufacturing standards, comply with federal and state healthcare fraud and abuse laws and regulations, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, or illegal misappropriation of drug product, which could result in regulatory sanctions and serious harm to our reputation. We have adopted a Code of Business Conduct and Ethics, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

We use hazardous materials, chemicals and controlled substances in our research and development and manufacturing activities and we may incur significant costs complying with the environmental, health and safety laws and regulations that govern such use. In addition, if we fail to comply with the applicable environmental, health and safety regulations, we could be exposed to significant liabilities.

Our research and development as well as manufacturing activities involve the use of potentially harmful hazardous materials, chemicals and controlled substances that could be hazardous to human health and safety or the environment and which are subject to a variety of federal, state and local laws

 

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and regulations governing their use, generation, manufacture, storage, handling and disposal. These materials and various wastes resulting from their use are stored at our facility pending ultimate use and disposal. We cannot completely eliminate the risk of contamination, which could cause:

 

   

an interruption of our research and development and manufacturing efforts;

 

   

injury to our employees and others;

 

   

environmental damage resulting in costly clean up; and

 

   

liabilities under federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products.

In such an event, we may be held liable for any resulting damages, and any such liability could exceed our resources. Although we carry insurance in amounts and type that we consider commercially reasonable, we do not carry specific biological or hazardous waste insurance coverage.

Since the starting materials we utilize to manufacture dronabinol are sourced out of India, we are exposed to a number of risks and uncertainties associated with that geographic region.

The suppliers of the starting materials we utilize to manufacture dronabinol are located in India. This exposes us to a number of risks and uncertainties outside our control. India has suffered political instability in the past due to various factors including the failure of any party to win an absolute majority in the Indian Parliament for several years. There have also been armed conflicts between India and neighboring Pakistan. Moreover, extremist groups within India and neighboring Pakistan have from time to time targeted Western interests. In addition, India is susceptible to natural disasters such as earthquakes and floods. Political instability, future hostilities with countries such as Pakistan, targeting of our interests by extremist attacks, and earthquakes or other natural disasters in India could harm our operations and impede our ability to produce dronabinol on our anticipated timeline, or at all.

If we fail to successfully develop, identify and acquire or in-license additional products or product candidates, we may have limited growth opportunities.

As resources allow and opportunities present themselves, we intend to enhance our pipeline of new products and product candidates through acquisition or in-licensing. The success of this strategy will depend upon our ability to effectively identify, select and acquire or in-license pharmaceutical products or product candidates.

The process of proposing, negotiating and implementing the acquisition or in-license of a product or product candidate is lengthy and complex. Other companies, including some with substantially greater financial, marketing and sales resources, may compete with us for these products or product candidates. We have limited resources to identify and execute acquisition or in-licensing transactions. Even if we acquire or in-license additional products or product candidates, we have limited resources to integrate the acquired or licensed assets into our current infrastructure. In addition, we may devote resources to potential acquisition or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts after expenditure of considerable time and resources. We may not be able to acquire the rights to additional products or product candidates on terms that we find acceptable, or at all.

Future acquisition and in-licensing transactions may entail numerous operational and financial risks including:

 

   

exposure to unknown liabilities;

 

   

disruption of our business and diversion of our management’s time and attention to the development of these products or product candidates;

 

   

incurrence of substantial debt or dilutive issuances of securities to pay for acquisitions or in-licensing transactions; and

 

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high acquisition and integration costs.

Product candidates that we acquire or in-license will likely require additional development efforts prior to commercial sale, including product development, extensive clinical testing and approval by the FDA and other applicable regulatory authorities. All product candidates are prone to risks of failure typical of pharmaceutical product development, including the possibility that a product candidate will not be shown to be sufficiently safe or effective for approval by regulatory authorities. In addition, we cannot provide assurance that any products or product candidates that we acquire or in-license will be manufactured profitably or achieve market acceptance.

We may engage in strategic transactions that could impact our liquidity, increase our expenses and present significant distractions to our management.

From time to time we may consider strategic transactions, such as acquisitions of companies, asset purchases and out-licensing or in-licensing of products, product candidates or technologies. For example, in November 2010, we completed the Merger which resulted in Insys Pharma becoming our wholly-owned subsidiary. Previously, in September 2009, Insys Pharma obtained assets which have given us the ability to manufacture our supply of dronabinol API internally through our manufacturing facility in Texas. Additional potential transactions include a variety of different business arrangements, spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and investments. Any such transaction may require us to incur non-recurring or other charges, may increase our near and long-term expenditures and may pose significant integration challenges or disrupt our management or business, which could harm our operations and financial results.

We may not realize any benefits and may experience detriments as a result of the combination of Insys Therapeutics and Insys Pharma.

We may not realize any benefits from the integration of the businesses of Insys Therapeutics and Insys Pharma. The timely, efficient and successful integration of the businesses will entail execution of a number of tasks, including the following:

 

   

integrating the business, operations, different locations, research and development functions and technologies of the companies;

 

   

retaining and assimilating the key personnel of each company;

 

   

managing the varying regulatory approval processes, intellectual property protection strategies and other activities of the companies;

 

   

retaining strategic partners of each company and attracting new strategic partners;

 

   

creating uniform standards, controls, procedures, policies and information systems, including with respect to disclosure controls and procedures and internal control over financial reporting; and

 

   

meeting the challenges inherent in efficiently managing an increased number of employees, including the need to implement appropriate systems, policies, benefits and compliance programs.

We may encounter difficulties successfully managing a larger and more diverse organization and may encounter significant delays in achieving successful management of our organization. Integration of our business operations will involve risks and may not be successful. These risks include the following:

 

   

the potential disruption of ongoing business and distraction of our management;

 

   

the potential strain on our financial and managerial controls and reporting systems and procedures;

 

   

our inability to manage the research and development, regulatory and reimbursement approval, and other activities of our businesses;

 

   

unanticipated or greater than anticipated expenses and potential delays related to integration of the operations, technology and other resources of our businesses;

 

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the impairment of relationships with employees and suppliers as a result of any integration of new management personnel or other activities; and

 

   

potential unknown liabilities associated with the strategic combination and the combined operations.

We may not succeed in addressing these risks or any other problems encountered in connection with the integration of our businesses. The inability to integrate successfully the operations, technology and personnel of our businesses, or any significant delay in achieving integration, could have a material adverse effect on our business, results of operations and prospects, and on the market price of our common stock.

Our results of operations and liquidity needs could be materially negatively affected by market fluctuations and economic downturn.

Our results of operations and liquidity could be materially negatively affected by economic conditions generally, both in the United States and elsewhere around the world. Domestic and international equity and debt markets have experienced and may continue to experience heightened volatility and turmoil based on domestic and international economic conditions and concerns. In the event these economic conditions and concerns continue or worsen and the markets continue to remain volatile, our results of operations and liquidity could be adversely affected by those factors in many ways, including making it more difficult for us to raise funds if necessary.

We may incur substantial liabilities from any product liability claims if our insurance coverage for those claims is inadequate.

We face an inherent risk of product liability exposure related to the testing, manufacturing and marketing of our product candidates in human clinical trials, and will face an even greater risk if we sell our product candidates commercially. Common adverse events for dronabinol products include: abdominal pain, nausea, vomiting, dizziness, euphoria, paranoid reaction, somnolence, abnormal thought patterns, and difficulty with concentration/attention. Common adverse events for fentanyl products include: nausea, dizziness, somnolence, vomiting, asthenia or lack of energy and strength and anxiety. An individual may bring a liability claim against us if one of our product candidates causes, or merely appears to have caused, an injury. If we cannot successfully defend ourselves against product liability claims, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

   

decreased demand for our product candidates;

 

   

product recall or withdrawal from the market;

 

   

impairment to our business reputation or acceptance in the medical community;

 

   

withdrawal of clinical trial participants;

 

   

costs of related litigation;

 

   

distraction of management’s attention from our primary business;

 

   

substantial monetary awards to patients or other claimants;

 

   

loss of revenues; and

 

   

the inability to commercialize our product candidates.

We have obtained product liability insurance coverage for our clinical trials with a $1 million per occurrence and $2 million aggregate limit, together with an umbrella policy of $3 million for each occurrence and $3 million aggregate limit. Our insurance coverage may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly

 

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expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost, in sufficient amounts or upon adequate coverage terms to protect us against losses due to liability. We intend to expand our insurance coverage to include the sale of commercial products if regulatory approval is obtained for any of our product candidates. However, we may be unable to obtain this product liability insurance on commercially reasonable terms or with insurance coverage that will be adequate to satisfy any liability that may arise. Large judgments have been awarded in class action or individual lawsuits based on drugs that had unanticipated side effects, including side effects which are less severe than those of our product candidates. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.

Our ability to utilize our net operating loss carryforwards, or NOLs, and research and development income tax credit carryforwards may be limited.

Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, substantial changes in our ownership may limit the amount of NOLs and research and development income tax credit carryforwards that could be utilized annually in the future to offset taxable income, if any. Specifically, this limitation may arise in the event of a cumulative change in ownership of our company of more than 50% within a three-year period. Any such annual limitation may significantly reduce the utilization of the NOLs before they expire. The closing of this offering, together with the other transactions that have occurred since our inception, may trigger an ownership change pursuant to Sections 382 and 383, which could further limit the amount of NOLs that could be utilized annually in the future to offset taxable income, if any. Any such limitation, whether as the result of prior transactions, sales of common stock by our existing stockholders or additional sales of common stock by us after this offering, could have an adverse effect on our results of operations.

On November 8, 2010, Insys Therapeutics, Inc. effected the Merger in a transaction that was accounted for as a reverse acquisition and resulted in a change of 50% or more of the ownership of NeoPharm. As of the Merger date, NeoPharm had $274.0 million of federal NOLs which were scheduled to expire in tax years 2011 to 2029. Under Section 382 of the Code, our utilization of the pre-Merger federal NOLs of NeoPharm to offset our post-Merger federal taxable income is significantly limited due to the Merger. Prior to the Merger, NeoPharm had completed a partial analysis of ownership changes under Section 382 of the Code to determine if a change in control of NeoPharm had occurred. Based on NeoPharm’s partial analysis, no change in control was identified, based on the review of eight test dates covering a four-year period ended December 31, 2007. A complete formal analysis of ownership change would have to be performed in order to obtain certainty that a change in control of NeoPharm had not occurred prior to the Merger, which could further limit the utilization of the NeoPharm pre-Merger NOLs by us. Based on the above, we have estimated the amount of pre-Merger federal NOLs of NeoPharm that are available to offset our post-Merger income is limited to approximately $158,000 a year for 20 years, or cumulatively $3.2 million. For state income tax purposes, we have $274.0 million of state NOLs related to NeoPharm operations. We have placed a valuation allowance on our deferred tax assets, which include the federal and state NOLs, for it is not more likely than not that such amounts will be realized.

Our product candidates contain controlled substances, the use of which may generate public controversy.

Fentanyl is a Schedule II controlled substance narcotic derivative and despite the strict regulations on the marketing, prescribing and dispensing of Schedule II substances, illicit use and abuse of fentanyl products is well-documented. Moreover dronabinol, though synthetic, is a cannabinoid. Since our product candidates contain controlled substances, regulatory approval of these product candidates may generate public controversy. Political and social pressures and adverse publicity could lead to delays in, and increased expenses for, and limit or restrict the introduction and marketing of our product candidates.

 

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Import/export regulations and tariffs may change and increase our operating costs.

We are subject to risks associated with the regulations relating to the import and export of products and materials. In particular, for dronabinol, we obtain the two chemicals that are used as starting materials for its production from suppliers in India. We cannot predict whether the import and/or export of our products will be adversely affected by changes in, or enactment of new quotas, duties, taxes or other charges or restrictions imposed by India or any other country in the future. Any of these factors could have a material adverse effect on our operating costs.

Currency exchange rate fluctuations may increase our costs.

The exchange rate between the U.S. dollar and non-U.S. currencies in which we trade to conduct our business have and will likely fluctuate in the future. Any appreciation in the value of these non-U.S. currencies would result in higher expenses for our company. We do not have any hedging arrangements to protect against such exchange rate exposures.

 

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Risks Relating to Our Intellectual Property

We may not be able to obtain and enforce patent rights or other intellectual property rights that cover our product candidates, such as Subsys, Dronabinol RT Capsule, Dronabinol Oral Solution, Dronabinol Inhalation Device, Dronabinol IV Solution and LEP-ETU and are of sufficient breadth to prevent third parties from competing against us.

Our success with respect to our product candidates, such as Subsys, Dronabinol RT Capsule, Dronabinol Oral Solution, Dronabinol Inhalation Device, Dronabinol IV Solution and LEP-ETU will depend in part on our ability to obtain and maintain patent protection in both the United States and other countries, to preserve our trade secrets, and to prevent third parties from infringing upon our proprietary rights on our product candidates. Our ability to protect any of our approved drug products from unauthorized or infringing use by third parties depends in substantial part on our ability to obtain and maintain valid and enforceable patents. Fentanyl, dronabinol and paclitaxel have been approved for many years and therefore our ability to obtain any patent protection is limited. Composition of matter patents on active pharmaceutical ingredients are a particularly effective form of intellectual property protection for pharmaceutical products as they apply without regard to any method of use or other type of limitation. However, we will not be able to obtain composition of matter patents or methods of use patents that cover the active pharmaceutical ingredients in any of our product candidates. As a result, competitors who obtain the requisite regulatory approval can offer products with the same active ingredients as our product candidates so long as the competitors do not infringe any formulation patents that we may obtain or license, if any.

The only patent protection that we can expect will cover, our fentanyl, dronabinol and LEP product candidates consists of patents relating to formulations and methods of treatment using certain formulations. Formulation patents protect the product only when competitors use a similar formulation. However, this type of patent does not limit a competitor from making and marketing a product that is intended to be used in the same indication as long they use a different dosage form and/or formulation. Any formulation patents that we may obtain may be too narrow in scope and thus easily circumvented by competitors.

We have multiple pending patent applications in the United States and in some foreign jurisdictions that attempt to cover our formulations for our fentanyl, dronabinol, and LEP product candidates. We have no issued patents in the United States, or in many foreign countries, that pertain to either fentanyl or dronabinol formulations. We can give no assurances that any patents will issue, that if they do issue, they will provide sufficient protection against competitors, or that they would be valid and enforceable. In addition, two of the issued patents for LEP-ETU expire in July 2018 and the third one expires in June 2019.

Due to evolving legal standards relating to patentability, validity, enforceability and claim scope of patents covering pharmaceutical inventions, our ability to maintain, obtain and enforce patents is uncertain and involves complex legal and factual questions. Accordingly, rights under any patents we may obtain or license may not provide us with sufficient protection for our product candidates and products to afford a commercial advantage against competitive products or processes, including those from branded and generic pharmaceutical companies. In addition, we cannot guarantee that any patents will issue from any pending or future patent applications owned by or licensed to us. Even if patents have issued or will issue, we cannot guarantee that the claims of these patents are or will be held valid or enforceable by the courts or will provide us with any significant protection against competitive products or otherwise be commercially valuable to us. Patent applications in the United States are maintained in confidence for up to 18 months after their filing. In some cases, however, patent applications remain confidential in the United States Patent and Trademark Office, or USPTO, for the entire time prior to issuance as a U.S. patent. Similarly, publication of discoveries in scientific or patent literature often lag behind actual discoveries. Consequently, we cannot be certain that we or our licensors were the first to invent, or the first to file patent applications on our product candidates or products. In the event that a third party has also filed a U.S. patent application relating to our drug

 

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product or a similar invention, we may have to participate in interference proceedings declared by the USPTO to determine priority of invention in the United States. The costs of these proceedings could be substantial and it is possible that our efforts would be unsuccessful, resulting in a loss of our U.S. patent position.

In addition, third parties may challenge our in-licensed patents and any of our own patents that we may obtain, which could result in the invalidation or unenforceability of some or all of the relevant patent claims. Litigation or other proceedings to enforce or defend intellectual property rights is very complex, expensive, and may divert our management’s attention from our core business and may result in unfavorable results that could adversely affect our ability to prevent third parties from competing with us.

The laws of some foreign jurisdictions do not provide intellectual property rights to the same extent as in the United States and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties in protecting or are otherwise precluded from effectively protecting our intellectual property in foreign jurisdictions, our business prospects could be substantially harmed. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. Changes in either the patent laws or in the interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents.

The degree of future protection of our proprietary rights is uncertain. Patent protection may be unavailable or severely limited in some cases and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:

 

   

we might not have been the first to file patent applications for these or similar inventions;

 

   

we might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;

 

   

others may independently develop similar or alternative technologies or duplicate any of our technologies;

 

   

the patents of others may have an adverse effect on our business;

 

   

it is possible that none of our or our licensors’ pending patent applications will result in issued patents;

 

   

any patents we obtain or our licensors’ issued patents may not encompass commercially viable products, may not provide us with any competitive advantages, or may be challenged by third parties;

 

   

any patents we obtain or our in-licensed issued patents may not be valid or enforceable; or

 

   

we may not develop additional proprietary technologies that are patentable.

If we or our licensors fail to appropriately prosecute and maintain patent protection for these product candidates or other product candidates that we may develop, our ability to develop and commercialize these or any other product candidates we develop may be adversely affected and we may not be able to prevent competitors from making, using and selling competing products. This failure to properly protect the intellectual property rights relating to these product candidates could have a material adverse effect on our business, financial condition and results of operation.

Proprietary trade secrets and unpatented know-how are also very important to our business. Although we have taken steps to protect our trade secrets and unpatented know-how, by entering into confidentiality agreements with third parties, and confidential information and inventions agreements with certain employees, consultants and advisors, third parties may still obtain this information or we

 

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may be unable to protect our rights. There can be no assurance that binding agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets and unpatented know-how will not otherwise become known or be independently discovered by our competitors. If trade secrets are independently discovered, we would not be able to prevent their use. Enforcing a claim that a third party illegally obtained and is using our trade secrets or unpatented know-how is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secret information.

We are a defendant in a lawsuit to seek rescission of certain invention assignments, and if we do not prevail, any resulting rescission of invention assignments could have a material adverse impact on our business by preventing us from obtaining exclusive patent rights covering certain of our product candidates.

Although we expect all of our employees to assign their inventions to us, and all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information or technology to enter into confidential information and inventions agreements, we cannot provide any assurances that all such agreements have been duly executed or will be held enforceable.

For example, in September 2009, Insys Pharma and certain of its officers and directors, as well as their spouses, were named as defendants in a lawsuit in Arizona Superior Court brought by Santosh Kottayil, certain of his family members and a trust of which Dr. Kottayil is the trustee. Dr. Kottayil formerly served as President, Chief Scientific Officer and a director of Insys Pharma, among other positions. The complaint brought a cause of action, among others, seeking to rescind Dr. Kottayil’s assignment to Insys Pharma of his interest in all of the fentanyl and dronabinol patent applications we own and to recover the benefits of those interests. Insys Pharma and the other defendants answered and filed counter-claims to Dr. Kottayil’s complaint. If the patent assignments are successfully rescinded, we will not have exclusive patent rights covering our fentanyl and dronabinol product candidates, and such exclusive patent rights may not be available to us on acceptable terms, if at all, which would have a material adverse effect on our business. If the assignments are rescinded, Kottayil could assign his interest in the fentanyl and dronabinol patent applications to a competitor and we would not be able to prevent generic copies of our products. Please see the section entitled “Legal Proceedings.”

We license patent rights from third-party owners. If such owners do not properly maintain or enforce the patents underlying such licenses, our competitive position and business prospects may be harmed.

We are party to a number of license agreements that give us rights to third-party intellectual property that may be necessary or useful for our business. We may enter into additional license agreements to use third- party intellectual property in the future. Our success will depend in part on the ability of our licensors to obtain, maintain and enforce patent protection for their intellectual property, in particular, those patents to which we have secured exclusive rights. Our licensors may not successfully prosecute the patent applications to which we are licensed. Even if patents issue from these patent applications, our licensors may fail to maintain these patents, may determine not to pursue litigation against other companies that are infringing these patents, or may pursue such litigation less aggressively than we would, and in certain licenses, we only maintain the right to enforce the patents if the applicable licensor fails or decides to not take any action. In addition, our licensors may terminate their agreements with us in the event we breach the applicable license agreement and fail to cure the breach within a specified period of time. Without protection for the intellectual property we license, other companies might be able to offer substantially identical products for sale, which could adversely affect our competitive business position and harm our business prospects.

 

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If we are sued for infringing intellectual property rights of third parties, it will be costly and time consuming to defend such litigation, and an unfavorable outcome in that litigation may have a material adverse effect on our business.

Our commercial success also depends upon our ability and the ability of our future collaborators to develop, manufacture, market and sell our product candidates and to use our proprietary technologies without infringing the proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing products. Furthermore, we may not have identified all U.S. and foreign patents or published applications that affect our business either by potentially blocking our ability to commercialize our product candidates or by covering similar technologies that affect our target markets. Because patent applications can take many years to issue, there may be currently pending applications, which may later result in issued patents that our product candidates or proprietary technologies may infringe.

We may be exposed to, or threatened with, future litigation by third parties having patent or other intellectual property rights alleging that our product candidates and/or proprietary technologies infringe their intellectual property rights. If one of these patents was found to cover our product candidates, proprietary technologies or their uses or manufacturer, we or our future collaborators could be required to pay damages and could be unable to commercialize our product candidates or to use our proprietary technologies unless we or they obtained a license to the patent. A license may not be available to us or our future collaborators on acceptable terms, if at all. Thus, we could be prevented from commercializing the product for many years until the patent expires which would have a material adverse effect on our business. In addition, during litigation, the patent holder could obtain a preliminary injunction or other equitable right which could prohibit us from making, using or selling our products, technologies or methods.

There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries generally. And in particular, the generic drug industry is characterized by frequent litigation between generic drug companies and branded drug companies. If a third party claims that we infringe its intellectual property rights, we may face a number of issues, including, but not limited to:

 

   

infringement and other intellectual property claims which, with or without merit, may be expensive and time-consuming to litigate and may divert our management’s attention from our core business;

 

   

substantial damages for infringement, including treble damages and attorneys’ fees, which we may have to pay if a court decides that the product or proprietary technology at issue infringes on or violates the third party’s rights;

 

   

a court prohibiting us from selling or licensing the product or using the proprietary technology unless the third party licenses its technology to us, which it is not required to do;

 

   

if a license is available from the third party, we may have to pay substantial royalties, fees and/or grant cross licenses to our technology; and

 

   

redesigning our product candidates or processes so they do not infringe, which may not be possible or may require substantial funds and time.

We have not conducted an extensive search of patents issued to third parties, and no assurance can be given that third-party patents containing claims covering our product candidates, technology or methods do not exist, have not been filed, or could not be filed or issued. Because of the number of patents issued and patent applications filed in our technical areas or fields, we believe there is a significant risk that third parties may allege they have patent rights encompassing our products, technology or methods. Other product candidates that we may in-license or acquire could be subject to similar risks and uncertainties.

 

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We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed alleged trade secrets of their other clients or former employers to us.

As is common in the biotechnology and pharmaceutical industry, certain of our employees were formerly employed by other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Moreover, we engage the services of consultants to assist us in the development of our product candidates, many of whom were previously employed at or may have previously been or are currently providing consulting services to, other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We may be subject to claims that these employees and consultants or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers or their former or current customers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. For example, on November 2, 2007, we received a letter from counsel for Solvay Pharmaceuticals, Inc. and Unimed Pharmaceuticals, Inc., or Abbott (Solvay/Unimed), in which Abbott (Solvay/Unimed) asserted that we may have used its confidential and proprietary information in the development of our dronabinol technology and products, and requested various information and written assurances from us. Abbott (Solvay/Unimed)’s letter contains broad allegations concerning its Marinol manufacturing and business strategy, but does not specifically identify any particular confidential or proprietary information allegedly used by us. The allegations appear to be based primarily on the fact that our founder worked for Abbott (Solvay/Unimed) several years ago. We responded to Abbott (Solvay/Unimed) denying these allegations on November 14, 2007 and informed them at that time that we do not intend to comply with any of the requests made in their letter. On January 25, 2008, we received another letter from counsel for Solvay that mainly reasserted the allegations and repeated the request for information and assurances made in the November 2, 2007 letter. In response, on January 30, 2008, we responded to Solvay, once again denying their assertions and informing them we do not intend to comply with their requests. After this latest response, we have had no further communications. There can be no assurance, however, that Abbott (Solvay/Unimed) will not take further legal action with respect to such assertions or allegations. Any such litigation would likely be protracted, expensive, a distraction to our management team, not viewed favorably by investors and other third parties, and may potentially result in an unfavorable outcome.

Risks Related to This Offering and Ownership of Our Common Stock

Our Executive Chairman and principal stockholder can individually control our direction and policies, and his interests may be adverse to the interests of our stockholders.

As of June 30, 2011, our founder, Executive Chairman and principal stockholder, Dr. John N. Kapoor, beneficially owned approximately     % of our capital stock outstanding as of June 30, 2011, after giving effect to the issuance of              shares of our common stock upon conversion of notes beneficially owned by him and accrued interest thereon immediately prior to the closing of this offering, assuming a conversion date of                     , 2011 and an initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus. Upon the closing of this offering, assuming no exercise of the underwriters’ option to purchase additional shares, Dr. Kapoor will beneficially own approximately     % of our outstanding shares of common stock. By virtue of his holdings, Dr. Kapoor can and will continue to be able to effectively control the election of the members of our board of directors, our management and our affairs and prevent corporate transactions such as mergers, consolidations or the sale of all or substantially all of our assets that may be favorable from our standpoint or that of our other stockholders or cause a transaction that we or our other stockholders may view as unfavorable. Accordingly, this concentration of ownership may harm the market price of our common stock by:

 

   

delaying, deferring or preventing a change in control;

 

   

impeding a merger, consolidation, takeover or other business combination involving us; or

 

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discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.

In addition, sales of shares beneficially owned by Dr. Kapoor could be viewed negatively by third parties and have a negative impact on our stock price. Moreover, upon his passing, we cannot assure you as to how these shares will be distributed and subsequently voted.

Moreover, trusts controlled by Dr. Kapoor have been the sole source of financing for Insys Pharma to date. As of June 30, 2011, we owed $43.7 million in secured debt and accrued interest to Dr. Kapoor’s trusts. While this outstanding debt will convert into shares of our common stock upon completion of this offering, we may in the future issue additional debt to entities controlled by Dr. Kapoor and Dr. Kapoor’s interest as a holder of our debt may conflict with your interest as a holder of our common stock.

If we are unable to successfully remediate the material weakness in our internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected.

In connection with the audit of our consolidated financial statements for the year ended December 31, 2010, our management and independent registered public accounting firm identified a material weakness in our internal control over financial reporting. A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Our management and independent registered public accounting firm did not perform an evaluation of our internal control over financial reporting as of December 31, 2010 in accordance with the provisions of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act. Had we and our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional control deficiencies may have been identified by management or our independent registered public accounting firm, and those control deficiencies could have also represented one or more material weaknesses.

Our management and independent registered public accounting firm identified a material weakness related to a lack of sufficient staff with appropriate training in GAAP and SEC rules and regulations with respect to financial reporting. This deficiency resulted in a more than remote likelihood that a material misstatement of our annual and interim financial statements would not be prevented or detected. As a result, audit adjustments to our financial statements were identified during the course of the audit. Currently, we have only one designated finance and accounting employee, our new Chief Financial Officer, and rely on consultants to provide many accounting, book-keeping and administrative services. In an effort to remediate this material weakness, we intend to hire additional finance and accounting personnel, build our financial management and reporting infrastructure, and further develop and document our accounting policies and financial reporting procedures in 2011 and 2012. For example, we have begun a search for a controller and expect to fill that position in 2011. We cannot assure you that we will be successful in these hiring efforts or that these measures will significantly improve or remediate the material weakness described above. We also cannot assure you that we have identified all or that we will not in the future have additional material weaknesses. Accordingly, material weaknesses may still exist when we report on the effectiveness of our internal control over financial reporting for purposes of our attestation required by reporting requirements under the Securities Exchange Act of 1934, as amended, or the Exchange Act, or Section 404 of the Sarbanes-Oxley Act after this offering. The standards required for a Section 404 assessment under the Sarbanes-Oxley Act will require us to implement additional corporate governance practices and adhere to a variety of reporting requirements and complex accounting rules. These stringent standards require that our audit committee be advised and regularly updated on management’s review of internal controls. Our management may not be able to effectively and timely implement controls and procedures that adequately respond to the increased regulatory compliance and reporting requirements that will be applicable to us as a public company. If we fail to staff our accounting and finance function adequately or maintain internal controls

 

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adequate to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to report our financial results accurately or in a timely manner and our business and stock price may suffer.

Maintaining and improving our financial controls and the requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

As a public company, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the Nasdaq Stock Market Rules, or Nasdaq rules. The requirements of these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and may also place undue strain on our personnel, systems and resources. The Exchange Act will require, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition.

The Sarbanes-Oxley Act will require, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Ensuring that we have adequate internal financial and accounting controls and procedures in place is a costly and time-consuming effort that needs to be re-evaluated frequently. We are in the process of documenting, reviewing and, where appropriate, improving our internal controls and procedures in preparation for compliance with the SEC regulations adopted pursuant to Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal control over financial reporting and, if we are an accelerated filer, a report by our independent auditors addressing these assessments. Both we and potentially our independent auditors will be testing our internal controls in connection with the Section 404 requirements and could, as part of that documentation and testing, identify material weaknesses, significant deficiencies or other areas for further attention or improvement. Implementing any appropriate changes to our internal controls may require specific compliance training for our directors, officers and employees, entail substantial costs to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to satisfy the requirements of Section 404 on a timely basis could result in the loss of investor confidence in the reliability of our financial statements, which in turn could cause the market value of our common stock to decline.

In accordance with Nasdaq rules, we will be required to maintain a majority independent board of directors. We also expect that the various rules and regulations applicable to public companies will make it more difficult and more expensive for us to maintain directors’ and officers’ liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to maintain coverage. If we are unable to maintain adequate directors’ and officers’ insurance, our ability to recruit and retain qualified directors, especially those directors who may be deemed independent for purposes of Nasdaq rules, and officers will be significantly curtailed.

Compliance with these reporting rules, Sarbanes-Oxley Act and Nasdaq requirements will require us to build out our accounting and finance staff. Our Chief Financial Officer is the only dedicated accounting and finance employee currently employed by us. We will need to expand our accounting and financing staff, and our failure to adequately do so would harm our ability to comply with the requirements listed above.

 

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We expect that the price of our common stock will fluctuate substantially.

Following this offering, the market price for our common stock is likely to be volatile, in part because there has not been a true public market for the common stock of our combined entity prior to this offering. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:

 

   

the development status of our product candidates and whether and when any of our product candidates receive regulatory approval or acceptable scheduling by the DEA, including the regulatory status of our NDA for Subsys and sANDA for Dronabinol SG Capsule;

 

   

the results of our preclinical studies and clinical trials;

 

   

variations in the level of expenses related to our product candidates or preclinical and clinical development programs, including relating to the timing of invoices, from and other billing practices of, our CROs and clinical trial sites;

 

   

our execution of our manufacturing, sales and marketing, and other aspects of our business plan;

 

   

price and volume fluctuations in the overall stock market;

 

   

changes in operating performance and stock market valuations of other pharmaceutical companies;

 

   

market conditions or trends in our industry or the economy as a whole;

 

   

our execution of collaborative, co-promotion, licensing or other arrangements, and the timing of payments we may make or receive under these arrangements;

 

   

the public’s response to press releases or other public announcements by us or third parties, including our filings with the SEC and announcements relating to litigation, intellectual property or cannabinoids, dronabinol or fentanyl impacting us or our business;

 

   

the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

   

changes in financial estimates by any securities analysts who follow our common stock, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our common stock;

 

   

ratings downgrades by any securities analysts who follow our common stock;

 

   

the development and sustainability of an active trading market for our common stock;

 

   

future sales of our common stock by our officers, directors and significant stockholders;

 

   

other events or factors, including those resulting from war, incidents of terrorism, natural disasters or responses to these events; and

 

   

changes in accounting principles.

In addition, the stock markets, and in particular the Nasdaq Global Market, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many pharmaceutical companies. Stock prices of many pharmaceutical companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.

 

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If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

There may not be a viable public market for our common stock.

Although our common stock was once traded on the Nasdaq Capital Market and some of our common stock is currently quoted on the Pink Sheets, a centralized electronic quotation service for over-the-counter securities, immediately prior to this offering there is no liquid public market on which our common stock is actively and readily traded. The initial public offering price of our common stock for this offering will be determined through negotiations between us and the representatives of the underwriters, and may not be indicative of the market price of our common stock following this offering. If you purchase shares of our common stock, you may not be able to resell those shares at or above the initial public offering price. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the Nasdaq Global Market or otherwise or how liquid that market might become. An active public market for our common stock may not develop or be sustained after the offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all.

Future sales of our common stock or securities convertible into our common stock may depress our stock price.

Sales of a substantial number of shares of our common stock or securities convertible into our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have              outstanding shares of common stock based on the number of shares outstanding as of                     , 2011. This includes the shares that we are selling in this offering, which may be resold in the public market immediately unless held by an affiliate of ours. 464,353 of the remaining shares were outstanding prior to the Merger and, unless held by an affiliate of ours, substantially all of these shares will also be eligible for resale on the public market immediately, and              of the remaining shares may be sold after the expiration of lock-up agreements at least 180 days after the date of this prospectus pursuant to Rule 144 or Rule 701 under the Securities Act of 1933, as amended, or the Securities Act, unless held by an affiliate of ours, as more fully described in the section entitled “Shares Eligible for Future Sale.”

Moreover, we also intend to register all shares of common stock that we may issue after this offering under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements described above and in the section entitled “Underwriting—Lock-Up Agreements.”

If a large number of shares of our common stock or securities convertible into our common stock are sold in the public market after they become eligible for sale, the sales could reduce the trading price of our common stock and impede our ability to raise future capital.

 

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Anti-takeover provisions in our charter documents and Delaware law might deter acquisition bids for us that you might consider favorable.

Our amended and restated certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. These provisions:

 

   

establish a classified board of directors so that not all members of our board are elected at one time;

 

   

authorize the issuance of undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval, and which may include rights superior to the rights of the holders of common stock;

 

   

prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

 

   

provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws; and

 

   

establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing so as to cause us to take certain corporate actions you desire.

If you purchase shares of common stock sold in this offering, you will incur immediate and substantial dilution.

If you purchase shares of common stock in this offering, you will incur immediate and substantial dilution in the pro forma as adjusted amount of $             per share, because the initial public offering price of $             is substantially higher than the pro forma as adjusted net book value per share of our outstanding common stock as of June 30, 2011. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares. Moreover, investors who purchase shares of common stock in this offering will contribute approximately     % of our total funding to date but will own only     % of our outstanding shares. In addition, you may also experience additional dilution upon future equity issuances, including upon conversion of any outstanding debt, or the exercise of stock options to purchase common stock granted to our employees, consultants and directors under our stock option and equity incentive plans. Please see the section entitled “Dilution.”

Because management has broad discretion as to the use of the net proceeds from this offering, you may not agree with how we use them, and such proceeds may not be applied successfully.

Our management will have considerable discretion over the use of proceeds from this offering. We intend to use the net proceeds from this offering:

 

   

to fund the commercialization of Subsys and Dronabinol SG Capsule, if approved;

 

   

to fund the development of Dronabinol RT Capsule, Dronabinol Oral Solution, Dronabinol Inhalation Device, LEP-ETU and our other early-stage product candidates; and

 

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for working capital and general corporate purposes.

In addition, a portion of the net proceeds may also be used to acquire or license products, technologies or businesses. However, we do not currently have any specific plans for use of the net proceeds from this offering, nor have we performed studies or made preliminary decisions with respect to the best use of the capital resources resulting from this offering. As such, our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not necessarily improve our operating results or enhance the value of our common stock. You will be relying on the judgment of our management concerning these uses and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The failure of our management to apply these funds effectively could result in unfavorable returns and uncertainty about our prospects, each of which could cause the price of our common stock to decline.

We have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.

The continued operation and expansion of our business will require substantial funding. Accordingly, we do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

   

our ability to successfully complete preclinical and clinical development of, obtain regulatory approval and acceptable DEA classifications for, and commercialize our product candidates on our expected timeframes or at all;

 

   

the content and timing of submissions to and decisions made by the FDA, the DEA and other regulatory agencies;

 

   

the safety and efficacy of our product candidates;

 

   

the benefits of our product candidates, especially in comparison to competitors’ products and product candidates;

 

   

the actions of our competitors and success of competing drugs that are or may become available;

 

   

the effects of government regulation and regulatory developments, and our ability and the ability of the third parties with whom we engage to comply with applicable regulatory requirements;

 

   

our expectations regarding the development of a REMS program for Subsys;

 

   

our ability to effectively manage our anticipated future growth;

 

   

our ability to successfully integrate the operations of Insys Therapeutics, Inc. and Insys Pharma, Inc., and realize any expected benefits from the Merger;

 

   

our ability to effectively remediate the material weakness in our internal control over financial reporting;

 

   

our ability to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act;

 

   

our ability to manufacture, or otherwise secure the manufacture of, sufficient amounts of our API for preclinical studies and clinical trials and, if approved, products for commercialization activities;

 

   

the performance of our manufacturers, CROs and other third parties, over whom we have limited control;

 

   

our ability to successfully execute on our commercialization strategy for any approved product candidate, including the performance of Mylan under our distribution agreement for Dronabinol SG Capsule and Dronabinol RT Capsule, and building a sufficient commercial organization to sell and market Subsys and certain of our other proprietary products;

 

   

our ability to realize any cost-savings associated with our anticipated plan to build a capital-efficient commercial organization to market Subsys and certain of our other proprietary product candidates;

 

   

the rate and degree of market acceptance of any approved product candidates;

 

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the size and growth of the potential markets for any approved product candidates and our ability to serve or impact the size of those markets;

 

   

our expectations regarding DEA quotas;

 

   

the anticipated regulatory pathways for our product candidates;

 

   

our ability to obtain, maintain and successfully enforce adequate patent and other intellectual property protection of any of our product candidates that may be approved for sale;

 

   

our ability to operate our business without infringing the intellectual property rights of others;

 

   

our expectations regarding ongoing litigation related matters;

 

   

our anticipated use of the net proceeds from this offering;

 

   

our ability to attract and keep management and other key personnel; and

 

   

our ability to effectively transact business in foreign countries.

In some cases, you can identify these statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or the negative of those terms, and similar expressions. These forward-looking statements reflect our management’s beliefs and views with respect to future events and are based on estimates and assumptions as of the date of this prospectus and are subject to risks and uncertainties. We discuss many of these risks in greater detail under the heading “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Given these uncertainties, you should not place undue reliance on these forward-looking statements. The forward-looking statements contained in this prospectus are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act.

You should read this prospectus and the documents that we reference in this prospectus, and have filed as exhibits to the registration statement of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of the forward-looking statements in this prospectus by these cautionary statements.

Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds of approximately $             million (or approximately $             million if the underwriters’ over-allotment option is exercised in full) from the sale of the shares of common stock offered by us in this offering, based on an assumed initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to obtain additional capital to support our operations, to create an active public market for our common stock and to facilitate our future access to the public equity markets. We intend to use the net proceeds from this offering as follows:

 

   

approximately $15 million to fund the commercialization of Subsys and Dronabinol SG Capsule, if approved;

 

   

approximately $10 million to fund the development of Dronabinol RT Capsule, Dronabinol Oral Solution, Dronabinol Inhalation Device, LEP-ETU and our other early-stage product candidates; and

 

   

the remainder to fund working capital and other general corporate purposes.

We may also use a portion of the net proceeds to in-license, acquire or invest in complementary businesses or products; however, we have no current commitments or obligations to do so. Pending their use, we plan to invest the net proceeds from this offering in short- and intermediate-term interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

We believe that the net proceeds from this offering and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund our operations for at least the next 12 months.

The amounts and timing of our actual expenditures will depend on numerous factors, including the regulatory action relating to our pending Dronabinol SG Capsule ANDA and Subsys NDA, the progress of our preclinical and clinical trials, and other development and commercialization efforts, as well as the amount of cash used in our operations. Therefore, the amount actually spent for the purposes described above may vary significantly. We also may find it necessary or advisable to use the net proceeds for other purposes, and we will have broad discretion in the application of the net proceeds.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our board of directors may deem relevant.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2011 on:

 

   

an actual basis;

 

   

a pro forma basis to give effect to (1) the filing of our amended and restated certificate of incorporation which will occur upon the closing of this offering, (2) the conversion of our convertible preferred stock outstanding as of such date into 8,528,860 shares of our common stock which will occur automatically immediately prior to the closing of this offering, (3) the issuance of an additional $             million in aggregate principal amount of notes payable to trusts controlled by our Executive Chairman and principal stockholder subsequent to June 30, 2011 and (4) the conversion of $             million in aggregate principal amount of notes and accrued interest thereon owed to trusts controlled by our Executive Chairman and principal stockholder into              shares of common stock, assuming a conversion date of                     , 2011 and an initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, immediately prior to the closing of this offering, which amount includes the $             million in aggregate principal amount of notes issued subsequent to June 30, 2011 and accrued interest on all notes payable through                     , 2011; and

 

   

a pro forma as adjusted basis to give further effect to the sale of shares of common stock by us in this offering at an assumed initial offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The information in this table is illustrative only and our capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read the information in this table together with our financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

 

     As of June 30, 2011  
     Actual     Pro Forma      Pro Forma
As Adjusted (1)
 
     (Unaudited)  
     (In thousands, except per share
data)
 

Cash and cash equivalents

   $ 17      $                    $                
  

 

 

   

 

 

    

 

 

 

Debt, current and long-term

   $ 43,705      $         $     

Stockholders’ equity:

       

Common stock, $0.0002145 par value: 750,000,000 shares authorized and 784,020 shares issued and outstanding, actual; 200,000,000 shares authorized and              shares issued and outstanding, pro forma; 200,000,000 shares authorized and              shares issued and outstanding, pro forma as adjusted

     —          

Convertible preferred stock, $0.01 par value: 15,000,000 shares authorized and 14,864,607 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     149        

Preferred stock, $0.001 par value: no shares authorized, issued or outstanding, actual; 10,000,000 shares authorized and no shares issued and outstanding, pro forma and pro forma as adjusted…

     —          

Additional paid-in capital

     60,596        

Notes receivable from stockholders

     (21     

Deficit accumulated during the development stage

     (94,859     
  

 

 

   

 

 

    

 

 

 

Total stockholders’ equity (deficit)

     (34,135     
  

 

 

   

 

 

    

 

 

 

Total capitalization

   $ 9,570      $         $     
  

 

 

   

 

 

    

 

 

 

 

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(1) A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) each of the pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholder’s equity and total capitalization by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The number of shares of our common stock outstanding as of June 30, 2011 on an actual, pro forma and pro forma as adjusted basis excludes:

 

   

540,102 shares of our common stock issuable upon the exercise of outstanding options as of June 30, 2011 under our equity incentive plans, with a weighted average exercise price of $9.76 per share;

 

   

1,079,133 shares of our common stock issuable upon the exercise of outstanding options as of June 30, 2011 under the Insys Pharma, Inc. equity incentive plan, with a weighted average exercise price of $1.83 per share; and

 

   

3,000,000 shares of common stock reserved for future issuance under our 2011 equity incentive plan, 2011 non-employee directors’ stock award plan and 2011 employee stock purchase plan, each of which will become effective upon the signing of the underwriting agreement for this offering.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value (deficit) per share of our common stock after this offering. The historical net tangible book deficit of our common stock as of June 30, 2011 was $39.5 million, or $4.25 per share of common stock, based on the number of shares of common stock outstanding as of June 30, 2011, without giving effect to the conversion of our outstanding convertible preferred stock or outstanding notes and accrued interest thereon into shares of our common stock immediately prior to the closing of this offering. Historical net tangible book value (deficit) per share is determined by dividing the number of shares of our common stock outstanding as of June 30, 2011 into the amount of our total tangible assets (total assets less intangible assets) less total liabilities allocable to holders of our common stock.

The pro forma net tangible book value as of June 30, 2011 of $             million, or $             per share of our common stock, represents our historical net tangible book deficit as of June 30, 2011 after giving effect to (1) the filing of our amended and restated certificate of incorporation which will occur upon the closing of this offering, (2) the conversion of all of our outstanding convertible preferred stock into an aggregate of 8,528,860 shares of common stock which will occur automatically immediately prior to the closing of this offering (3) the issuance of an additional $             million in aggregate principal amount of notes payable to trusts controlled by our Executive Chairman and principal stockholder subsequent to June 30, 2011 and (4) the conversion of $             million in aggregate principal amount of notes and accrued interest thereon owed to trusts controlled by our Executive Chairman and principal stockholder into              shares of common stock, assuming a conversion date of                     , 2011 and an initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, immediately prior to the closing of this offering, which amount includes the $             million in aggregate principal amount of notes issued subsequent to June 30, 2011 and accrued interest on all notes payable through                     , 2011.

Investors participating in this offering will incur immediate, substantial dilution. After giving further effect to the sale of             shares of common stock by us in this offering at an assumed initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2011 would have been $             million, or $             per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $             per share to existing stockholders, and an immediate dilution of $             per share to investors participating in this offering. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

    $                

Historical net tangible book value (deficit) per share as of June 30, 2011

  $  (4.25  

Pro forma increase in net tangible book value per share as of June 30, 2011 attributable to the conversion of convertible preferred stock

  $ —       

Pro forma        in net tangible book value (deficit) per share as of June 30, 2011 attributable to the issuance of additional notes payable and the conversion of outstanding notes and accrued interest

  $                  
 

 

 

   

Pro forma net tangible book value (deficit) per share as of June 30, 2011

  $                  

Increase in pro forma net tangible book value per share attributable to investors participating in this offering

  $                  
 

 

 

   

Pro forma as adjusted net tangible book value per share after this offering

    $                
   

 

 

 

Pro forma as adjusted dilution per share to investors participating in this offering

    $                
   

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted net tangible book value per share after this offering by approximately $             per share and the dilution in pro forma as adjusted net tangible book value per share to

 

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investors participating in this offering by approximately $             per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise in full their over-allotment option to purchase additional shares at the assumed initial public offering price of $             per share, the pro forma as adjusted net tangible book value per share after the offering would be $             per share, the increase in pro forma net tangible book value per share to existing stockholders would be $             per share and the dilution to new investors would be $             per share.

The following table summarizes, on the pro forma as adjusted basis described above, as of June 30, 2011, the differences between the number of shares of common stock purchased from us, the total effective cash consideration paid to us, and the average price per share paid to us by our existing stockholders and by investors participating in this offering at an assumed initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

    Shares Purchased     Total Consideration     Average
Price
Per Share
 
    Number   Percent     Amount     Percent    

Existing stockholders before this offering

             $                            $                

Investors participating in this offering

                       
 

 

 

 

 

   

 

 

   

 

 

   

Total

      100   $                     100   $                
 

 

 

 

 

   

 

 

   

 

 

   

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by investors participating in this offering by approximately $             million, and increase (decrease) the percent of total consideration paid by investors participating in this offering by     %, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters’ over-allotment option to purchase additional shares is exercised in full, the number of shares of common stock held by existing stockholders will be further reduced to     % of the total number of shares of common stock to be outstanding after this offering, and the number of shares of common stock held by investors participating in this offering will be further increased to              shares or     % of the total number of shares of common stock to be outstanding after this offering.

The number of shares of our common stock outstanding as of June 30, 2011 on an actual, pro forma and pro forma as adjusted basis excludes:

 

   

540,102 shares of our common stock issuable upon the exercise of outstanding options as of June 30, 2011 under our equity incentive plans, with a weighted average exercise price of $9.76 per share; and

 

   

1,079,133 shares of our common stock issuable upon the exercise of outstanding options as of June 30, 2011 under the Insys Pharma, Inc. equity incentive plan, with a weighted average exercise price of $1.83 per share.

In addition, effective upon the signing of the underwriting agreement for this offering, an aggregate of 3,000,000 shares of our common stock will be reserved for issuance under our 2011 equity incentive plan, our 2011 non-employee directors’ stock award plan and our 2011 employee stock purchase plan, respectively, and these share reserves will also be subject to automatic annual increases in accordance with the terms of the plans. Furthermore, we may choose to raise additional capital through the sale of equity or convertible debt securities due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that any of these options are exercised, new stock awards are issued under our equity incentive plans or we issue additional shares of common stock or other equity or convertible debt securities in the future, investors participating in this offering will experience further dilution.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED

FINANCIAL INFORMATION

Introductory Note

On October 29, 2010, we entered into an Agreement and Plan of Merger with Insys Therapeutics, Inc., a Delaware corporation (the entity now known as Insys Pharma), and ITNI Merger Sub Inc., our wholly-owned subsidiary and a Delaware corporation. On November 8, 2010, pursuant to the Agreement and Plan of Merger, ITNI Merger Sub Inc. merged with and into Insys Therapeutics, Inc., and Insys Therapeutics, Inc. survived as our wholly-owned subsidiary. We refer to this transaction herein as the Merger. All of the outstanding share capital of Insys Therapeutics, Inc. was exchanged for newly-issued shares of common stock and convertible preferred stock of NeoPharm. As a result of the Merger, Insys Therapeutics, Inc. became a wholly-owned subsidiary of NeoPharm and changed its name to Insys Pharma, Inc. NeoPharm then changed its name to Insys Therapeutics, Inc.

The Merger was accounted for as a reverse acquisition under the provisions of Accounting Standards Codification, or ASC, 805, Business Combinations. Pursuant to the Merger agreement, all of the common stock of the entity now known as Insys Pharma prior to the Merger was exchanged for 319,667 shares of NeoPharm common stock and 14,864,607 shares of newly-created NeoPharm convertible preferred stock. The convertible preferred stock is convertible into common stock on a one-for-0.57 basis and, until converted, will be entitled to the voting, dividend and liquidation rights of the same number of shares of common stock into which it is convertible. Immediately subsequent to the Merger, the former NeoPharm stockholders owned 5% of the combined entity on an as-converted basis.

As additional consideration, the NeoPharm board of directors approved the distribution, immediately after the Merger, of non-transferable contingent payment rights, or CPRs, to its stockholders of record as of November 5, 2010. These rights entitle the pre-Merger stockholders of NeoPharm to receive cash payments aggregating $20.0 million (equivalent to $0.70402 per share) if, prior to the five year anniversary of the Merger, the FDA approves a new drug application for any one or more of the NeoPharm drugs that were under development at the time of the Merger. The distribution would be payable within nine months of FDA approval. The fair value of this contingent payment was determined to be $1.8 million based on the assumed probability of this event. See Note 10 to the consolidated financial statements appearing elsewhere in this prospectus.

Basis of Presentation

The following unaudited pro forma condensed consolidated financial information for the year ended December 31, 2010 and the six months ended June 30, 2011 was prepared in accordance with SEC Regulation S-X, Article 11, giving effect to the accounting acquisition of NeoPharm, as described above, as well as certain related pro forma adjustments, all of which are described in the notes accompanying this unaudited pro forma condensed consolidated financial information.

The determination of the accounting acquirer was based on a review of the pertinent facts and circumstances. The identification of the acquiring entity in this instance is subjective and was based on a number of factors outlined in ASC 805-10-55-12, which are as follows:

 

   

the relative voting rights in the combined entity after the business combination;

 

   

the existence of a large minority voting interest in the combined entity if no other owner or organized group of owners has a significant voting interest;

 

   

the composition of the governing board of directors of the combined entity;

 

   

the composition of the senior management of the combined entity;

 

   

the terms of the exchange of equity interests;

 

   

the relative size of each entity;

 

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which party initiated the transaction; and

 

   

other qualitative factors.

After consideration of the factors outlined above, it was determined that Insys Therapeutics, Inc. (entity now known as Insys Pharma) was the accounting acquirer in this transaction based on the following:

 

   

Immediately following the Merger, Insys Therapeutics, Inc. stockholders held a 95% stake on an as-converted basis in the combined company and held a greater than 50% ownership in the combined entity after giving consideration to the exercise of vested, in-the-money stock options, leading to the conclusion that this criterion favored Insys Therapeutics, Inc. as the accounting acquirer.

 

   

Immediately following the consummation of the Merger, Insys Therapeutics, Inc.’s board members comprised all of the combined company’s board of directors, leading to the conclusion that this criterion favored Insys Therapeutics, Inc. as the accounting acquirer.

 

   

Immediately following the consummation of the Merger, Insys Therapeutics, Inc. management team members comprised all of the senior management positions of the combined company, leading to the conclusion that this criterion favored Insys Therapeutics, Inc. as the accounting acquirer.

 

   

Ownership interests received by the parties in the combined company were the result of a value-for-value exchange, and given neither companies’ stock was actively and readily traded, any valuation would have been inherently subjective and may not have provided a clear indication as to a premium (if any) being paid by either party, leading to the conclusion that this was a neutral criterion not favoring either entity as the accounting acquirer.

 

   

Income statement and book value of assets indicated that Insys Therapeutics, Inc. was more significant, leading to the conclusion that this criterion favored Insys Therapeutics, Inc. as the accounting acquirer.

 

   

Insys Therapeutics, Inc. initiated the transaction discussions, led the transaction negotiations, and the combined company’s operations were anticipated to be headquartered at Insys Therapeutics, Inc.’s location going forward, leading to the conclusion that this criterion favored Insys Therapeutics, Inc. as the accounting acquirer.

The Merger was accounted for using the “acquisition method” of accounting. Under the acquisition method of accounting, the purchase price is required to be allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values. Any purchase price in excess of the fair market value of the acquired tangible and intangible assets is required to be allocated to goodwill in our condensed consolidated balance sheet and amounted to $0.1 million.

We performed appraisals necessary to derive preliminary fair values of the tangible and intangible assets acquired and liabilities assumed, the amounts of assets and liabilities arising from contingencies, and the amount of goodwill to be recognized as of the Merger date, and the related preliminary allocation of the purchase price. The purchase price for accounting purposes equals the fair value of the outstanding shares of NeoPharm just prior to the Merger. While NeoPharm’s outstanding common stock options remain outstanding after the Merger, their value as of the Merger date was de minimis. We believe diversifying NeoPharm’s drug product candidates with our drug product candidates to enable the combined company to better access the capital markets, and gaining access to our management and board with significant commercial experience in cancer supportive care areas, provided the primary motivation for NeoPharm to enter the Merger.

The unaudited pro forma condensed consolidated statements of operations information for the six months ended June 30, 2011 and for the year ended December 31, 2010 are based on the consolidated

 

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statements of operations of Insys Therapeutics, Inc. for the respective periods and the unaudited consolidated financial statements of NeoPharm for the period from January 1, 2010 to November 8, 2010 (the date of the Merger), and gives effect to:

 

   

the Merger;

 

   

the issuance after each period presented of additional notes payable to trusts controlled by our Executive Chairman and principal stockholder;

 

   

the conversion of the resulting $             million in aggregate principal amount of notes and actual accrued interest thereon through                     , 2011 owed to trusts controlled by our Executive Chairman and principal stockholder into              shares of common stock, assuming an initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus; and

 

   

the conversion of all outstanding shares of our preferred stock into 8,528,860 shares of common stock,

as if all such transactions had occurred on January 1, 2010.

The unaudited pro forma condensed consolidated financial information presented for the year ended December 31, 2010 is preliminary and subject to change, is provided for illustrative purposes only and is not necessarily indicative of the results that would have been achieved had the Merger been completed as of the date indicated or that may be achieved in future periods. The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2010 does not include:

 

   

the effects of any non-recurring costs or income/gains resulting from:

 

   

professional fees and other direct or indirect costs incurred in connection with the Merger,

 

   

accelerated stock-based compensation expense resulting from the Merger, or

 

   

income tax benefits resulting directly from the Merger;

 

   

the costs related to restructuring or integration activities that we may implement subsequent to the closing of the Merger; and

 

   

the realization of any cost savings from operating efficiencies, synergies or other restructurings that may result from the Merger.

This unaudited pro forma condensed consolidated financial information should be read in conjunction with the historical consolidated financial statements of Insys Therapeutics, Inc. and NeoPharm and the related notes thereto and other information included elsewhere in this prospectus.

 

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An unaudited pro forma condensed consolidated balance sheet as of June 30, 2011 that gives effect to the above transactions is not presented primarily because the Merger is already fully reflected in our actual June 30, 2011 balance sheet. The impact of the assumed conversion of all outstanding shares of our preferred stock into 8,528,860 shares of our common stock as of June 30, 2011 would result in a reclassification within our stockholders’ equity (deficit) of $0.1 million between capital accounts. The impact of the assumed issuance of additional notes and conversion of the resulting outstanding notes and accrued interest into shares of our common stock would result in additional cash of $             million and a reclassification of $             million of debt and accrued interest into stockholders’ equity (deficit).

INSYS THERAPEUTICS, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2011

(in thousands, except share and per share data)

 

     Insys
Therapeutics,
Inc.
    Pro Forma
Adjustments
See Note 2
     Pro Forma  

Revenues

   $      $       $   

Operating expenses:

       

Research and development

     3,807                3,807   

General and administrative

     4,595                4,595   
  

 

 

   

 

 

    

 

 

 

Total operating expenses

     8,402                8,402   
  

 

 

   

 

 

    

 

 

 

Loss from operations:

     (8,402             (8,402

Other income

     102                102   

Interest expense, net.

     (888     888           
  

 

 

   

 

 

    

 

 

 

Net loss

     (9,188   $ 888         (8,300
    

 

 

    

Net loss allocable to preferred stockholders

     8,414             
  

 

 

      

 

 

 

Net loss allocable to common stockholders

   $ (774      $ (8,300
  

 

 

      

 

 

 

Loss per common share

   $ (0.99      $     
  

 

 

      

 

 

 

Weighted average common shares outstanding

     784,020        
  

 

 

   

 

 

    

 

 

 

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

INSYS THERAPEUTICS, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FISCAL YEAR ENDED DECEMBER 31, 2010

(in thousands, except share and per share data)

 

    Insys
Therapeutics,
Inc.
    NeoPharm, Inc.     Pro Forma
Adjustments
(See Note 2)
    Pro
Forma
Combined
 

Revenues

  $      $      $      $   

Operating expenses:

       

Research and development

    10,428        2,921        (105     13,244   

General and administrative

    3,539        2,140        (414     5,265   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    13,967        5,061        (519     18,509   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (13,967     (5,061     519        (18,509

Other income

    797        735               1,532   

Interest income (expense), net

    (1,148     55        1,150        57   

Income tax benefit

    575               (575       
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (13,743   $ (4,271   $ 1,094        (16,920
   

 

 

   

 

 

   

Net loss allocable to preferred stockholders

    13,144              
 

 

 

       

 

 

 

Net loss allocable to common stockholders

  $ (599       $ (16,920
 

 

 

       

 

 

 

Loss per common share

  $ (1.54       $                
 

 

 

       

 

 

 

Weighted average common shares outstanding

    388,449         
 

 

 

     

 

 

   

 

 

 

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

NOTE 1 – PRELIMINARY PURCHASE PRICE ALLOCATION — NEOPHARM

The assets acquired and liabilities assumed in the Merger are as follows (in thousands):

 

     Amount  

Cash

   $ 143   

Prepaid and other current assets

     429   

Fixed assets

     144   

Other assets

     371   

Identifiable intangible assets

     5,300   

Goodwill

     103   
  

 

 

 

Total assets acquired

   $ 6,490   
  

 

 

 

Accounts payable and accrued expenses

   $ (1,693

Unfavorable lease liability

     (120

Deferred tax liability

     (575

Contingent liability to NeoPharm stockholders

     (1,829
  

 

 

 

Total liabilities acquired

   $ (4,217
  

 

 

 

Net assets acquired

   $ 2,273   
  

 

 

 

 

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We have assessed the fair values of the acquired assets and assumed liabilities and allocated the purchase price accordingly. This valuation resulted in the recording of in-process research and development, or IPR&D, as an intangible long-lived asset in the amount of $5.3 million. The fair value of the IPR&D was determined primarily through the use of the cost approach. The cost approach relies on historical costs incurred adjusted for estimated wasted efforts and taxes. A deferred tax liability of approximately $0.6 million was generated as a result of purchase accounting at the Merger date. Accordingly, we released $0.6 million of the valuation allowance on our deferred tax assets which created an income tax benefit as of the date of the Merger and offsets this deferred tax liability. The fair value of the contingent consideration of $1.8 million was determined based on the estimated probability of any payment being made to the prior NeoPharm stockholders in 2015, discounted to present value at a rate of 15%. Any subsequent changes in the estimated fair value of this contingent consideration will be recorded in our Statement of Operations.

The $2.3 million fair value of NeoPharm at the time of the Merger was derived from a valuation that was conducted for the post-Merger combination of NeoPharm and Insys Therapeutics, Inc. This valuation exercise utilized the Income Approach using Probability Weighted Expected Return Method, or PWERM. This approach involves the estimation of future potential outcomes for the company, as well as values and probabilities associated with each respective potential outcome. The fair value of the post-Merger combined entity was determined to be $4.88 per common share, and this fair value per common share was then applied to the 464,353 shares of NeoPharm common stock outstanding at the time of the Merger.

NOTE 2 – PRO FORMA ADJUSTMENTS

The research and development and general and administrative pro forma adjustments for the year ended December 31, 2010 relate to the:

 

   

additional amortization for the period from January 1, 2010 through November 8, 2010 that would have been recorded on the unfavorable lease liability resulting from the Merger in the amount of ($18,000);

 

   

the elimination of stock-based compensation expense recorded in the NeoPharm historical results relating to acceleration of the vesting of the NeoPharm stock options upon the Merger in the amount of ($0.2 million); and

 

   

the elimination of direct Merger-related expenses recorded in both the Insys and NeoPharm historical results in the amount of ($0.3 million).

No pro forma amortization is reflected for the IPR&D in either period as the related product candidates are not expected to be in commercial production within one year of the Merger date.

The interest expense, net pro forma adjustments, in both periods represents the elimination of interest expense that would have been avoided due to the assumed conversion of the related notes into shares of common stock.

The income tax benefit pro forma adjustment for the year ended December 31, 2010 represents the elimination of a deferred income tax benefit recorded in the Insys historical results related to the reduction of its income tax valuation allowance as a direct result of the Merger.

The weighted average shares outstanding pro forma adjustment for the year ended December 31, 2010 reflects:

 

   

the deemed issuance of 464,353 common shares to the NeoPharm stockholders on the Merger date;

 

   

the conversion of preferred shares into 8,528,860 shares of common stock; and

 

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the conversion of $             million in aggregate principal amount of notes and actual accrued interest thereon through                     , 2011 owed to trusts controlled by our Executive Chairman and principal stockholder into              shares of common stock, assuming an initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus.

The weighted average shares outstanding pro forma adjustment for the six months ended June 30, 2011 reflects:

 

   

the conversion of all outstanding shares of our preferred stock into 8,528,860 shares of common stock; and

 

   

the conversion of $             million in aggregate principal amount of notes and actual accrued interest thereon through                     , 2011 owed to trusts controlled by our Executive Chairman and principal stockholder into              shares of common stock, assuming an initial public offering price of $         per share, the mid-point of the price range set forth on the cover page of this prospectus.

While the conversion of the preferred shares into common shares for both periods did increase the pro forma weighted average shares outstanding, it had no impact on earnings per share because the historical computation of per share losses is done under the two class method which essentially treats the preferred shares as converted common shares.

 

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SELECTED FINANCIAL DATA

The following tables set forth our selected financial data. The selected statements of operations data for the years ended December 31, 2010, 2009 and 2008 and the selected balance sheet data as of December 31, 2010 and 2009 are derived from our audited financial statements appearing elsewhere in this prospectus. The selected statements of operations data for the years ended December 31, 2007 and 2006 and the selected balance sheet data as of December 31, 2008, 2007 and 2006 are derived from our audited financial statements not included in this prospectus. The selected statement of operations data for the six months ended June 30, 2011 and 2010, and for the period from October 2002 (date of inception) to June 30, 2011 and the selected balance sheet data as of June 30, 2011 have been derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. The unaudited financial statements have been prepared on a basis consistent with our audited financial statements included in this prospectus and include, in our opinion, all adjustments, consisting only of normal recurring adjustments, necessary to state fairly our financial position as of June 30, 2011 and results of operations for the six months ended June 30, 2011 and 2010. You should read this selected financial data in conjunction with the financial statements and related notes and the information under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Unaudited Pro Forma Condensed Consolidated Financial Information” appearing elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results.

On October 29, 2010, we entered into an Agreement and Plan of Merger with Insys Therapeutics, Inc., a Delaware corporation, and ITNI Merger Sub Inc., our wholly-owned subsidiary and a Delaware corporation. On November 8, 2010, pursuant to the Agreement and Plan of Merger, ITNI Merger Sub Inc. merged with and into Insys Therapeutics, Inc., and Insys Therapeutics, Inc. survived as our wholly-owned subsidiary. We refer to this transaction as the Merger. Following the Merger, our wholly-owned subsidiary, Insys Therapeutics, Inc., changed its name to Insys Pharma, Inc. and we changed our name to Insys Therapeutics, Inc. In connection with the Merger, all of the outstanding shares of common stock of Insys Pharma prior to the Merger were exchanged for 319,667 shares of our common stock and 14,864,607 shares of our newly-created convertible preferred stock. Each share of our convertible preferred stock is convertible into 0.57 shares of our common stock. As a result of the Merger, 95% of our common stock on an as-converted basis was held by the then-existing stockholders of Insys Pharma. Since Insys Pharma is the acquiring entity for accounting purposes, the financial statements for all periods up to and including the November 8, 2010 Merger date are the financial statements of the entity that is now our subsidiary, Insys Pharma. The financial statements for all periods subsequent to the November 8, 2010 Merger date are the consolidated financial statements of Insys Therapeutics, Inc. and Insys Pharma. However, for all periods, the financial statements are labeled “Insys Therapeutics, Inc.” financial statements. In addition, the audited financial statements of NeoPharm for the years ended December 31, 2009 and 2008 and the unaudited financial statements for the nine months ended September 30, 2010 and 2009 are also included in this prospectus.

The selected unaudited pro forma condensed consolidated statement of operations data for the six months ended June 30, 2011 and for the year ended December 31, 2010 below is based on the historical consolidated statements of operations of Insys Therapeutics, Inc. and NeoPharm, giving effect to the Merger, the conversion of our convertible preferred stock outstanding as of June 30, 2011 and December 31, 2010 into 8,528,860 shares of our common stock and the issuance of an additional $             million in aggregate principal amount of notes payable to trusts controlled by our Executive Chairman and principal stockholder subsequent to June 30, 2011 and the conversion of $             million in aggregate principal amount of notes and actual accrued interest thereon through                     , 2011 owed to trusts controlled by our Executive Chairman and principal stockholder into             shares of common stock, assuming an initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, as if such transactions had occurred on January 1, 2010. The unaudited pro forma condensed consolidated statement of operations data is based on the estimates and assumptions set forth in the notes to the unaudited pro forma condensed consolidated financial statement. These estimates and assumptions are preliminary and subject to change, and have

 

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been made solely for the purposes of developing such pro forma information. The selected unaudited pro forma condensed consolidated statement of operations data is not necessarily indicative of the combined results of operations to be expected in any future period or the results that actually would have been realized had the entities been a single entity during the period presented.

 

    Pro Forma     Actual     Pro Forma     Actual  
    Six
Months
Ended
June 30,
2011
    Period
from
October,
2002
(inception)
to
June 30,
2011
                                                 
        Six Months
Ended June 30,
    Year Ended December 31,  
        2011     2010     2010     2010     2009     2008     2007     2006  
         

(Unaudited)

       
          (In thousands, except share and per share data)  

Statement of Operations Data:

                   

Revenues

  $  —      $      $      $      $      $      $      $      $      $   

Operating expenses:

                   

Research and development

    3,807        61,300        3,807        5,240        13,244        10,428        8,982        14,729        13,723        5,707   

General and administrative

    4,595        27,048        4,595        2,015        5,265        3,539        4,504        10,221        2,999        571   

Loss on settlement of vendor dispute

           1,104                                           1,104                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    8,402        89,452        8,402        7,255        18,509        13,967        13,486        26,054        16,722        6,278   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations:

    (8,402     (89,452     (8,402     (7,255     (18,509     (13,967     (13,486     (26,054     (16,722     (6,278

Other income

    102        1,710        102        26        1,532        797        31        780                 

Interest expense, net.

           (7,692     (888     (473     57        (1,148     (999     (1,913     (1,739     (727

Income tax benefit

           575                             575                               
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (8,300   $ (94,859     (9,188     (7,702     (16,920     (13,743     (14,454     (27,187     (18,461     (7,005
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss allocable to preferred stockholders

             8,414        7,425               13,144        13,932        26,205        17,794        6,752   
 

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss allocable to common stockholders

  $ (8,300     $ (774   $ (277   $ (16,920   $ (599   $ (522   $ (982   $ (667   $ (253
 

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per common share

  $                     $          (0.99   $        (0.87   $                   $ (1.54   $ (7.05   $ (19.09   $ (25.58   $ (11.19
 

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding, basic and diluted (1)

        784,020        319,423          388,449        74,063        51,438        26,080        22,617   
 

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Please see Note 2 to our audited financial statements appearing elsewhere in this prospectus for an explanation of the method used to calculate the net loss per common share and the number of common shares used in the computation of historical per share amounts.

 

     As of
June 30,
2011
     As of December 31,  
        2010      2009      2008      2007      2006  
     (Unaudited)         
     (In thousands)  

Balance Sheet Data:

                 

Cash and cash equivalents

   $ 17       $ 64       $ 143       $ 528       $ 9       $ 17   

Total current assets

     1,524         1,147         953         3,997         43         21   

Total assets

     14,644         14,755         8,241         5,553         9,952         1,707   

Total current liabilities, including debt

     46,381         37,970         23,387         5,046         9,748         4,631   

Total long term debt

                             14,888         29,465         8,623   

Total liabilities

     48,779         40,277         23,772         20,070         39,213         13,456   

Total stockholders’ equity (deficit)

     (34,135      (25,522      (15,531      (14,517      (29,261      (11,749

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with “Selected Financial Data” and our financial statements and related notes included elsewhere in this prospectus. This discussion and analysis and other parts of this prospectus contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. You should carefully read the “Risk Factors” section of this prospectus to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please see the section entitled “Special Note Regarding Forward-Looking Statements.”

Overview

We are a specialty pharmaceutical company that develops and seeks to commercialize innovative pharmaceutical products that target the unmet needs of cancer patients, with an initial focus on cancer-supportive care. We focus our research and development efforts on product candidates that utilize innovative formulations to address the clinical shortcomings of existing commercial pharmaceutical products. We have two product candidates, our proprietary fentanyl spray Subsys and our generic Dronabinol SG Capsule, under review for marketing approval by the FDA. We intend to build a capital-efficient commercial organization to market Subsys and our other proprietary products, if approved.

In March 2011, we submitted an NDA to the FDA for Subsys, a sublingual spray for the treatment of BTCP in opioid-tolerant patients. The FDA notified us in May 2011 that it had accepted the NDA for review and initially assigned a PDUFA goal date of January 4, 2012 for its review of the NDA. Subsys is a proprietary, single-use product that delivers fentanyl, an opioid analgesic, in seconds for transmucosal absorption underneath the tongue.

In June 2010, we submitted an amendment to our ANDA for Dronabinol SG Capsule. Dronabinol SG Capsule is a dronabinol soft gelatin capsule intended to be a generic equivalent to Marinol, a currently approved treatment for CINV and appetite stimulation in patients with AIDS. Dronabinol SG Capsule is the first in our family of dronabinol products. If Dronabinol SG Capsule is approved by the FDA, we intend to submit an ANDA to the FDA for a proprietary dronabinol soft gel formulation that is stable at room temperature, which we refer to as Dronabinol RT Capsule. Our most advanced proprietary formulation of dronabinol, Dronabinol Oral Solution, is an orally administered liquid formulation. We have completed an end-of-Phase 2 meeting with the FDA and plan to initiate a pivotal bioequivalence study for this product candidate in the second half of 2011. We produce our clinical and commercial supply of dronabinol API in our U.S.-based, state-of-the-art dronabinol manufacturing facility, which we believe provides us with a significant competitive advantage.

In addition to our cancer-supportive care products, we are developing proprietary cancer therapeutics, the most advanced of which is LEP-ETU, which recently completed a Phase 2 clinical trial of 70 patients with metastatic breast cancer. LEP-ETU is a proprietary NeoLipid liposomal, or microscopic membrane-like structure created from lipids, formulation that incorporates paclitaxel, the active ingredient in the cancer chemotherapy drugs Taxol and Abraxane.

Insys Therapeutics, Inc. was incorporated in the state of Delaware in October 2002, and we maintain our headquarters in Phoenix, Arizona. On November 8, 2010, Insys Therapeutics, Inc. effected the Merger in a transaction that was accounted for as a reverse acquisition. All of the outstanding share capital of Insys Therapeutics, Inc. was exchanged for newly-issued shares of common stock and convertible preferred stock of NeoPharm. As a result of the Merger, Insys Therapeutics, Inc. became a wholly-owned subsidiary of NeoPharm and changed its name to Insys Pharma. As of immediately prior to the Merger, our Executive Chairman, Dr. John N. Kapoor, was the chairman of NeoPharm’s board of directors and beneficial holder of more than 5% of NeoPharm’s common stock. As a result of the Merger, 95% of our common stock, on an as-converted basis, was held by the then-existing

 

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stockholders of Insys Pharma. NeoPharm then changed its name to Insys Therapeutics, Inc. Since Insys Pharma is the acquiring entity for accounting purposes, the financial statements for all periods up to and including the November 8, 2010 Merger date are the financial statements of the entity that is now Insys Pharma. The financial statements for all periods subsequent to the November 8, 2010 Merger date are the consolidated financial statements of Insys Therapeutics, Inc. and Insys Pharma. All of the discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations will reflect this financial presentation of these entities. However, for all periods, the financial statements are labeled “Insys Therapeutics, Inc.” financial statements.

We are a development-stage company. To date, we have generated no revenues and have incurred significant losses. We have financed our operations and internal growth through the issuance of promissory notes to The John N. Kapoor Trust and the Kapoor Children 1992 Trust, some of which have been converted into shares of our common stock, as well as through the sale of shares of our common stock. These trusts are controlled by our founder, Executive Chairman and principal stockholder, Dr. John N. Kapoor. We have devoted substantially all of our efforts to research and development activities, including preclinical studies and clinical trials. Our net loss was $9.2 million for the six months ended June 30, 2011 and $13.7 million for the year ended December 31, 2010. As of June 30, 2011, we had an accumulated deficit of $94.9 million. This accumulated deficit is attributable primarily to our research and development activities.

We are focusing our efforts and capital resources on obtaining approval for Subsys and Dronabinol SG Capsule, developing our other proprietary product candidates, and commercializing Subsys and our other proprietary products through a capital-efficient commercial organization and Dronabinol SG Capsule and Dronabinol RT Capsule through a distribution agreement with a leading generic pharmaceutical company.

We are subject to risks and uncertainties common to biopharmaceutical companies in the development stage, including, but not limited to, obtaining regulatory approval and acceptable DEA classification for our product candidates, dependence upon market acceptance of any approved products, risks associated with intellectual property, pricing and reimbursement, intense competition, development of markets and distribution channels and dependence on key personnel.

Our ultimate success is dependent upon our ability to successfully develop, obtain approval for and market our product candidates. We anticipate we will continue to incur net losses for at least the next several years as we:

 

   

incur expenses for the regulatory approval of Subsys and our Dronabinol SG Capsule and the development of our other product candidates, including Dronabinol Oral Solution;

 

   

establish sales and marketing capabilities for the anticipated U.S. commercial launch of Subsys;

 

   

expand our corporate infrastructure to support growth and commercialization activities and transition to operating as a public company;

 

   

increase general and administrative expenses associated with the commercialization of our Dronabinol SG Capsule and Dronabinol RT Capsule product candidates, if approved, through a potential distribution agreement with a leading generic pharmaceutical company; and

 

   

advance the clinical development of LEP-ETU and other product candidates either currently in our pipeline or that we may in-license or acquire in the future.

As of June 30, 2011, we had cash and cash equivalents of $17,000. We believe that the net proceeds from this offering and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund our operations for at least 12 months. However, we may need additional financing in the event that we do not obtain regulatory approval for our product candidates when expected, or if approved, the future sales of our product candidates do not generate sufficient revenues to fund operations. Failure to raise capital if and when needed would have a negative impact on our financial condition and our ability to pursue our business strategies.

 

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Basis of Presentation

Revenues

To date, we have generated no revenues. We do not expect to begin generating any revenues unless any of our product candidates receive marketing approval from the FDA.

Research and Development Expenses

Research and development expenses, including those for NeoPharm, consist of costs associated with our preclinical studies and clinical trials, and other expenses related to our drug development efforts. Our research and development expenses consist primarily of:

 

   

external research and development expenses incurred under agreements with third-party CROs and investigative sites, third-party manufacturers and consultants;

 

   

employee-related expenses, which include salaries, benefits and stock-based compensation for the personnel involved in our preclinical and clinical drug development activities; and

 

   

facilities, depreciation and other allocated expenses, and equipment and laboratory supplies.

To date, our research and development efforts have been focused primarily on product candidates from our fentanyl, dronabinol and LEP-ETU programs. Research and development expenses for product candidates historically developed by NeoPharm, including expenses relating to development of LEP-ETU, have been consolidated since the effective date of the Merger on November 8, 2010. From inception to June 30, 2011, we have incurred $61.3 million in total research and development expenses.

The following table provides a breakdown of our research and development expenses over the past three years, and the six months ended June 30, 2011 and 2010 (in millions):

 

     Cumulative Period
from January 1,
2007 to June 30,
2011(1)
     Six Months
Ended

June 30,
     Year Ended December 31,  
      2011      2010        2010          2009          2008    

Fentanyl(2)

   $ 26.0       $ 0.5       $ 3.1       $ 5.7       $ 6.4       $ 4.6   

Dronabinol(2)

     11.7         0.6         1.0         1.7         2.2         5.5   

LEP-ETU(2)

     0.8         0.8                                   

Internal research and development costs(3)

     12.9         1.9         1.1         3.0         0.4         4.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 51.4       $ 3.8       $ 5.2       $ 10.4       $ 9.0       $ 14.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Prior to January 1, 2007, a number of research and development expenses were incurred in connection with multiple product candidates and families, and therefore were not attributable to one specific product candidate family. We concluded that it was not practicable to attempt to track expenses by product candidate prior to such date. Therefore, the table above does not reflect a breakdown of our research and development expenses by product candidates or family for the inception to date period, but rather from January 1, 2007 to June 30, 2011.

 

(2) Consists primarily of direct research and development costs related to product development.

 

(3) Comprised primarily of salary and benefits, depreciation, facilities expenses and stock-based compensation allocated to our research and development activities.

We expect research and development expenses to increase as we continue our planned preclinical studies and clinical trials for our product candidates, particularly our proprietary dronabinol and LEP-ETU product candidates. Clinical development timelines, likelihood of regulatory approval and commercialization and associated costs are uncertain and therefore can vary significantly. We anticipate determining which research and development projects to pursue as well as the level of funding available for each project based on the scientific and preclinical and clinical results of each product candidate and related regulatory action.

 

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Several actions and additional financial investment are necessary to complete development of our Dronabinol SG Capsule product candidate in preparation for our anticipated commercialization, if approved. For example, we plan to complete multiple process validation batches aimed to meet FDA regulatory requirements for a commercial launch of Dronabinol SG Capsule. It is anticipated that the financial requirement for these process related steps will be $1.1 million incurred over a 12-month period. We believe this investment and the processes undertaken as described above will allow us to complete development of Dronabinol SG Capsule in anticipation of potential commercial launch.

Due to the risks inherent in conducting preclinical studies and clinical trials, the regulatory approval process and the costs of preparing, filing and prosecuting patent applications, our development completion dates and costs will vary significantly for each product candidate and are very difficult to estimate. The lengthy process of seeking regulatory approvals and the subsequent compliance with applicable regulations require the expenditure of substantial additional resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals or acceptable DEA classifications for our product candidates could cause our research and development expenditures to increase significantly and, in turn, have a material adverse effect on our results of operations.

General and Administrative Expenses

General and administrative expenses consist primarily of:

 

   

personnel-related expenses, including stock-based compensation costs;

 

   

depreciation and amortization charges allocated to general and administrative expense;

 

   

costs related to raising capital and becoming a public reporting company;

 

   

facilities-related expenses; and

 

   

business development-related expenses.

Our general and administrative expenses have historically been significant, and we expect these expenses to increase as we expand our infrastructure to support increased commercialization efforts relating to Subsys, Dronabinol SG Capsule and our other product candidates, if those product candidates are approved by the FDA. We also anticipate incurring additional expenses as a public company following the closing of this offering as a result of additional legal, accounting and corporate governance expenses, including costs associated with tax return preparations, accounting support services, expenses related to compliance with the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, expenses related to filing annual, quarterly and other reports and documents with the Securities and Exchange Commission, directors’ fees, directors’ and officers’ insurance premiums, expenses related to listing and transfer agent fees, and investor relations expenses.

If our NDA for Subsys is approved, we anticipate hiring a head of sales and marketing and thereafter building a sales force, supplemented by additional representatives as deemed necessary in the future. We anticipate incurring these costs sometime in the first half of 2012, depending on related regulatory action.

Interest Expense and Interest Income

Interest expense consists primarily of the interest accrued on outstanding promissory notes payable to The John N. Kapoor Trust and the Kapoor Children 1992 Trust. These trusts are controlled by our founder, Executive Chairman and principal stockholder, Dr. John N. Kapoor. The interest rate on these promissory notes is the applicable prime rate plus 2%, which was 5.25% at June 30, 2011. As of June 30, 2011, we had $43.7 million in debt owed to these trusts, including accrued interest of $6.1 million, all of which is payable on demand.

Interest income consists of amounts received from our interest-bearing checking account.

 

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Other Income

Other income consists primarily of one-time credits for cash received related to awards for government grants and other various items.

Unaudited Pro Forma Condensed Consolidated Financial Information

The unaudited pro forma condensed consolidated statement of operations information for the year ended December 31, 2010 is based on the historical consolidated statements of operations of Insys Therapeutics, Inc. and NeoPharm, giving effect to the Merger as if it had occurred on January 1, 2010. This pro forma information was prepared utilizing:

 

   

the audited consolidated financial statements of Insys Therapeutics, Inc. for the year ended December 31, 2010 and the unaudited consolidated financial statements of NeoPharm for the period from January 1, 2010 to November 8, 2010, the Merger date;

 

   

the preliminary purchase price allocation of the Merger, a summary of which is included in Note 1 to the pro forma information included in the section entitled “Unaudited Pro Forma Condensed Consolidated Financial Information;” and

 

   

the assumptions and adjustments described in the notes to such pro forma financial information.

The unaudited pro forma condensed consolidated financial information for the year ended December 31, 2010 is preliminary and subject to change, is provided for illustrative purposes only and is not necessarily indicative of the results that would have been achieved had the Merger been completed as of the date indicated or that may be achieved in future periods. In addition, the unaudited pro forma condensed consolidated statement of operations does not include:

 

   

the effects of any non-recurring costs or income/gains resulting from:

 

   

professional fees and other direct or indirect costs incurred in connection with the Merger,

 

   

accelerated stock-based compensation expense resulting from the Merger, or

 

   

income tax benefits resulting directly from the Merger;

 

   

the costs related to restructuring or integration activities that we may implement subsequent to the closing of the Merger; and

 

   

the realization of any cost savings from operating efficiencies, synergies or other restructurings that may result from the Merger.

The unaudited pro forma condensed consolidated financial information for the year ended December 31, 2010 should be read in conjunction with the historical consolidated audited financial statements of Insys Therapeutics, Inc. and NeoPharm and the related notes thereto and other information included elsewhere in this prospectus.

The unaudited pro forma condensed consolidated financial information for the six months ended June 30, 2011 is based on our historical consolidated statements of operations, giving effect to the transactions described in the notes to such pro forma financial information as if such transactions had occurred on January 1, 2010. The unaudited pro forma condensed consolidated financial information for the six months ended June 30, 2011 should be read in conjunction with our historical consolidated unaudited financial statements and the related notes thereto and other information included elsewhere in this prospectus.

Internal Control Over Financial Reporting

In connection with the audit of our consolidated financial statements for the year ended December 31, 2010, our management and independent registered public accounting firm identified a material weakness in our internal control over financial reporting, as defined in rules established by the

 

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Public Company Accounting Oversight Board, or PCAOB. This material weakness related to a lack of sufficient staff with appropriate training in GAAP and SEC rules and regulations with respect to financial reporting. As a result, audit adjustments to our financial statements were identified during the course of the audit. Currently, we have only one designated finance and accounting employee, our new Chief Financial Officer, and rely on consultants to provide many accounting, book-keeping and administrative services. In an effort to remediate this material weakness, we intend to hire additional finance and accounting personnel, build our financial management and reporting infrastructure, and further develop and document our accounting policies and financial reporting procedures in 2011 and 2012. For example, we have begun a search for a controller and expect to fill that position in 2011. We cannot assure you that we will be successful in these hiring or remediation efforts, or that any of these measures will significantly improve or remediate the material weakness described above.

Assessing our staffing and training procedures to improve our internal control over financial reporting is an ongoing process. We are currently not required to comply with Section 404 of the Sarbanes-Oxley Act, and are therefore not required to make an assessment of the effectiveness of our internal control over financial reporting. As a result, our management did not perform an evaluation of our internal control over financial reporting as of December 31, 2010. Further, our independent registered public accounting firm has not been engaged to express, nor have they expressed, an opinion on the effectiveness of our internal control over financial reporting. We also currently do not have an internal audit function.

For the year ending December 31, 2012, pursuant to Section 404 of the Sarbanes-Oxley Act, management will be required to deliver a report that assesses the effectiveness of our internal control over financial reporting. Under current SEC rules, if we are an accelerated filer, our independent registered public accounting firm will also be required to deliver an attestation report on the effectiveness of our internal control over financial reporting beginning with the year ending December 31, 2012.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosed amounts of contingent assets and liabilities, and our reported expenses. We evaluate our estimates and judgments related to these estimates on an ongoing basis. We base our estimates of the carrying values of assets and liabilities that are not readily apparent from other sources on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

We believe that the following accounting policies are critical to a full understanding of our reported financial results. Our significant accounting policies are more fully described in Note 1 of our audited consolidated financial statements appearing elsewhere in this prospectus.

Research and Development Expenses

As a development-stage company, research and development is our most significant expenditure. Our research and development expenses consist of expenses incurred in developing and testing our product candidates. These expenses include, among other things, salaries, benefits, stock-based compensation costs, consulting fees and costs reimbursed to third parties under license and research agreements, expenses related to regulatory filings for our drug candidates, facilities, depreciation and other allocated expenses, and equipment and laboratory supplies. We expense our research and development costs as incurred and expect little variability between the estimates recorded and actual research and development expenses. As we continue to develop product candidates and proceed through the various preclinical studies and clinical trials required for possible FDA approvals, we

 

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expect that research and development expenses will increase in absolute dollars, but, if and when we begin generating revenues as anticipated, decrease as a percentage of revenues going forward.

Acquisitions, Goodwill and Other Intangible Assets

We account for acquired businesses using the acquisition method of accounting in accordance with GAAP accounting rules for business combinations which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of net assets acquired is recorded as goodwill. Any excess of the fair value of assets acquired and liabilities assumed over the purchase price is recorded as a bargain purchase gain. The fair value of intangible assets, including developed product and in-process research and development, is based on significant judgments made by management. The valuations and useful life assumptions are based on information available near the acquisition date and are based on expectations and assumptions that are considered reasonable by management. In our assessment of the fair value of identifiable intangible assets acquired in the Merger, management used valuation techniques and made various assumptions in determining the valuation. Our analysis and financial projections are based on management’s prospective operating plans and the historical performance of the acquired business. In connection with the Merger on November 8, 2010, we engaged consultants to assist management in the following:

 

   

developing an understanding of the economic and competitive environment for the industry in which we and the acquired company participate;

 

   

identifying the intangible assets acquired;

 

   

reviewing the Merger agreements and other relevant documents made available;

 

   

interviewing our employees, including the employees of the acquired company, regarding the history and nature of the Merger, historical and expected financial performance, product lifecycles and roadmap, and other factors deemed relevant to our valuation analysis;

 

   

performing additional market research and analysis deemed relevant to our valuation analysis;

 

   

estimating the fair values and recommending useful lives of the acquired intangible assets; and

 

   

preparing a narrative report detailing methods and assumptions used in the valuation of the intangible assets.

All work performed by consultants was discussed and reviewed in detail by management to determine the estimated fair values of the intangible assets. The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations.

Federal and State Income Taxes

Prior to November 8, 2010, the subsidiary entity that is now known as Insys Pharma was subject to taxation under the provisions of Subchapter S of the Code in the United States, and, as a result, the federal and state income tax liabilities of that entity were the responsibility of its stockholders. Accordingly, no provision was made for federal or state income taxes of that entity, since it was the personal responsibility of the individual stockholders of that entity to separately report their proportionate share of its taxable income or loss. As of November 8, 2010, as a result of the Merger, the subsidiary entity that is now known as Insys Pharma became a Subchapter C Corporation and became subject to U.S. federal and state income tax at the corporate level. The effect of the change in tax status was to recognize a one-time non-cash tax benefit of $3.0 million to establish a $3.0 million net deferred tax asset for the future tax consequences attributable to differences between the financial statement and income tax bases of its assets and liabilities as of November 8, 2010. A full valuation allowance was recorded against this net deferred tax asset as it is not more likely than not that it will be realized.

 

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On November 8, 2010, Insys Therapeutics, Inc. effected the Merger in a transaction that was accounted for as a reverse acquisition and resulted in a change of 50% or more of the ownership of NeoPharm. As of the Merger date, NeoPharm had $274.0 million of federal NOLs which were scheduled to expire in tax years 2011 to 2029. Under Section 382 of the Code, our utilization of the pre-Merger federal NOLs of NeoPharm to offset our post-Merger federal taxable income is significantly limited due to the Merger. Prior to the Merger, NeoPharm had completed a partial analysis of ownership changes under Section 382 of the Code to determine if a change in control of NeoPharm had occurred. Based on NeoPharm’s partial analysis, no change in control was identified, based on the review of eight test dates covering a four-year period ended December 31, 2007. A complete formal analysis of ownership change would have to be performed in order to obtain certainty that a change in control of NeoPharm had not occurred prior to the Merger, which could further limit the utilization of the NeoPharm pre-Merger NOLs by us.

Based on the above, we have estimated the amount of pre-Merger federal NOLs of NeoPharm that are available to offset our post-Merger income is limited to approximately $158,000 each year for 20 years, or cumulatively $3.2 million. For state income tax purposes, we have $274.0 million of state NOLs relating to NeoPharm. We have placed a valuation allowance on its deferred tax assets, which include the federal and state NOLs, for it is not more likely than not that such amounts will be realized.

We account for our deferred income tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities, and NOLs and other tax credit carryforwards. These items are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date.

We record a valuation allowance to reduce the deferred income tax assets to the amount that is more likely than not to be realized. In making such determination, management considers available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations.

We recognize a tax benefit from uncertain tax positions when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. We recognize interest accrued on unrecognized tax benefits and penalties in income tax expense.

Stock-Based Compensation

We account for stock-based compensation under the guidance of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 718: Compensation-Stock Compensation. Under this standard, the fair value of each share-based payment award is estimated on the date of grant using an option pricing model that meets certain requirements and the expense is amortized ratably over the vesting period. We currently use the Black-Scholes option pricing model to estimate the fair value of our share-based payment awards. The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is highly subjective and requires judgment, and a number of assumptions, including expected volatility, risk-free interest rate, expected term and expected dividend yield.

For the six months ended June 30, 2011 and the years ended December 31, 2010 and 2008 (there were no grants in 2009) the fair value of stock options was estimated at the grant date using the following assumptions:

 

     Six Months Ended
June 30, 2011
   Year Ended December 31,
        2010    2008

Expected volatility

   109.2%    100.0% – 110.8%    123.1% – 123.2%

Risk-free interest rate

   3.5%    2.5% – 2.9%    3.3% – 3.5%

Expected term (in years)

   6.5 – 9.7    5.0 – 6.0    6.0

Expected dividend yield

   0.0%    0.0%    0.0%

 

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Expected Volatility. Prior to the Merger, we did not have a history of market prices for our common stock and since the Merger, we do not have what we consider a sufficiently actively and readily traded market for our common stock to use historical market prices for our common stock to estimate volatility. Accordingly, we estimate the expected stock price volatility for our common stock by taking the median historical stock price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. Industry peers consist of other public companies in the pharmaceutical industry similar in size, stage of life cycle and financial leverage. We did not rely on the implied volatilities of traded options in our industry peers’ common stock, because either the term of those traded options was much shorter than the expected term of our stock option grants, or the volume of activity was relatively low.

Risk-Free Interest Rate. Generally, the risk-free interest rate assumption is based on observed interest rates appropriate for the terms of our awards. For grants made in 2011, 2010 and 2008, the risk-free interest rate assumption was based on zero coupon U.S. Treasury instruments whose term was consistent with the expected term of our stock option grants.

Expected Term.    Generally, the expected term of the awards is based on a simplified method which defines the life as the average of the contractual term of the options and the weighted average vesting period for all open tranches. We have very little historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for our stock option grants. As a result, for stock option grants made to employees during the six months ended June 30, 2011, and the years ended December 31, 2010 and 2008, the expected term was estimated using the simplified method allowed under Securities and Exchange Commission Staff Accounting Bulletin No. 107, Share-Based Payment.

Expected Dividend Yield.    The dividend yield assumption is based on our history and expectation of paying no dividends.

We periodically evaluate the assumptions used to value our awards. If factors change, such as changes in the expected term of the options granted or the fair value of our common stock, and we employ different assumptions, stock-based compensation expense may differ significantly from what we may have recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity awards to employees or we assume unvested equity awards in connection with acquisitions.

We have granted to our employees options to purchase common stock at exercise prices equal to the fair market value of the underlying stock at the time of each grant, as determined by our board of directors. The board of directors considered objective and subjective factors in determining the estimated fair value of our common stock on each option grant date, including, among others:

 

   

the development status of our product candidates and regulatory issues encountered during the relevant period;

 

   

the composition of the management team and employees;

 

   

developments in the industry and our targeted markets;

 

   

the actual financial condition and results of operations relative to our formal operating plan during the relevant period;

 

   

lack of earnings and dividend paying capacity;

 

   

limited sources of funding and dependence on one investor for financing;

 

   

lack of revenues and estimated revenue forecasts;

 

   

risks and volatility associated with us, our industry and our peers;

 

 

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the illiquidity of our capital stock;

 

   

the likelihood of a liquidity event;

 

   

certain equity award and stock restrictions; and

 

   

concentration in control of ownership.

In addition to considering such factors in determining the fair value of our common stock and common stock options, our board of directors, with the assistance of management, conducted valuations of our common stock as of April 15, 2008, May 31, 2009 and February 28, 2010. We used a valuation methodology that is consistent with the practices recommended by the American Institute of Certified Public Accountants, or AICPA, Audit and Practice Aid Series Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid. In determining the appropriate method to use in valuing our common stock, we used the Income Approach, specifically the Discounted Cash Flow, or DCF, method which is the suggested method for a development stage company that is in Stage 3 as defined in the Practice Aid.

The DCF method is predicated on the concept that the fair market value of a business and its common stock is equal to the present value of cash flows earned during the forecast period, plus the value at the end of that period referred to as its terminal value. The primary assumptions applied in the DCF valuation analysis are revenue, costs of goods sold, research and development expenses, selling, general and administrative expenses, depreciation, capital expenditures, debt free working capital, notes receivable, federal and state tax rates and notes outstanding.

Once the total equity capital is calculated, the analysis then determines the discount rate (cost of equity) applied to the forecasted economics based on venture capital rates of return for biotechnology companies. Insys was considered a high risk investment given its early stage of development. The residual value was calculated using the “Gordon Growth Model.”

In July 2008, we granted options to purchase a total of 299,418 shares of our common stock (voting and non-voting) with an exercise price of $22.57 per share (reflecting the retroactive effect of a one-for-1,500,000 reverse stock split effective on June 5, 2009, a 1,862,623-for-one stock split on February 22, 2010, and the Merger). Utilizing the DCF method described above, it was determined that the indicated total invested capital value was $70 million and equity value after debt totaled $30 million. The overall weighted average cost of capital used in this calculation was 35%. The discounts related to lack of control (-10%) and lack of marketability (-30%) were then taken into account, due to the fact that we were still in a development stage and had a simple capital structure with only one major investor. The adjusted equity value was then determined to be $18.0 million, or $22.57 per share, of our common stock (voting and non-voting) using the DCF method.

In 2009, we granted no options and all of the previously granted options were cancelled at the time that we effected a one-for-1,500,000 reverse stock split and cancelled all of the resulting fractional shares.

In February and April 2010, we granted options to purchase a total of 1,138,804 shares of our common stock (voting and non-voting) with an exercise price of $1.83 per share (reflecting the retroactive effect of a one for-1,500,000 reverse stock split effective on June 5, 2009, a 1,862,623-for-one stock split on February 22, 2010, and the Merger). Utilizing the DCF method described above, it was determined that the indicated total invested capital was $48.4 million and equity value after debt totaled $26.2 million. The overall weighted average cost of capital used in this calculation was 40%. The discounts related to minority interests (-15%) and lack of marketability (-30%) were then taken into account. The adjusted equity value was determined to be $14.4 million, or $1.83 per share. There were several key internal and external factors which contributed to the decline of the value of our common stock between July 2008 and February 2010. These key factors included:

 

   

In 2008, a competitor of ours received approval for a generic form of Marinol, resulting in a downward revision in our estimated market opportunity for our lead product lines.

 

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During 2009, macro-economic conditions continued to deteriorate, making it difficult for private biotechnology companies to raise additional capital to fund their operations. Financings that closed during this period were at significant discounts to prior rounds of financing, and there was a high level of uncertainty regarding whether we would be able to obtain sufficient funding to continue long-term operations.

 

   

In May 2009, we received notice from the FDA that our Dronabinol HG Capsule application was denied and that it would be in our best interest to abandon the project. At the time, Dronabinol HG Capsule was our only potential near-term source of revenue and prior to the FDA notice we attributed a significant portion of the overall value of our company to this product candidate. At this time we also froze spending on our other Dronabinol line extensions.

 

   

As of February 2010, we were pursuing the development of our Dronabinol SG Capsule and were conducting the bioequivalence study but did not yet know the results of the study or whether we would be able to resubmit our application to the FDA. Additionally, as of this time our debt had increased to $22.3 million and we were reliant on one major investor.

 

   

Between July 2008 and February 2010, sales of Dronabinol decreased substantially, which caused us to lower our projected future earnings if we were to ever commercialize a Dronabinol product. Also during this period, the FDA began scrutinizing prescriptions of Fentanyl products to patients who do not fit indicated patient profiles or for off label uses. We believe this resulted in lower sales of Fentanyl products, which in turn caused us to revise our projected revenues from Subsys, if approved.

On February 15, 2011, we conducted another valuation exercise utilizing the Income Approach using Probability Weighted Expected Return Method, or PWERM. This approach involves the estimation of future potential outcomes for us, as well as values and probabilities associated with each respective potential outcome. The common stock per share value determined using this approach is ultimately based upon probability-weighted per share values resulting from the various future scenarios, which can include an initial public offering, merger or sale, dissolution, or continued operation as a private company. Under a probability-weighted expected return method, in accordance with the AICPA guidelines, the value of the common stock is estimated based upon an analysis of future values for the enterprise assuming various future outcomes. Share value is based upon the probability-weighted present value of future expected investment returns, considering each of the possible future outcomes available to the enterprise, as well as the rights of each share class.

We first determined the value of our equity using the Income Approach, the Market Approach (which calculates the equity value based on the Public Company Market Multiple Method, or PCMMM), and the Cost Approach. The values from these various approaches were then used to conclude a future value of Insys through a PWERM analysis as described below. PWERM was determined to be the most appropriate methodology due to Insys’ shorter expected time horizon to a potential liquidity event, as well as management’s ability to more accurately assess potential exit events and associated probabilities. The following likelihoods of various scenarios were used for this analysis:

 

   

Initial public offering in 6 months – 35% probability (Market Approach used);

 

   

Initial public offering in 1 year – 20% probability (Market Approach used);

 

   

Acquisition in 1 year – 15% probability (Income Approach used);

 

   

Acquisition in 1.5 years – 10% probability (Income Approach used);

 

   

Liquidation in 1.5 years – 10% probability (Cost Approach used); and

 

   

Remain private – 10% probability (Income Approach used).

The value under the income approach was determined using the DCF method. The discount rate used was 35% after assessing rates of returns on investments in development-stage biotechnology companies. We used similar primary assumptions as used in prior year valuations in which the Income

 

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Approach was used. Under the Income Approach using the DCF method, it was determined that our equity value was $69.9 million after a 10% lack of control adjustment. Our value under the acquisition scenario and in the scenario where we remained private was based on our equity value concluded from the Income Approach.

For PCMMM, we selected guideline companies which represented the most comparable publicly traded companies with operations similar to ours at the valuation date and analyzed the enterprise value, or EV, to future revenue multiples for each of these companies. Initial public offering multiples from transactions that occurred between October 2008 and June 2009 were excluded due to the economic turmoil and instability in the capital markets during that time frame. We also cross-referenced forward initial public offering multiples and considered adjustments to reflect the differences between us and the guideline companies in terms of growth, profitability and risk. Based on this analysis, we arrived at an estimated equity value of $93 million. Our value under the initial public offering scenario was based on the selected multiple from the PCMMM of the market approach.

Our value under the liquidation scenario was determined based on a cost approach, in which the book value of our equity as of December 2010 (including NeoPharm) was assumed to approximate our fair market value in connection with a liquidation in 1.5 years. The book value of our equity as of December 2010 was negative. As a result, liquidation proceeds to equity holders under this scenario were determined to be zero.

The following is a summary of the PWERM values as of February 15, 2011:

 

Scenario

   Scenario
Probability
    Time to Event
(years)
     Common Shares  
        Value Per Share      Probability
Weighted Value
 

IPO (6 months)

     35     0.5       $ 7.93       $ 2.44   

IPO (1 year)

     20     1.0         6.71         1.22   

Acquisition (1 year)

     15     1.0         6.71         1.22   

Acquisition (1.5 years)

     10     1.5         6.71         0.61   

Liquidation (1.5 years)

     10     1.5                   

Remain private

     10     NA         6.71         0.61   
                      

Total

     100         $ 6.71   

25% downward adjustment for lack of marketability

  

   ($ 1.83
                

Concluded value per share (minority, non-marketable basis) (rounded)

  

   $ 4.88   

In March 2011, we granted options to purchase a total of 508,491 shares of our common stock with an exercise price of $4.88 per share which was based on the valuation of our common stock in February 2011 as described above, but prior to consideration of the initial public offering and the underlying corporate activities that supported the offering. We subsequently reassessed the fair market value of our common stock after giving consideration to our proposed initial public offering and the underlying corporate activities that supported the offering and determined that for accounting purposes the fair market value of our common stock in March 2011 was $15.00 per share.

 

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The following table sets forth the number of options granted, the fair market value per share underlying the options based on the analyses set forth above, the total fair market value of the option shares, the exercise price and the intrinsic value, if any, for each option grant made by us since January 1, 2008:

 

Option Date

  Total
Options
Granted  (1)
    Fair Market
Value Per
Share
    Total
Fair

Market
Value
    Exercise
Price
    Total
Exercise
Price
    Intrinsic
Value (2)
 

July 9, 2008

    2,574      $ 22.57      $ 58,095      $ 22.57      $ 58,095      $   

July 25, 2008

    296,844      $ 22.57      $ 6,699,769      $ 22.57      $ 6,699,769          

February 22, 2010

    1,026,678      $ 1.83      $ 1,878,821      $ 1.83      $ 1,878,821          

April 5, 2010

    112,126      $ 1.83      $ 205,191      $ 1.83      $ 205,191          

March 28, 2011

    508,491      $ 15.00      $ 7,627,365      $ 4.88      $ 2,481,436        5,145,929   

Total Options

           

Options outstanding vested at June 30, 2011

    1,118,851      $ 4.64 (3)    $ 5,191,469      $ 4.27 (3)    $ 4,777,494     

Options outstanding unvested at June 30, 2011

    500,381      $ 14.26 (3)    $ 7,135,433      $ 4.88 (3)    $ 2,441,859     

 

(1) Represents shares of both voting and non-voting common stock.

 

(2) The intrinsic value of the options granted on July 9, 2008, July 25, 2008, February 22, 2010 and March 28, 2011 is defined as the positive difference between the fair market value of our common stock (voting and non-voting) at the date of grant (as determined by the valuation methods described above) and the exercise price of the options. The intrinsic value of the total options outstanding (vested and unvested) at June 30, 2011 is defined as the positive difference between the estimated offering price of our common stock in this offering and the weighted average exercise price of the outstanding options.

 

(3) Weighted average fair market value and exercise price.

Stock-based compensation expense was $570,000 and $1.3 million for the six months ended June 30, 2011 and 2010, respectively, and $1.4 million, $2.5 million and $7.8 million for the years ended December 31, 2010, 2009 and 2008, respectively. Included in stock-based compensation expense for the years ended December 31, 2009 and 2008 was $3.2 million and $3.9 million, respectively, resulting from the difference between the fair market value per share of a controlling equity interest in us and the fair market value per share of the minority, non-marketable interest relating to certain issuances of shares of our common stock to The John N. Kapoor Trust and Dr. John N. Kapoor. On December 29, 2009, debt and accrued interest totaling $11.5 million was converted into 253,414 shares and on July 25, 2008, debt and accrued interest totaling $24.2 million was converted into 38,112 shares. See Note 10, “NeoPharm Merger” to the Insys Therapeutics consolidated financial statements located elsewhere in this prospectus.

In connection with the one-for-1,500,000 reverse stock split on June 2, 2009, we cancelled all options outstanding at that time. This resulted in a reversal of stock-based compensation expense that had been previously recorded for all of the outstanding options that had not vested as of the date cancelled. The total reversal of stock-based compensation expense related to this cancellation and employee terminations resulted in an offset to our stock-based compensation expense of $0.7 million for the year ended December 31, 2009.

Results of Operations

Comparison of Six Months Ended June 30, 2011 to Six Months Ended June 30, 2010

Revenues.    We did not recognize any revenues during the six months ended June 30, 2011 or 2010.

Research and Development Expenses.    For the six months ended June 30, 2011, research and development expenses were $3.8 million. Of this amount, $2.7 million related to Insys Pharma

 

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operations and $1.1 million was associated with the NeoPharm operations. Of these research and development expenses, $0.5 million were for direct costs attributable to our fentanyl program and $0.6 million were direct costs attributable to our dronabinol programs. The $1.1 million expenses associated with the NeoPharm operations were for staffing and for direct costs related to the clinical trials for LEP-ETU. For the six months ended June 30, 2010, research and development expenses were $5.2 million and all related to the Insys Pharma operations. We estimate $3.1 million of these research and development expenses was attributable to our fentanyl program and $1.0 million was attributable to our dronabinol programs. The $1.4 million, or 27%, decrease in research and development expenses between the six months ended June 30, 2011 and the six months ended June 30, 2010 is primarily the result of decreased expenses in connection with the completion of our clinical trials for Subsys and Dronabinol SG Capsule products and decreased stock-based compensation expenses, partly offset by the inclusion of expenses associated with NeoPharm’s operations in the six months ended June 30, 2011. Total research and development stock-based compensation expense for the six months ended June 30, 2011 was $0.1 million, a decrease of $0.5 million from the 2010 period. The decrease is primarily attributable to a longer vesting period for the shares granted in March 2011, as compared to the vesting period for the shares granted in February 2010.

General and Administrative Expenses.    General and administrative expenses were $4.6 million for the six months ended June 30, 2011, an increase of $2.6 million, or 130%, from $2.0 million for the six months ended June 30, 2010. This increase was primarily due to the payment of approximately $1.5 million of regulatory filing fees for the submission of the NDA for the fentanyl drug product and general and administrative expenses of approximately $1.3 million related to NeoPharm’s operations.

Interest Expense.    Net interest expense was $0.9 million for the six months ended June 30, 2011, an increase of $0.4 million, or 80%, from $0.5 million for the six months ended June 30, 2010. This increase was primarily a result of greater amounts outstanding under promissory notes payable to The John N. Kapoor Trust and the Kapoor Children 1992 Trust during the six months ended June 30, 2011 as compared to the six months ended June 30, 2011. As of June 30, 2011 and December 31, 2010, the aggregate principal balance of these notes payable was $37.6 million and $29.7 million, respectively, excluding accrued interest expense payable of $6.1 million and $5.2 million, respectively.

Other Income, Net.    Other income, net of $0.1 million for the six months ended June 30, 2011 was primarily the result of a $0.3 million grant awarded to us under a program administered by the U.S. federal government for certain types of qualifying therapeutic discovery projects, partially offset by the $0.2 million accretion of our contingent payment obligation to the pre-Merger NeoPharm stockholders.

Comparison of Year Ended December 31, 2010 to Year Ended December 31, 2009

Revenues.    We did not recognize any revenues during the years ended December 31, 2010 or 2009.

Research and Development Expenses.    For the year ended December 31, 2010, research and development expenses were $10.4 million. Of this amount, $10.2 million related to Insys Pharma operations and $0.2 million was associated with the NeoPharm operations. Of these research and development expenses, $5.7 million were for direct costs attributable to our fentanyl program and $1.7 million were direct costs attributable to our dronabinol programs. The $0.2 million expenses associated with the NeoPharm operations were for staffing and for direct costs related to the clinical trials for LEP-ETU. For the year ended December 31, 2009, research and development expenses were $9.0 million. We estimate $6.4 million of these research and development expenses was attributable to our fentanyl program and $2.2 million was attributable to our dronabinol programs. The $1.4 million, or 16%, increase in research and development expenses between the year ended December 31, 2010 and the year ended December 31, 2009 is primarily the result of increased stock-based compensation expenses, as well as increased personnel costs in connection with an increase in staffing at the Dronabinol API manufacturing facility that was obtained in the third quarter of 2009. Total research and development stock-based compensation expense for the year ended December 31, 2010 was $0.7 million, an increase of $1.1 million over 2009. The total cancellation of all stock options outstanding and

 

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employee terminations in 2009 resulted in a $0.4 million net reversal of research and development stock-based compensation expense for the year ended December 31, 2009.

General and Administrative Expenses.    General and administrative expenses were $3.5 million for the year ended December 31, 2010, a decrease of $1.0 million, or 21%, from $4.5 million for the year ended December 31, 2009. This decrease was primarily due to lower stock-based compensation expenses, reduced legal expenses and decreased salaries due to a restructuring of the executive team.

Interest Expense.    Net interest expense was $1.1 million for the year ended December 31, 2010, an increase of $0.1 million, or 15%, from $1.0 million for the year ended December 31, 2009. This increase was primarily a result of greater amounts outstanding under promissory notes payable to The John N. Kapoor Trust and the Kapoor Children 1992 Trust during the year ended December 31, 2010 as compared to the year ended December 31, 2009. As of December 31, 2010 and December 31, 2009, the aggregate principal balance of these notes payable was $29.7 million and $14.5 million, respectively, excluding accrued interest expense payable of $5.2 million and $4.1 million, respectively.

Other Income.    Other income of $0.8 million for the year ended December 31, 2010 was primarily the result of grants awarded to us under a program administered by the U.S. federal government for certain types of qualifying therapeutic discovery projects.

Income Tax Benefit.    An income tax benefit of $0.6 million that was recorded for the year ended December 31, 2010 was primarily due to the release of a portion of our valuation allowance on deferred tax assets to offset the deferred tax liability created as a result of the Merger on November 8, 2010. Prior to November 8, 2010, the federal and state income tax liabilities of Insys Pharma were the responsibility of its stockholders and, accordingly, no provision was made for federal or state income taxes in fiscal years 2009 and 2008 and prior thereto.

Comparison of Year Ended December 31, 2009 to Year Ended December 31, 2008

Revenues.    We did not recognize any revenues during the years ended December 31, 2009 or 2008.

Research and Development Expenses.    For the year ended December 31, 2009, research and development expenses were $9.0 million. Of these research and development expenses, approximately $6.4 million were direct costs attributable to the fentanyl program and $2.2 million were direct costs attributable to dronabinol programs. For the year ended December 31, 2008, research and development expenses were $14.7 million. Of these research and development expenses, approximately $4.6 million were direct costs attributable to the fentanyl program and $5.5 million was attributable to dronabinol programs. The $5.7 million, or 39%, decrease in research and development expenses between the year ended December 31, 2009 and the year ended December 31, 2008 resulted primarily from the discontinuation of the Dronabinol HG Capsule product candidate program in 2009, partially offset by expenses for additional outside consultants hired as we expanded our development of the Dronabinol RT Capsule, Dronabinol Oral Solution and Dronabinol Inhalation Device product candidates.

General and Administrative Expenses.    General and administrative expenses were $4.5 million for the year ended December 31, 2009, a decrease of $5.7 million, or 56%, from $10.2 million for the year ended December 31, 2008. This decrease was primarily due to reduced expenses related to stock-based compensation and lower executive salaries due to restructuring. We had also incurred expenses in 2008 in connection with a contemplated initial public offering which led to higher expenses in 2008 as compared to 2009.

Interest Expense and Interest Income.    Net interest expense was $1.0 million for the year ended December 31, 2009, a decrease from $1.9 million for the year ended December 31, 2008. This decrease was primarily due to a decline in the principal balance of the demand and promissory notes payable to entities affiliated with Dr. John N. Kapoor during 2009 as compared to 2008 primarily as a result of the

 

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conversion of a portion of such debt to equity that took place in July 2008. With no further borrowing for the rest of the year, the principal balance of these notes payable, excluding $4.1 million of accrued interest payable, remained $14.3 million as of December 31, 2008.

Other Income.    Other income decreased from $0.8 million for the year ended December 31, 2008 to approximately $31,000 for the year ended December 31, 2009. Included in other income for the year ended December 31, 2008 was a one-time credit that was recorded in connection with the settlement of a dispute with a supplier.

Liquidity and Capital Resources

Sources of Liquidity

We have incurred losses since our inception. As of June 30, 2011, we had an accumulated deficit of $94.9 million. We have financed our operations through the issuance of promissory notes to The John N. Kapoor Trust and the Kapoor Children 1992 Trust, which are controlled by our founder, Executive Chairman and principal stockholder. During the six months ended June 30, 2011, we received net proceeds of $7.9 million, and during the years ended December 31, 2010, 2009 and 2008, we received net proceeds of $15.1 million, $11.5 million and $9.5 million, respectively, from the issuance of such promissory notes.

As of June 30, 2011, we and Insys Pharma had $43.7 million in debt, including accrued interest of $6.1 million, under the promissory notes payable to The John N. Kapoor Trust and the Kapoor Children 1992 Trust, and $17,000 in cash and cash equivalents. Upon the closing of this offering, these notes, and other notes issued by us or Insys Pharma to trusts controlled by Dr. Kapoor, including accrued interest, will convert into shares of our common stock at the price to the public of the shares sold in this offering.

Cash Flows

The following table shows a summary of our cash flows for the periods indicated (in millions):

 

     Six Months
Ended June 30,
    Year Ended
December 31,
 
     2011     2010     2010     2009     2008  
     (Unaudited)                    

Cash and cash equivalents at beginning of period

   $ 0.1      $ 0.1      $ 0.1      $ 0.5      $ 0.0   

Cash provided by (used in):

          

Operating activities

     (7.8     (6.5     (15.0     (10.2     (15.4

Investing activities

     (0.2     (0.1     (0.2     (1.6     (0.3

Financing activities

     7.9        6.5        15.1        11.4        16.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

   $ (0.1   $ (0.1   $ 0.1      $ 0.4      $ 0.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 0.0      $ 0.0      $ 0.1      $ 0.1      $ 0.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Cash Used in Operating Activities.    Net cash used in operating activities was $7.8 million and $6.5 million for the six months ended June 30, 2011 and 2010, respectively, and $15.0 million, $10.2 million and $15.4 million for the years ended December 31, 2010, 2009 and 2008, respectively. The net cash used in each of these periods primarily reflects the net loss for those periods, offset in part by depreciation, stock-based compensation expense and non-cash interest expense and is also impacted by changes in other current liabilities.

Net Cash Used in Investing Activities.    Net cash used in investing activities was $0.2 million and $0.1 for the six months ended June 30, 2011 and 2010, respectively, and $0.2 million, $1.6 million and $0.3 million for the years ended December 31, 2010, 2009 and 2008, respectively. The significant increase in net cash used in investing activities during the year ended December 31, 2009, primarily reflects the purchase of equipment, leasehold improvements and API related to the manufacturing facility for dronabinol which we obtained in 2009.

 

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Net Cash Provided by Financing Activities.    Net cash provided by financing activities was $7.9 million and $6.5 million for the six months ended June 30, 2011 and 2010, respectively, and $15.1 million, $11.4 million and $16.2 million for the years ended December 31, 2010, 2009 and 2008, respectively. Net cash provided by financing activities was primarily attributable to the promissory notes payable to The John N. Kapoor Trust and The Kapoor Children 1992 Trust.

Our cash flows for the remainder of 2011 and beyond will depend on a variety of factors, including anticipated regulatory approvals, revenues from commercialization of approved products and funding requirements, as well as timing of the closing of this offering and our use of net offering proceeds as described in this prospectus under the heading “Use of Proceeds.” Until we obtain regulatory approval and commence sales of our products, we expect our net cash outflows to continue increasing as we expand research and development, manufacturing, regulatory and sales and marketing activities and operate as a public company.

Funding Requirements

We believe that the net proceeds from this offering and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund our anticipated operating expenses and capital expenditures for at least the next 12 months.

As of June 30, 2011, we had $0.4 million of undrawn funds available under a note payable to The John N. Kapoor Trust. During the third quarter of 2011, we borrowed the remaining amount available under this note and issued one additional note of $1.0 million to The John N. Kapoor Trust to fund our regulatory filings for Subsys, working capital and general purposes. We have borrowed an aggregate of $             from The John N. Kapoor Trust as of                     , 2011. We expect that our funding requirements will be for development and commercialization of our product candidates, payments under contract manufacturing agreements and working capital and general purposes. In February 2011, The John N. Kapoor Trust agreed to fund the operations of Insys on an as-needed basis through March 31, 2012.

Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to predict the amounts of increased capital outlays and operating expenditures associated with our current anticipated product introduction, clinical trials and preclinical studies. Our funding requirements will depend on numerous factors, including:

 

   

timing of FDA approval and DEA classification of Subsys, Dronabinol SG Capsule and other product candidates, if at all;

 

   

the timing and amount of revenue from sales of any of our product candidates, if approved, or revenue from grants or other sources;

 

   

rate of progress and cost of our clinical trials and other product development programs for our dronabinol, fentanyl product and LEP-ETU product candidates and any other product candidates that we may develop, in-license or acquire;

 

   

costs of establishing or outsourcing sales, marketing and distribution capabilities;

 

   

costs and timing of completion of outsourced commercial manufacturing supply arrangements for each product candidate;

 

   

costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights associated with our product candidates;

 

   

costs of operating as a public company;

 

   

the effects of competing technological and market developments;

 

   

our ability to acquire or in-license products and product candidates, technologies or businesses;

 

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personnel, facilities and equipment requirements; and

 

   

terms and timing of any collaborative, licensing, co-promotion or other arrangements that we may establish.

We believe that if approved, our generic Dronabinol SG Capsule will begin providing us with revenues that we intend to use toward the commercialization of our other product candidates, if approved, and toward general and administrative expenses. However, until we can consistently generate significant cash from sales of our product candidates and other operations, we expect to continue to fund our operations primarily from the net proceeds from offerings of our equity securities, including this offering, and from the issuance of notes payable to trusts controlled by Dr. John N. Kapoor. We cannot be sure that our existing cash and cash equivalents will be adequate, or that additional financing will be available when needed, or that, if available, financing will be obtained on terms favorable to us or our stockholders. Having insufficient funds may require us to delay, scale back or eliminate some or all of our research or development programs or to relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders will likely result. If we raise additional funds by incurring debt obligations, the terms of the debt will likely require significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.

Contractual Obligations

The following table summarizes our outstanding contractual obligations as of December 31, 2010 (in millions):

 

     Payments due by period  
     Less than One
Year (2011)
     2-3 Years      4-5 Years      Total  

Operating leases

   $ 0.7       $ 1.7       $ 0.5       $ 2.9   

Promissory notes payable (including accrued interest)1

     34.9                         34.9   

Future interest on promissory notes2

     1.6                         1.6   

Clinical trial expenses3

     0.3                         0.3   

Manufacturing agreement expenses4

     1.5                         1.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL

   $ 39.0       $ 1.7       $ 0.5       $ 41.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) These promissory notes and related accrued interest are payable upon demand. For purposes of this table, the notes and interest are assumed to be required to be paid by December 31, 2011. As of June 30, 2011, total promissory notes including accrued interest have increased by $8.8 million to $43.7 million. Upon the closing of this offering, these notes, and other notes issued by us or Insys Pharma to trusts controlled by Dr. Kapoor, including accrued interest, will convert into shares of our common stock at the price to the public of the shares sold in this offering.

 

(2) Estimated interest at an assumed interest rate of 5.25%, based on the prevailing prime interest rate as of December 31, 2010.

 

(3) Remaining commitments for clinical trial agreements for our fentanyl and LEP-ETU product candidates.

 

(4) Estimated minimum purchase obligations contingent on commercialization of product and amounts reasonably likely to be paid in future periods to contract manufacturers for the Dronabinol SG Capsule and Subsys product candidates. As of August 5, 2011, these estimated minimum purchase obligations have increased by $4.2 million, $3.7 million, $2.1 million and $10.0 million for the periods from 2-3 years, 4-5 years, greater than 5 years and in total, respectively. Approximately $9.5 million of this total obligation is subject to approval of the related product candidates.

 

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In addition, we may be required to make future payments to our licensors based on the achievement of milestones set forth in various in-licensing agreements. In most cases, these milestone payments are based on the achievement of development or regulatory milestones, including the exercise of options to obtain licenses related to specific disease targets, commencement of various phases of clinical trials, filing of product license applications, approval of product licenses from the FDA or foreign regulatory agencies, and the first commercial sale of a related product. Payment for the achievement of milestones under our in-license agreements is highly speculative and subject to a number of contingencies. The aggregate amount of additional milestone payments that we could be required to pay under all of our in-license agreements in effect at December 31, 2010 is approximately $2.9 million, all of which is related to university and government collaborations which are currently on hold or in clinical development. These amounts assume that all remaining milestones associated with the related milestone payments are met. In the event that product license approval for any of the related products is obtained, we may be required to make royalty payments in addition to these milestone payments. Although we believe that in the distant future some of the milestones contained in our in-license agreements may be achieved, it is highly unlikely that a significant number of them will be achieved. Because the milestones are highly contingent and we have limited control over whether the development and regulatory milestones will be achieved, we are not in a position to reasonably estimate how much, if any, of the potential milestone payments will ultimately be paid, or when. Additionally, under the in-license agreements, many of the milestone events are related to progress in clinical trials which will take at least several years to achieve.

Moreover, in connection with the Merger, each of the pre-Merger stockholders of NeoPharm was distributed a contingent payment right, or CPR, for each share of NeoPharm common stock then-held by such stockholder. Each CPR entitles the holder to receive a pro rata share of up to an aggregate of $20.0 million, payable in cash, if, within five years of the Merger, one of the NeoPharm product candidates that was in development prior to the Merger receives FDA approval. Of these product candidates, we are actively developing LEP-ETU, but we cannot predict when, if ever, this product candidate will receive FDA approval, and we believe the probability of making this payment is low.

Quantitative and Qualitative Disclosure About Market Risk

Our exposure to market risk includes our cash and cash equivalents, which we may invest in high-quality financial instruments. Our cash may be subject to interest rate risk and could fall in value if interest rates were to increase. Additionally, the interest expense we incur on our outstanding debt is subject to interest rate risk because it is based on the prime rate, and as a result, our obligations may increase in the future if interest rates were to increase. We do not hedge interest rate exposure. Because most of our transactions are denominated in U.S. dollars, we do not have any material exposure to fluctuations in currency exchange rates.

Recently Issued Accounting Pronouncements

In January 2010, the FASB issued amended guidance on fair value measurements and disclosures. The new guidance requires additional disclosures regarding fair value measurements, amends disclosures about postretirement benefit plan assets, and provides clarification regarding the level of disaggregation of fair value disclosures by investment class. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for certain Level 3 activity disclosure requirements that will be effective for reporting periods beginning after December 15, 2010. Accordingly, we adopted this amendment on January 1, 2010, except for the additional Level 3 requirements which were adopted on January 1, 2011. The adoption had no impact on our consolidated financial statements.

In April 2010, the FASB issued an accounting standard update which provides guidance on the criteria to be followed in recognizing revenue under the milestone method. The milestone method of recognition allows a vendor who is involved with the provision of deliverables to recognize the full

 

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amount of a milestone payment upon achievement, if, at the inception of the revenue arrangement, the milestone is determined to be substantive as defined in the standard. The guidance is effective on a prospective basis for milestones achieved in fiscal years and interim periods within those fiscal years, beginning on or after June 15, 2010. Early adoption is permitted. We adopted this guidance on January 1, 2011 and it did not have a material impact on our consolidated financial statements.

In December 2010, the FASB issued guidance relating to the disclosure of supplementary pro forma information for business combinations. This guidance specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This guidance also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. We adopted this guidance in 2010 and the disclosures relating to the Merger in Note 10 to our audited consolidated financial statements included elsewhere in this prospectus are made based on this guidance.

 

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BUSINESS

Overview

We are a specialty pharmaceutical company that develops and seeks to commercialize innovative pharmaceutical products that target the unmet needs of cancer patients, with an initial focus on cancer-supportive care. We focus our research and development efforts on product candidates that utilize innovative formulations to address the clinical shortcomings of existing commercial pharmaceutical products. We have two product candidates, our proprietary fentanyl spray Subsys and our generic Dronabinol SG Capsule, under review for marketing approval by the U.S. Food and Drug Administration, or FDA. We intend to build a capital-efficient commercial organization to market Subsys and our other proprietary products, if approved. We expect to utilize an incentive-based sales model similar to that employed by Sciele Pharma, Inc. and other companies previously led by members of our board, including our founder and Executive Chairman.

In March 2011, we submitted a New Drug Application, or NDA, to the FDA for Subsys, a sublingual spray for the treatment of breakthrough cancer pain, or BTCP, in opioid-tolerant patients. The FDA notified us in May 2011 that it had accepted the NDA for review and initially assigned a Prescription Drug User Fee Act, or PDUFA, goal date of January 4, 2012 for its review of the NDA. BTCP is characterized by sudden, often unpredictable, episodes of intense pain which can peak in severity at three to five minutes despite background pain medication. Subsys is a proprietary, single-use product that delivers fentanyl, an opioid analgesic, in seconds for transmucosal absorption underneath the tongue. In our pivotal Phase 3 clinical trial, Subsys demonstrated statistically significant pain relief at five minutes, which represents a result that has not been reported by any other competitor in this class of products for the treatment of BTCP. We believe this product is further differentiated by ease and speed of administration relative to the most widely-prescribed current treatments, including Actiq, a lozenge which requires patient manipulation for up to 15 minutes to fully dissolve, and Fentora, a buccal tablet which takes 14 to 25 minutes to fully disintegrate. According to IMS Health, transmucosal immediate-release fentanyl, or TIRF, products generated $440 million in U.S. sales in 2010. We believe the TIRF market has the potential to expand if faster-acting and more convenient products such as Subsys are approved by the FDA and the product class is more effectively promoted to oncologists and pain specialists. If approved, we currently plan on marketing Subsys in the United States through a targeted sales force of approximately 50 to 75 representatives.

In June 2010, we submitted an amendment to our Abbreviated New Drug Application, or ANDA, to the FDA for Dronabinol SG Capsule. Dronabinol SG Capsule is a dronabinol soft gelatin capsule intended to be a generic equivalent to Marinol, a currently approved treatment for chemotherapy-induced nausea and vomiting, or CINV, and appetite stimulation in patients with AIDS. Dronabinol, the active ingredient in Marinol, is a synthetic cannabinoid whose chemical name is delta-9-tetrahydrocannabinol, or THC. Dronabinol SG Capsule is the first in our family of dronabinol products that we are developing for the treatment of CINV and appetite stimulation in patients with AIDS, as well as other indications where synthetic THC could have potential therapeutic benefits, including central nervous system, or CNS, disorders such as multiple sclerosis, or MS. If approved, we intend to commercialize Dronabinol SG Capsule with the aim of generating near-term cash flows to help fund the commercialization of Subsys and the development of our proprietary dronabinol and other product candidates, as well as to validating our dronabinol supply chain and internal manufacturing capabilities. If Dronabinol SG Capsule is approved by the FDA, we intend to submit a supplemental ANDA, or sANDA, to the FDA for a proprietary dronabinol soft gel formulation that is stable at room temperature, which we refer to as Dronabinol RT Capsule. We believe this formulation, if approved, would offer convenience advantages to distributors, pharmacies and patients, as product labeling for Marinol requires storage at refrigerated temperatures. Finally, we believe we have an additional competitive advantage by producing our clinical and commercial supply of dronabinol active pharmaceutical ingredient, or API, in our U.S.-based, state-of-the-art dronabinol manufacturing facility.

 

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We are also developing additional proprietary formulations of dronabinol, the most advanced of which is Dronabinol Oral Solution, an orally administered liquid formulation. We have completed an end-of-Phase 2 meeting with the FDA and plan to initiate a pivotal bioequivalence study for this product candidate in the second half of 2011. As Marinol is characterized by a highly variable bioavailability and an onset of action that ranges from 30 minutes to one hour, we believe a significant need exists for a dronabinol product with a more consistent bioavailability and faster onset of action. In our Phase 1 clinical trial, Dronabinol Oral Solution demonstrated a more reliable absorption profile and rapid onset of action as compared to Marinol, which we believe will offer dosing and efficacy advantages. We believe these product attributes, coupled with increased acceptance of THC as a therapeutic alternative, could result in Dronabinol Oral Solution capturing market share and potentially expanding the market for dronabinol-based products, which, in 2010, generated approximately $142 million in U.S. sales. Importantly, we believe our family of dronabinol products, if approved, has the potential to capture a broader share of the CINV market, which, according to IMS Health, generated $1.9 billion in U.S. sales in 2010.

The National Cancer Institute estimates that as of January 1, 2008, there were approximately 12.0 million people in the United States who had been previously diagnosed or were living with cancer. According to the American Cancer Society, the number of patients with cancer continues to increase as the population ages and diagnosis, treatment and survival rates improve due to higher standards of care and greater patient access to health care. Cancer patients often suffer from symptoms such as pain, nausea, vomiting, fatigue, weight loss and anemia as a result of their cancer or radiation and chemotherapy treatments intended to eradicate or inhibit the growth of cancerous cells and tumors. Pain is a widely prevalent symptom of cancer patients, of whom it is estimated that between 50 to 90% also suffer from BTCP. We believe that the acute pain episodes of BTCP patients are not adequately managed by oncologists and pain specialists, creating an opportunity for us to educate these medical professionals and promote effective BTCP management using Subsys. According to a 2004 study by the American Society of Clinical Oncology, it is estimated that 60 to 80% of all cancer patients who receive chemotherapy experience nausea and vomiting associated with their therapy. We believe current therapies do not adequately address the needs of many of these patients. Supportive care is an important component in the treatment of cancer patients, as suggested by an August 2010 article in the New England Journal of Medicine indicating that improved supportive care in cancer patients prolonged median survival by over two months. By focusing on supportive care products, we believe we can contribute to the improvement of cancer patient outcomes and survival rates.

In addition to our cancer-supportive care products, we are developing a portfolio of proprietary cancer therapeutics, the most advanced of which is LEP-ETU, which recently completed a Phase 2 clinical trial in metastatic breast cancer. LEP-ETU is a proprietary NeoLipid liposomal, or microscopic membrane-like structure created from lipids, formulation that incorporates paclitaxel, the active ingredient in the cancer chemotherapy drugs Taxol and Abraxane. We are developing this product candidate to improve efficacy and reduce paclitaxel-related side effects. The Phase 2 clinical trial enrolled 70 patients and LEP-ETU demonstrated a tumor response rate of 24.6% in the 69 eligible patients. According to IMS Health, paclitaxel products generated $393 million in U.S. sales in 2010.

We are led by a management team and board of directors with substantial experience founding and managing pharmaceutical and related companies. Our founder and Executive Chairman, Dr. John N. Kapoor, has held executive management and board positions at Sciele Pharma and OptionCare, Inc., among others. Dr. Kapoor has also had significant experience with cancer-supportive care products, including Marinol while he was Chairman of Unimed Pharmaceuticals, Inc. Our President and Chief Executive Officer, Michael L. Babich, has board and management experience at Alliant Pharmaceuticals, Inc. and EJ Financial Enterprises, Inc. Our Director of Scientific Development, Dr. Daniel D. Von Hoff, is a renowned oncologist and a founder of ILEX Oncology, Inc. Dr. Von Hoff previously led the development of several approved cancer and cancer-supportive care therapies including drugs such as Campath, Camptosar and Clofarabine. Our Chief Medical Officer, Dr. Larry Dillaha, served as the Chief Medical Officer of Sciele Pharma. We intend to leverage the experience of

 

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our management team to build Insys into a leading specialty pharmaceutical company focused on commercializing innovative therapies that address unmet medical needs of cancer patients.

Strategy

The key elements of our strategy are to:

 

   

Obtain FDA approval of Subsys.    In March 2011, we submitted an NDA to the FDA for Subsys with a proposed Risk Evaluation and Mitigation Strategies, or REMS, program. The FDA notified us in May 2011 that it had accepted the NDA for review and initially assigned a PDUFA goal date of January 4, 2012 for its review of the NDA. In addition, we are currently working jointly with companies in the TIRF space in developing a classwide REMS program.

 

   

Build a capital-efficient commercial organization to market Subsys and complementary products.    We intend to commercialize Subsys and our proprietary dronabinol products through a capital-efficient commercial organization utilizing an incentive-based sales model similar to that employed by Sciele Pharma and other companies previously led by members of our board of directors, including our founder and Executive Chairman. We intend to target our product detailing efforts primarily towards oncologists, pain specialists and centers that focus on supportive care. We also intend to launch a related marketing campaign directed at patient advocacy groups, clinicians, researchers and the academic community.

 

   

Obtain FDA approval of Dronabinol SG Capsule and Dronabinol RT Capsule, and commercialize these products through our distribution agreement with Mylan Pharmaceuticals Inc., or Mylan.    In June 2010, we submitted an amendment to our ANDA for Dronabinol SG Capsule. If our Dronabinol SG Capsule ANDA is approved, we intend to submit an sANDA for Dronabinol RT Capsule. We have partnered with Mylan to distribute Dronabinol SG and RT Capsules, if approved. If approved, we intend to use cash flows from Dronabinol SG and RT Capsules to help fund the commercialization of Subsys and the development of our proprietary dronabinol and other product candidates.

 

   

Develop innovative dronabinol formulations to expand usage of synthetic THC for CINV and appetite stimulation in AIDS patients, as well as other indications.    We believe there is an unmet patient need for a more reliable and effective synthetic THC for treating CINV and appetite stimulation in patients with AIDS, as well as other indications. We plan to initiate a pivotal bioequivalence study for our proprietary Dronabinol Oral Solution in the second half of 2011. Our Dronabinol Oral Solution has demonstrated what we believe is a promising product profile in Phase 1 clinical development. We are also evaluating our proprietary Dronabinol Inhalation Device and Dronabinol IV Solution in preclinical testing. Since dronabinol is difficult to import, procure and produce, we have acquired a U.S.-based, state-of-the-art dronabinol manufacturing facility, which we anticipate will be able to supply the API for all of our dronabinol product candidates.

 

   

Advance clinical development of LEP-ETU.    The results from the Phase 2 clinical trial of LEP-ETU in 70 patients with metastatic breast cancer demonstrated a tumor reduction response rate of 24.6% for our product candidate in the 69 eligible patients. Based on the results of the Phase 2 clinical trial, we intend to further develop this product candidate in indications such as breast, gastric and ovarian cancers.

 

   

Add commercial products or product candidates to our portfolio that complement our core competencies.    We believe our core competencies include the development of superior formulations of existing compounds as well as building and operating a capital-efficient, incentive-based commercial organization. We intend to leverage our proprietary spray technology and know-how to develop additional existing compounds that we believe would benefit from a more rapid onset of action and convenient administration. We may also pursue opportunities to acquire commercial products or product candidates that could further leverage our planned cancer-supportive care commercial organization.

 

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Our Product Candidates

The following table summarizes certain information regarding our most advanced product candidates:

 

Franchise

 

Product Candidate

   Regulatory
Pathway
     

Indication

 

Status

Spray  

Subsys

   505(b)(2)        BTCP in Opioid-Tolerant
Patients
  NDA Accepted;
PDUFA goal date
January 4, 2012

Dronabinol

  Dronabinol SG Capsule    ANDA     CINV and Appetite Stimulation
in Patients with AIDS
  ANDA
Submitted
3
 

Dronabinol RT Capsule

 

   sANDA1   }     Pending4
  Dronabinol Oral Solution    505(b)(2)1     CINV and Appetite Stimulation
in Patients with AIDS
2
  Pre-Phase 35
 

Dronabinol Inhalation Device

 

   505(b)(2)1       Preclinical
  Dronabinol IV Solution    505(b)(2)1       Preclinical
           

Oncology

  LEP-ETU    TBD       Metastatic Breast Cancer2   Phase 2

 

1 

Anticipated regulatory pathway

2 

Initial targeted indication

3 

ANDA under expedited review

4 

sANDA expected to be filed in the first-quarter of 2012, assuming approval of Dronabinol SG Capsule ANDA in the third quarter of 2011

5 

End-of-Phase 2 meeting completed; planning to initiate pivotal bioequivalence study

Subsys Product Candidate

In March 2011, we submitted an NDA to the FDA for Subsys for the treatment of BTCP in opioid-tolerant patients. The FDA notified us in May 2011 that it had accepted the NDA for review and initially assigned a PDUFA goal date of January 4, 2012 for its review of the NDA. We believe that Subsys has the potential to address certain key limitations of currently-marketed fentanyl formulations by providing more rapid onset of pain control, increased patient convenience, a higher level of bioavailability and a lower level of gastrointestinal, or GI, side effects. We submitted our NDA via the 505(b)(2) regulatory pathway. If we receive FDA approval for Subsys, we intend to build a capital-efficient, incentive-based commercial organization to market this product primarily to oncologists, pain specialists and centers that focus on supportive care. In addition, we may conduct post-marketing clinical trials to seek to establish other advantages that Subsys may have over existing fentanyl products.

Fentanyl is an opioid analgesic approved in the United States for acute and chronic pain management. Depending upon the type of pain, physicians currently prescribe fentanyl in three forms of administration: injectable, transmucosal, or delivery by diffusion through the mucous membranes of the mouth, and transdermal, or delivery through the skin. Fentanyl imitates natural biochemicals found in the body that moderate pain and block the transmission of pain signals that travel along nerves to the brain. We believe these properties make fentanyl a potent and effective therapy for use in patients with cancer who suffer from acute or breakthrough episodes of pain.

Subsys is a proprietary, single-use product developed to treat BTCP through the delivery of a liquid fentanyl formulation in 100, 200, 400, 600 and 800 microgram, or mcg, dosages. We have also tested Subsys in 1200 and 1600 mcg doses, which are delivered by consecutively spraying two 600 and 800 mcg unit dose spray products, respectively. The mechanism by which the liquid is delivered is a highly consistent, one-step process in which a plume of fentanyl is generated by the actuation of the device.

 

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The plume disperses a small volume of liquid across the surface area of the sublingual mucosa and facilitates rapid absorption by the body.

LOGO

Cancer Pain Market Overview

Cancer pain can occur as a result of tumors pressing on nerves, damage caused by cancer cells in bone and treatments for cancer such as chemotherapy, radiation therapy or surgery. Many cancer patients experiencing pain suffer from two types of pain: (1) persistent or continuous pain, which is typically managed by long-acting or sustained-release drugs taken by patients on a regular schedule, and (2) breakthrough pain, which can be severe and sudden, and may require a stronger, fast-acting medication. Opioids are the most widely-prescribed treatment for cancer pain followed by medications commonly used to treat inflammatory pain, such as corticosteroids, anesthetics, non-steroidal anti-inflammatory drugs, anticonvulsants and antidepressants. A report published by Worldwide Marketing Research estimated that the value of the U.S. cancer pain market was $3.1 billion in 2008 and will increase to $5.3 billion by 2018.

BTCP is characterized by sudden, often unpredictable, episodes of intense pain which peak in severity at three to five minutes despite background pain medication. These episodes can last several minutes to an hour, and usually occur several times per day. Pain is a widely prevalent symptom of cancer patients, of whom it is estimated that between 50 to 90% suffer from BTCP, which is particularly difficult to treat due to its severity, rapid onset and the often unpredictable nature of its occurrence. Physicians typically treat BTCP with a variety of short-acting opioid medications, including morphine, morphine and codeine derivatives and fentanyl.

Morphine and morphine and codeine derivatives have been available for decades in immediate-release forms of tablets, capsules or liquids that are ingested by the patient. More recently approved short-acting opioid-based fentanyl formulations utilize transmucosal delivery in an attempt to improve upon existing fentanyl therapies. Cephalon, Inc.’s Actiq, approved by the FDA in 1998 and now available in several generic options, is an oral transmucosal lozenge, and Fentora, approved by the FDA in 2006, is a fentanyl buccal tablet. BioDelivery Sciences International, Inc.’s Onsolis, a soluble film placed on the buccal area after wetting the inside of the cheek with saliva or water, was approved in 2009 by the FDA. Most recently, in January 2011, ProStrakan Group plc’s received FDA approval for Abstral, an immediate-release transmucosal sublingual tablet. According to IMS Health, oral fentanyl products indicated for BTCP generated $440 million in U.S. sales in 2010. Although these existing therapies provide improvements over oral opioids, we believe that the current treatment options have limitations and that there remains a significant unmet need for therapies that provide faster pain relief, more convenient dose administration and a better pharmacokinetic, or PK, profile.

Limitations of Existing Therapies

We believe that the BTCP market is underserved due to the limitations of existing therapies, which include:

 

   

Time until statistically significant pain relief:    Patients suffering from BTCP require rapid pain relief as peak intensity of episodic breakthrough pain can occur between three and five minutes

 

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from the onset of pain symptoms. The peak effect of transmucosal delivery systems may be delayed as it may take up to 14 to 30 minutes for the lozenge or tablet to fully dissolve and be absorbed. In addition, oral immediate-release opioids are metabolized in the liver and consequently may take up to 30 to 45 minutes to become effective.

 

   

Inconvenient delivery:    We believe current commercially available therapies do not adequately address patient ease of use and convenience needs. Existing BTCP therapies can require an administration period of several minutes, disrupt daily activities and cause patient discomfort. For example, some products require patients to place lozenges between their cheeks and lower gums and rub the lozenge from side to side over a 15-minute period. In addition, patients with dry mouth and oral mucositis may experience difficulty in using some current commercially available therapies.

 

   

Pharmacokinetic profile:    Actiq, the current market leader, and its generic equivalents achieve bioavailability of approximately 50% and require 15 to 30 minutes for absorption. Up to half of the delivered dose of competing treatments is swallowed and is absorbed slowly through the GI tract, which we believe may delay the onset of pain relief and contribute to side effects.

 

   

Limited dosage forms:    Actiq and its generic equivalents are available in six dosage strengths ranging from 200 to 1600 mcg. No other commercially available BTCP therapies are offered in the 1200 and 1600 mcg dosage range. According to IMS Health, approximately 45% of the U.S. sales of Actiq in 2010 were in the 1200 and 1600 mcg doses.

Our Solution

We believe Subsys’s formulation and sublingual delivery mechanism will offer several advantages over current FDA-approved transmucosal treatment alternatives, and these advantages may lead to improved patient compliance and expanded medical use of fentanyl for BTCP. Such advantages include: