Alexza Pharmaceuticals Inc. - FORM 10-K

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EXCEL - IDEA: XBRL DOCUMENT - Alexza Pharmaceuticals Inc.	Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - Alexza Pharmaceuticals Inc.	d852872dex321.htm
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EX-31.1 - EXHIBIT 31.1 - Alexza Pharmaceuticals Inc.	d852872dex311.htm
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EX-10.21.5 - EX-10.21.5 - Alexza Pharmaceuticals Inc.	d852872dex10215.htm
EX-10.21.4 - EX-10.21.4 - Alexza Pharmaceuticals Inc.	d852872dex10214.htm

Index to Financial Statements

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-51820

Alexza Pharmaceuticals, Inc.

(Exact name of Registrant as specified in its charter)

Delaware

77-0567768

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification Number)

2091 Stierlin Court

Mountain View, California 94043

(Address of Principal Executive Offices including Zip Code)

Registrant’s telephone number, including area code:

(650) 944-7000

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


Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, par value $0.0001 per share		Nasdaq Capital Market

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

None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (of for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

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

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. (Check one):


Large accelerated filer ¨	Accelerated filer þ	Non-accelerated filer ¨	Smaller reporting company ¨
	(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ

The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant was $79,369,443 based on the closing sale price of the Registrant’s common stock on The NASDAQ Global Market on June 30, 2014. Shares of the Registrant’s common stock beneficially owned by each executive officer and director of the Registrant and by each person known by the Registrant to beneficially own 10% or more of its outstanding common stock have been excluded, in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the Registrant’s common stock as of March 2, 2015 was 19,404,697.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the 2015 Annual Meeting of Stockholders to be filed within 120 days after the end of the Registrant’s fiscal year ended December 31, 2014 are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent stated therein.

Index to Financial Statements

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014

TABLE OF CONTENTS


PART I
Item 1.	Business	3
Item 1A.	Risk Factors	32
Item 1B.	Unresolved Staff Comments	66
Item 2.	Properties	66
Item 3.	Legal Proceedings	66
Item 4.	Mine Safety Disclosures	66

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	67
Item 5A.	Quarterly Stock Price Information and Registered Stockholders	67
Item 5B.	Use of Proceeds from the Sale of Registered Securities	68
Item 5C.	Treasury Stock	68
Item 6.	Selected Financial Data	69
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	70
Item 7A.	Quantitative and Qualitative Disclosures About Market Risks	82
Item 8.	Financial Statements and Supplementary Data	83
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	113
Item 9A.	Controls and Procedures	113
Item 9B.	Other Information	114

PART III
Item 10.	Directors and Executive Officers of the Registrant	116
Item 11.	Executive Compensation	116
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	116
Item 13.	Certain Relationships and Related Transactions and Director Independence	117
Item 14.	Principal Accountant Fees and Services	117

PART IV
Item 15.	Exhibits and Financial Statement Schedules	118
Signatures		123

Exhibits Index		124

Index to Financial Statements

The names “Alexza Pharmaceuticals,” “Alexza,” “Staccato” and “ADASUVE” are trademarks of Alexza Pharmaceuticals, Inc. We have registered these trademarks with the U.S. Patent and Trademark Office and other ex-U.S. trademark offices. All other trademarks, trade names and service marks appearing in this Annual Report on Form 10-K are the property of their respective owners.

PART I.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under “Business,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report constitute forward-looking statements. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Examples of these statements include, but are not limited to, statements regarding: the ability of us and our collaborators to effectively and profitably commercialize ADASUVE, estimated product revenues and royalties associated with the sales of ADASUVE, the timing of the commercial launch of ADASUVE in various countries, the adequacy of our capital to support our operations, our ability to raise additional funds and the potential terms of such potential financings, our collaborators’ and our ability to implement and assess the ADASUVE REMS program, the timing and outcome of the ADASUVE post-marketing studies, the prospects of our receiving approval to market ADASUVE in Latin America, the Commonwealth of Independent States countries and other countries, the implications of interim or final results of our other clinical trials, the progress and timing of our research programs, including clinical testing, the extent to which our issued and pending patents may protect our products and technology, the potential of our product candidates to lead to the development of safe or effective therapies, our ability to enter into collaborations, our future operating expenses, our future losses, our future expenditures and the sufficiency of our cash resources. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. While we believe that we have a reasonable basis for each forward-looking statement contained in this Annual Report, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain.

In addition, you should refer to the “Risk Factors” section of this Annual Report for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Annual Report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.

We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Quarterly Reports on Form 10-Q and in our Current Reports on Form 8-K.

Item 1.

Business

BACKGROUND

We are a pharmaceutical company focused on the research, development and commercialization of novel proprietary products for the acute treatment of central nervous system conditions. The Staccato^® system, our proprietary technology, is the foundation for our first approved product, ADASUVE^® (Staccato loxapine), and all of our product candidates. The Staccato system vaporizes excipient-free drugs to form a condensation aerosol that, when inhaled, allows for rapid systemic drug delivery. Because of the particle size of the aerosol, the drug is quickly absorbed through the deep lung into the bloodstream, providing speed of therapeutic onset that is comparable to intravenous, or IV, administration but with greater ease, patient comfort and convenience.

Index to Financial Statements

ADASUVE has been developed for the treatment of agitation associated with schizophrenia or bipolar disorder and has been approved for marketing in the United States by the U.S. Food and Drug Administration, or FDA, in the European Union, or EU, by the European Commission, or EC and in several countries in Latin America. In the United States, the EU and Latin America, ADASUVE is approved for similar indications. It is approved with a different number of dose strengths and has different risk mitigation and management plans in the United States, the EU and Latin America. ADASUVE is our only approved product.

We have two product candidates in active development. AZ-002 (Staccato alprazolam) is being developed for the management of patients with acute repetitive seizures, sometimes called cluster seizures, or ARS. A Phase 2a proof-of-concept study for AZ-002 in patients with epilepsy was initiated in January 2015. AZ-007 (Staccato zaleplon) is being developed for the treatment of insomnia in patients who have difficulty falling asleep, including patients who awake in the middle of the night and have difficulty falling back asleep. We expect to initiate at least one clinical study for AZ-007 in 2015.

We have retained all rights to the Staccato system and to our product candidates other than ADASUVE and AZ-104 (Staccato loxapine, low-dose). For the U.S. market, we have licensed the exclusive rights to commercialize ADASUVE and AZ-104 to Teva Pharmaceuticals USA, Inc., or Teva. For Europe, Latin America and the Commonwealth of Independent States countries, or the Ferrer Territories, we have licensed the exclusive rights to commercialize ADASUVE to Grupo Ferrer Internacional S.A., or Ferrer. We intend to develop certain product candidates internally and to identify external resources or collaborators to develop and commercialize other product candidates.

We believe that, based on our cash, cash equivalents, marketable securities and restricted cash balances at December 31, 2014, estimated product revenues, milestone payments associated with the sale of ADASUVE, and our current expected cash usage, we have sufficient capital resources to meet our anticipated cash needs into the fourth quarter of 2015. In light of our ongoing costs, investments in ADASUVE manufacturing and product candidate development and our projected working capital needs, we expect to need to source additional capital to finance our ongoing operations in the next twelve months. Changing circumstances may cause us to consume capital significantly faster or slower than we currently anticipate, or to alter our operations.

AGITATION — ADASUVE (Staccato loxapine)

Episodes of agitation afflict many people suffering from major psychiatric disorders, including schizophrenia and bipolar disorder. In the United States, approximately 2.4 million adults have schizophrenia and approximately 5.7 million adults have bipolar disorder. Of these patients, approximately 900,000 adult patients with schizophrenia and 5 million adult patients with bipolar disorder are currently receiving pharmaceutical treatment and are the target patient population for ADASUVE. More than 90% of patients with schizophrenia and bipolar disorder will experience agitation in their lifetimes. Our primary market research indicates that approximately 50% of treated acute agitation episodes are treated in a hospital setting. In the hospital setting, patients are routinely treated in medical emergency departments, psychiatric emergency services and inpatient psychiatric units, which are the settings where ADASUVE may be used if such facilities are enrolled in the ADASUVE Risk Evaluation and Mitigation Strategy, or REMS, program.

Commercialization Strategy Overview

Our global commercialization strategy for ADASUVE is to use strategic collaborations to commercialize ADASUVE, while maintaining control and primary responsibility for commercial manufacturing. We currently have two commercialization collaborations, one with Teva and one with Ferrer. We are continuing to seek additional commercialization collaborations to commercialize ADASUVE in territories outside the United States and the Ferrer Territories.

In December 2012, the FDA approved our New Drug Application, or NDA, for Staccato loxapine, as ADASUVE (loxapine) Inhalation Powder 10 mg for the acute treatment of agitation associated with schizophrenia or bipolar I disorder in adults. We transferred the ADASUVE NDA and related regulatory documents to Teva in June 2013, together with responsibility for post-approval commitments and conditions related to the U.S. ADASUVE approval. In March 2014, Teva announced the U.S. launch of ADASUVE.

Index to Financial Statements

In February 2013, the European Commission, or the EC, granted marketing authorization for ADASUVE in the EU. ADASUVE, 4.5 mg and 9.1 mg inhalation powder loxapine, pre-dispensed, is authorized in the EU for the rapid control of mild-to-moderate agitation in adult patients with schizophrenia or bipolar disorder. The ADASUVE marketing authorization requires that patients receive regular treatment immediately after control of acute agitation symptoms, and that ADASUVE is administered only in a hospital setting under the supervision of a healthcare professional. The ADASUVE marketing authorization also states that a short-acting beta-agonist bronchodilator treatment should be available for treatment of possible severe respiratory side-effects, such as bronchospasm. The EC granted the marketing authorization for ADASUVE on the basis of the positive opinion issued by the European Medicines Agency, or EMA, in December 2012 and is valid in all 28 EU Member States, plus Iceland, Liechtenstein and Norway. Beginning in August 2014, Ferrer began to receive individual country approvals to market ADASUVE in Latin America. As of March 2, 2015, Ferrer has received seven individual Latin American country approvals including Chile, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras and Paraguay.

We have primary responsibility for certain post-approval requirements as outlined in the marketing authorisation for ADASUVE in the EU. Two of the five requirements have been completed and the data submitted to the European Medicines Agency, or the EMA. Work to complete the three additional requirements is ongoing.

We are responsible for the global commercial manufacturing of ADASUVE in our facility in Mountain View, California for commercialization in the United States, the Ferrer Territories and in any potential future territories. This facility has been inspected by the U.S. and EU competent authorities and operates under applicable U.S. and EU regulations.

We began manufacturing commercial quantities of ADASUVE in the second quarter of 2013 and continue to manufacture commercial product for Ferrer and Teva. Unit shipments in 2013 and 2014 consisted of the following:


	2013		2014		Total
EU		27,638		21,209		48,847
US		9,307		74,097		83,404

Total		36,945		95,306		132,251

Because our current license and supply agreements provide our collaborators with an acceptance period during which they may reject any product that does not conform to agreed-upon specifications, revenue for units shipped may be recognized in a period subsequent to the period in which the units are shipped. With the royalties associated with our Teva agreement, royalties on actual product sales may be recognized in periods subsequent to when revenue is recognized for units shipped.

ADASUVE is our only product approved for commercialization. In the United States, ADASUVE must be administered only in healthcare facilities enrolled in the ADASUVE REMS program that have immediate access on-site to equipment and personnel trained to manage acute bronchospasm, including advanced airway management (intubation and mechanical ventilation). If Teva is not able to successfully commercialize ADASUVE in the U.S., or if Ferrer is not able to successfully commercialize ADASUVE in the Ferrer Territories, our ability to generate revenue will be jeopardized and, consequently, our business will be seriously harmed.

Commercialization Strategy and Post-Approval Commitments — United States

In May 2013, we entered into a License and Supply Agreement with Teva, or the Teva Agreement, which provides Teva with an exclusive license to develop and commercialize ADASUVE in the United States. Under the terms of the Teva Agreement, Teva is responsible for all U.S. development, regulatory and commercialization activities for ADASUVE, including the U.S. post-approval clinical studies. Teva also has rights to conduct additional clinical trials of ADASUVE for potential new indications. We are responsible for

Index to Financial Statements

manufacturing and supplying ADASUVE to Teva for clinical trials and commercial sales. Teva has the exclusive rights to commercialize ADASUVE in the United States and the co-exclusive rights, with us and our affiliates, to manufacture the product.

As a condition of the approval of ADASUVE in the United States, a REMS program including “elements to assure safe use,” is required to be implemented and periodically assessed. Among other requirements in the REMS, ADASUVE is only available in healthcare facilities and hospitals enrolled in the ADASUVE REMS program. As an additional condition of U.S. approval, ADASUVE is subject to a post-marketing commitment and a number of post-marketing studies, including a 10,000 patient Phase 4 observational clinical study designed to gather patient safety data based on the “real-world” use of ADASUVE in the hospital setting and a clinical program designed to evaluate the safety and efficacy of ADASUVE in agitated adolescent patients. The data derived from any post-marketing study or trial could result in additional restrictions on the commercialization of ADASUVE through changes to the approved ADASUVE label, changes to the approved REMS, the imposition of additional post-marketing studies or trials, or even the withdrawal of the approval of ADASUVE from the market.

ADASUVE is being marketed by the Teva Select Brands team, or TSB, of Teva’s U.S. Specialty Pharmaceuticals business, which is a subsidiary of Teva Pharmaceutical Industries, Ltd. In March 2014, TSB announced the U.S. launch of ADASUVE, with dedicated sales and medical science liaison teams focusing on hospitals in the United States that treat a high volume of patients with agitation. Teva has set the per-dose price of ADASUVE and has received a C-Code from the Centers for Medicare and Medicaid Services, or CMS, to aid in reimbursement for use of ADASUVE in the hospital through the Outpatient Prospective Payment System. Teva has also launched the website for the ADASUVE REMS program (www.adasuverems.com) to provide information about the program and to allow healthcare facilities to complete the enrollment in the REMS program in order to purchase ADASUVE from specialty wholesalers. In March 2014, we completed a royalty securitization financing, in which we transferred our rights to U.S. royalty and milestone payments under the Teva Agreement to a wholly-owned subsidiary. The subsidiary then sold $45.0 million in notes backed by the royalty and milestone payments in a private placement to institutional accredited investors. The notes have no recourse to us, other than to our equity interest in our wholly-owned subsidiary, and we did not guarantee the notes, although we may elect to make voluntary payments on the notes.

Commercialization Strategy and Post-Approval Commitments — European Union and additional Ferrer Territory Countries

In October 2011, we entered into a commercial collaboration with Ferrer pursuant to a Collaboration, License and Supply Agreement, or the Ferrer Agreement, to commercialize ADASUVE in the Ferrer Territories. We supply ADASUVE to Ferrer for all of its commercial sales and receive a specified per-unit transfer price. We were responsible for gaining initial EU marketing authorization for ADASUVE and are responsible for specific EU post-marketing commitments required by the marketing authorization for ADASUVE. Ferrer is responsible for satisfying all other regulatory, pricing and reimbursement requirements to market and sell ADASUVE in the EU Member States and the non-EU countries of the Ferrer Territories.

The Ferrer Territories include the EU Member States and countries outside of the EU. In the EU, Ferrer has initiated a launch plan based on estimated market opportunity, timing of pricing and projected reimbursement, and coordination with distribution collaborators. ADASUVE is now being marketed in twelve EU Member States (Austria, Denmark, Finland, France, Germany, Latvia, Lithuania, Norway, Poland, Romania, Spain and Sweden) and one country in Latin America (Guatemala). Ferrer anticipates additional EU Member States and Latin American country launches in 2015 and 2016. In the other non-EU Ferrer Territories, Ferrer continues to interact with various regulatory agencies and is working on the required independent regulatory submissions.

In countries where Ferrer does not have a direct commercial presence, it is seeking to establish distribution agreements with companies that it believes have sales capabilities in the hospital and/or psychiatry markets. As of December 31, 2014, Ferrer had established ADASUVE distribution agreements with AOP Orphan Pharmaceuticals AG, BioProjet, Galenica SA and Medivir AB for sale of the product in countries where Ferrer does not have a direct sales organization.

Index to Financial Statements

As a part of its education, market conditioning and commercialization strategy, Ferrer is building awareness about agitation and ADASUVE at national and regional medical conferences, hosting medical symposia and regional educational events, and exhibiting at medical meetings with a branded ADASUVE booth in applicable territories. Also, in each country in the Ferrer Territory, we expect Ferrer to use a combination of medical science liaisons and sales representatives, as appropriate, to target hospitals and medical settings that Ferrer believes treat a high volume of patients with agitation, and to call on physicians and clinicians to educate them about agitation and promote ADASUVE.

As a condition of the EU ADASUVE marketing authorisation, we are responsible for conducting and funding the post-approval studies, including:

•

A benzodiazepine interaction study. This study is complete, with data submitted to the EMA in July 2014.

•

A controlled study to determine ADASUVE’s effect on cardiac rhythms, with two doses of ADASUVE. This study is complete, with data submitted to the EMA in July 2014.

•

A clinical program designed to evaluate the safety and efficacy of ADASUVE in agitated adolescent patients. The initial clinical study in this program, a Phase 1 dose-ranging study, was initiated in collaboration with Teva and the first patient was dosed in August 2014. We expect this study to be completed in the first half of 2015.

•

A post-authorization safety study has been initiated. This study is a multicenter, multinational, prospective observational study to evaluate the safety of ADASUVE when used in routine clinical setting in agitated patients. The study is intended to enroll approximately 1,500 patients from a total of about 20 to 25 centers in five to six EU Member States over a 24-month enrollment period.

•

A Drug Utilization Study has been initiated. This multicenter, multinational study entails retrospective review of medical records of patients receiving ADASUVE in routine clinical settings. The study is expected to include data from approximately 1,000 patients from a total of about 20 to 25 centers in five to six EU Member States over an 18-month period.

Commercialization Strategy — Other Countries

We continue to seek additional strategic collaborators to commercialize ADASUVE in countries outside of the United States and the Ferrer Territories.

Competition

ADASUVE competes with various injectable formulations of other antipsychotic and benzodiazepine drugs and oral, orally disintegrating tablet and liquid formulations of other antipsychotic drugs and benzodiazepine drugs. Only the injectable antipsychotics are approved for the treatment of agitation.

Product Candidate Development

We have retained all rights to the Staccato system and our product candidates other than those for ADASUVE and AZ-104. We intend to capitalize on our internal resources to develop certain product candidates and to identify routes to utilize external resources to develop and commercialize other product candidates.

AZ-002 (Staccato alprazolam) for Acute Repetitive Seizures

Epilepsy, a disorder of recurrent seizures, affects approximately 2.5 million Americans, making it the third most common neurological disorder in the United States. ARS refers to seizures that are serial, clustered, or crescendo, and ones that are distinct from the patient’s usual seizure pattern with an onset easily recognized by caregiver and physician. Typically there is recovery between seizures. Among the implications of ARS are concerns for patient safety. Prolonged or recurrent seizure activity persisting for 30 minutes or more may result in serious injury, health impacts or death that correlate directly with seizure duration. ARS, if left untreated, has been reported to evolve into a state of persistent seizure, or status epilepticus, which has a 3% mortality rate in children and 26% in adults.

Index to Financial Statements

Benzodiazepines are considered to be medications of first choice for the treatment of acute seizures. Clinical advantages of benzodiazepines include relatively rapid onset of action, high efficacy and minimal toxicity. The rapidity by which a medication can be delivered to the systemic circulation and then to the brain plays a significant role in reducing the time needed to treat seizures and reducing the likelihood of damage to the central nervous system. Current standard of care for ARS is the rectal gel formulation of diazepam, which must be administered by a caregiver or healthcare professional. In our market research, patients surveyed have commented that they find that the rectal gel takes longer to work than they would like and that the route of administration is sub-optimal and cannot be used in public. Intravenous benzodiazepines are rapid acting, but must be administered by a healthcare professional in a medical facility.

The ability to treat quickly is clinically imperative to prevent an epileptic event from evolving into status epilepticus or causing other serious complications. We believe a product that can be administered easily in the home setting to effectively treat ARS may result in avoiding a trip to the hospital for treatment or diminishing the need to use the rectal formulation of diazepam.

If approved, AZ-002 could reduce the use of IV or rectal benzodiazepines in treating patients who experience ARS. The potential benefits of AZ-002 may include a faster delivery to the blood stream, when compared to rectal delivery, and greater ease of use. AZ-002 could be administered after a first seizure in a cluster with the aim of preventing further seizures. The caregiver could provide dosing assistance between cluster seizures. We believe that alprazolam’s ability to inhibit anxiety, or anxiolytic action, may provide additional therapeutic benefits to ARS patients. We own full development and commercial rights to AZ-002. We have applied for orphan drug status with the FDA for AZ-002 and expect to apply for orphan drug status in the EU. There is no assurance that AZ-002 will receive such designation.

We initiated a Phase 2a proof-of-concept study for AZ-002 in January 2015. The Phase 2a clinical trial is designed to be an in-clinic, randomized, double-blind, cross-over evaluation of patients with epilepsy. The primary aim of this study will be to assess the safety and pharmacodynamic electroencephalographic effects of a single dose of AZ-002 at different dose strengths. Data from this clinical trial are expected to serve as the basis for dose determination in potential future efficacy and safety clinical studies. We own full development and commercial rights to AZ-002.

AZ-007 (Staccato zaleplon) for Insomnia

We are developing AZ-007 for the treatment of insomnia in patients who have difficulty falling asleep, including those patients with middle of the night awakening who have difficulty falling back asleep. Insomnia is the most prevalent sleep disorder, and we believe that it affects at least 15% to 20% of the United States population, with some estimates of up to 50% of Americans reporting difficulty getting a good night’s sleep at least a few nights a week. Insomnia can be due to a variety of causes, including depression, grief or stress, menopause, age, shift work, or environmental disruption. Whatever the cause of insomnia, it can take its toll on both the afflicted and the non-afflicted. Sleep disturbances have a major negative impact on public health and economic productivity.

Although benzodiazepines have been the clinical standard in treatment for sleep disorders for decades, issues with drug misuse and dependency are common and concerning. Other current treatments for insomnia include non-benzodiazepine GABA-A receptor agonists, which include zolpidem, both immediate release and controlled-release tablets, zaleplon, and eszopiclone, which have less abuse potential and fewer side effects than classical benzodiazepines and can be used for longer term treatment. Patients and physicians surveyed in market research suggest that current oral forms of these leading insomnia medications can take from 30-60 minutes to work, while promotions for insomnia medications cite 20-30 minutes. Compounds with a longer half-life keep patients asleep longer and if dosed in the middle of the night, can have residual side effects that can cause a “hangover” feeling the next day.

Index to Financial Statements

potentially large clinical need for a product which has the potential to lead to rapid and predictable onset of sleep in patients with insomnia, coupled with a predictable duration of sleep and rapid, clear awakening that has the potential to be satisfied by AZ-007.

We have completed Phase 1 testing for AZ-007. In the Phase 1 study, AZ-007 delivered an IV-like pharmacokinetic profile with a median time to peak drug concentration of 1.6 minutes. Pharmacodynamics, measured as sedation assessed on a 100 mm visual- analog scale, showed onset of effect as early as 2 minutes after dosing. During 2011, we completed the necessary process development work to transfer AZ-007 from our original single-dose clinical product device to our current single-dose commercial product device. In 2015, we plan to initiate a Phase 2 clinical study with AZ-007. The primary goal of this study will be to: (i) determine AZ-007’s effects and impact on sleep, as measured with polysomnography, (ii) to determine AZ-007’s residual effects after dosing, as measured in a driving simulator environment, and (iii) to collect additional safety data on AZ-007.

STACCATO SYSTEM

Background

Acute and intermittent medical conditions are characterized by a rapid onset of symptoms that are temporary and severe, and that occur at irregular intervals, unlike the symptoms of chronic medical conditions that continue at a relatively constant level over time. Approved drugs for the treatment of many acute and intermittent conditions, such as antipsychotics to treat agitation, triptans to treat migraine headaches and benzodiazepines to treat anxiety or epilepsy, are typically delivered either in tablets, by injections or by other formulations. Traditional oral inhalation technologies are also being developed to treat these conditions. These delivery methods have the following advantages and disadvantages:

•

Oral Tablets. Oral tablets or capsules are convenient and cost effective, but they generally do not provide rapid onset of action. Oral tablets may require at least one to four hours to achieve peak plasma levels. Also, some drugs, if administered as a tablet or capsule, do not achieve adequate or consistent bioavailability due to the degradation of the drug by the stomach or liver or inability to be absorbed into the bloodstream. Orally-disintegrating technology is often incorporated into oral tablets to enhance the dissolution characteristics of a formulation, and most orally disintegrating tablets are bioequivalent to conventional oral dosage forms of the original drug.

•

Injections. Intravenous, or IV, or intramuscular, or IM, injections provide a more rapid onset of action than oral tablets and can sometimes be used to titrate potent drugs with very rapid changes in effect. Titration refers to the ability to administer an initial dose of medication to determine if that dose is effective and, if not, to administer additional doses until the medication has had an adequate effect. However, with a few exceptions, injections generally are administered by trained medical personnel in a medical care setting. Other forms of injections result in an onset of action that is generally substantially slower than IV injection, although often faster than oral administration. All forms of injections are invasive, can be painful to some patients and are often expensive. In addition, many drugs are not water soluble and can be difficult to formulate in an injectable form.

•

Traditional Oral Inhalation. Traditional dry powder and aerosolized inhalation delivery systems have been designed and used primarily for local delivery of drugs to the airways, not to the deep lung for rapid systemic drug delivery. Certain recent variants of these systems, however, can provide systemic delivery of drugs, either for the purpose of rapid onset of action or to enable noninvasive delivery of drugs that are not orally bioavailable. Nevertheless, many of these systems have difficulty in generating appropriate drug particle sizes or consistent emitted doses for deep lung delivery. To achieve appropriate drug particle sizes and consistent emitted doses, most traditional inhalation systems require the use of excipients and additives such as detergents, stabilizers and solvents, which may cause toxicity or allergic reactions. Many traditional inhalation devices require patient coordination to deliver the correct drug dose, leading to potentially wide variations in the drug delivered to a patient.

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As a result of these limitations, we believe there is a significant unmet medical and patient need for products for the treatment of acute and intermittent conditions that can be delivered in precise amounts, provide rapid therapeutic onset, and are noninvasive and easy to use.

Our Solution: Staccato System

Our Staccato system rapidly vaporizes an excipient-free drug compound to form a proprietary condensation aerosol that is inhaled and rapidly achieves systemic blood circulation via deep lung absorption. The Staccato system consistently creates aerosol particles averaging one to three and one-half microns in size, which is the most appropriate size for deep lung inhalation and absorption into the bloodstream for systemic effect.

We believe our Staccato system matches delivery characteristics and product attributes to clinical and patient needs for acute and intermittent conditions, with the following advantages:

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Rapid Onset. The aerosol produced with the Staccato system is designed to be rapidly absorbed through the deep lung with a speed of therapeutic onset comparable to an IV injection, generally achieving peak plasma levels of drug in two to five minutes.

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Ease of Use. The Staccato system is breath actuated, and a patient simply inhales to administer the drug dose. Unlike injections, the Staccato system is noninvasive and may not require caregiver assistance. The aerosol produced with the Staccato system is relatively insensitive to patient inhalation rates. Unlike many other inhalation technologies, the patient does not need to learn a special breathing pattern. In addition, the Staccato device is small and easily portable.

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Consistent Particle Size and Dose. The Staccato system uses rapid heating of the drug film to create consistent and appropriate particle sizes for deep lung inhalation and absorption into the bloodstream. The Staccato system also produces a consistent high emitted dose, regardless of the patient’s breathing pattern.

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Potential for Broad Applicability. The Staccato system can deliver both water-soluble and water-insoluble drugs and eliminates the need for excipients and additives such as detergents, stabilizers and solvents, avoiding the side effects that may be associated with the excipients or additives.

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Design Flexibility. The Staccato system can incorporate multiple features, including, for example, a lockout system to potentially enhance safety, the convenience of patient titration, and a variety of dose administration regimens.

Drug Candidates Based on the Staccato System

We combine small molecule drugs with our Staccato system to create proprietary products and product candidates. We believe that the drugs we are currently using or studying are no longer eligible for patent protection as chemical entities or have their patent protection expiring in the next several years. These drugs have been widely used, and we believe their biological activity and safety are well understood and characterized. We have received composition of matter patent protection on the Staccato aerosolized forms of these drugs. We also intend to collaborate with pharmaceutical companies to develop new chemical entities, including compounds that might otherwise not be suitable for development because of limitations of traditional delivery methods.

Since our inception, we have screened more than 400 drug compounds, identifying approximately 200 drug compounds that demonstrate initial vaporization feasibility for delivery with our technology. We believe that a number of these drug compounds, when delivered by the Staccato system, would have a desirable therapeutic profile for the treatment of various acute and intermittent conditions. We are initially focusing on developing proprietary products by combining our Staccato system with small molecule drugs that have been in use for many years and are well-characterized to create Staccato-based aerosolized forms of these drugs.

Since 2004, we have filed six Investigational New Drug Applications, or INDs, and have received a U.S. NDA approval and EU marketing authorization for ADASUVE, based on the Staccato technology. In addition to ADASUVE, our only product approved for marketing, AZ-002 and AZ-007, two product candidates in active development, we have in the past allocated resources to the development of the following product candidates, none of which are currently in active development: (i) AZ-104 (Staccato loxapine, low-dose) for the treatment of

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patients suffering from acute migraine headaches, (ii) AZ-003 (Staccato fentanyl) for the treatment of patients with acute pain, including patients with breakthrough cancer pain and postoperative patients with acute pain episodes and (iii) Staccato nicotine which is designed to help smokers quit by addressing both the chemical and behavioral components of nicotine addiction by delivering nicotine replacement via inhalation.

Staccato System

We invented the Staccato system. Our product candidates employing the Staccato system consist of three core components: (1) a heat source that includes an inert metal substrate; (2) a thin film of an excipient-free drug compound, also known as an active pharmaceutical ingredient, or API, coated on the substrate; and (3) an airway through which the patient inhales. The left panel of the illustration below depicts these core components prior to patient inhalation.

The right panel of the illustration below depicts the Staccato system during patient inhalation: (1) the heated substrate has reached peak temperature in less than one half second after the start of patient inhalation; (2) the thin drug film has been vaporized; and (3) the drug vapor has subsequently cooled and condensed into excipient-free drug aerosol particles that are being drawn into the patient’s lungs. The entire Staccato system actuation occurs in less than one second.

LOGO

ADASUVE, AZ-002, AZ-007 and AZ-104 use the same disposable, single-dose delivery device. The single dose delivery device consists of a metal substrate that is chemically heated through a battery-initiated reaction of energetic materials. The device is portable and easy to carry. A diagram of the single dose delivery device is shown below:

LOGO

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We control final assembly of the Staccato technology-based products in an effort to maintain quality, to reduce the risk for supply interruptions and to allow for potentially more cost-effective manufacturing. We continue to undertake engineering and development efforts to improve the commercial manufacturability of our single dose device.

AZ-003 uses our multiple dose delivery technology, with a device consisting of a reusable controller and a disposable dose cartridge. We have designed the multiple dose delivery platform to meet the specific needs of each product candidate. The AZ-003 dose cartridge currently contains 25 separate metal substrates, each coated with the API, which rapidly heat upon application of electric current from the controller. In the current design for AZ-003, 25 micrograms of drug compound are coated on each metal substrate. The device is portable and easy to carry, with dimensions of approximately five inches in length, two and one-half inches in width and one inch in thickness. The controller weighs approximately four ounces, and the dose cartridge weighs approximately one ounce.

We are developing the next generation of the Staccato platform, a “smart” Staccato intended to take advantage of the current electronics in the multiple dose platform device and the electronics that could be added. We believe that a “smart” Staccato medication could offer users and healthcare providers a therapeutic solution to an indicated condition via drug delivery with potential safety features (such as preventing delivery of a dose of medication if such delivery is not appropriate) and condition management features (such as collecting data about product use to assist healthcare providers to better manage patients). We believe the combination of these features has the potential to lead to a unique system of therapeutic management not available in other drug delivery systems. These smart features can be incorporated into our current pipeline, including AZ-002, AZ-003 and AZ-007. We do not expect to commit significant resources towards the development of the “smart” Staccato platform prior to obtaining additional funding specific to this next generation platform.

ACTIVE DEVELOPMENT PROGRAMS

Acute Repetitive Seizures Program — AZ-002 (Staccato alprazolam)

We are developing AZ-002 (Staccato alprazolam) for the treatment of acute repetitive seizures, or ARS, which are clusters of epileptic seizures that occur over a short period of time. The active pharmaceutical agent, or API, of AZ-002 is alprazolam, a generic benzodiazepine drug. Alprazolam is currently approved in oral formulations in the United States for use in the management of anxiety disorder, for the short term relief of symptoms of anxiety, for anxiety associated with depression, and for the treatment of panic disorder with or without agoraphobia, or an abnormal fear of being in public places.

Market Opportunity

Epilepsy, a disorder of recurrent seizures, affects approximately 2.5 million Americans, which means it is the third most common neurological disorder in the United States. ARS refers to seizures that are serial, clustered, or crescendo, and distinct from the patient’s usual seizure pattern despite treatment from anti-epileptic drugs. ARS occurs in a small subset of patients with epilepsy who regularly experience breakthrough seizures in flurries or clusters, despite treatment with a regimen of anti-epileptic drugs. The socioeconomic effects of seizure clustering include missed school and work, as well as greater use of health care resources.

Among the implications of ARS are concerns for patient safety. Prolonged or recurrent seizure activity persisting for 30 minutes or more may result in serious injury, health impacts and death that correlate directly with seizure duration. ARS, if left untreated, has been reported to evolve into a state of persistent seizure, or status epilepticus, which has a 3% mortality rate in children and 26% in adults.

Our market research among neurologists and caregivers of ARS patients indicates that patients may experience clusters of seizures that vary from weekly to several months between clusters of seizures. Seizures can be preceded by a sense of perceptual disturbance and can last from one to two seconds to a couple of minutes. Patients typically experience three or four seizures per cluster, and the interval between seizures can vary from half an hour to two hours. In the intervals between seizures, the majority of patients are able to follow simple instructions and participate in a conversation.

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Benzodiazepines are considered to be medications of first choice for the treatment of acute seizures. Clinical advantages of benzodiazepines include relatively rapid onset of action, high efficacy and minimal toxicity. The rapidity by which a medication can be delivered to the systemic circulation and then to the brain plays a significant role in reducing the time needed to treat seizures and reducing the likelihood of damage to the central nervous system. Improvements in quality of life reported anecdotally by families of individuals treated with benzodiazepines for epileptic seizures include reduced emergency room visits and hospitalizations, reduced disruption of daily activities, reduced time lost from work or school, and increased sense of “control.”

Current standard of care for ARS is the rectal gel formulation of diazepam, which must be administered by a caregiver or healthcare professional. In our market research, patients surveyed have commented that they find that the rectal gel takes longer to work than they would like and that the route of administration is sub-optimal and cannot be used in public. Intravenous benzodiazepines are rapidly acting, but must be administered by a healthcare professional in a medical facility.

The ability to treat quickly is clinically imperative to prevent an epileptic event from evolving into status epilepticus or causing other serious complications. A product that can be administered easily in the home setting to effectively treat ARS may result in avoiding a trip to the hospital for treatment or diminishing the need to use the rectal formulation.

If approved, AZ-002 could replace use of IV or rectal benzodiazepines currently used in treating patients who experience ARS. The potential benefits of AZ-002 as compared to IV or rectal delivery may include a faster delivery to the blood stream, compared to rectal delivery, and greater ease of use. AZ-002 could be administered after a first seizure in a cluster with the aim of preventing further seizures. The caregiver could provide dosing assistance between cluster seizures. We believe that alprazolam’s ability to inhibit anxiety, or anxiolytic action, may provide additional therapeutic benefits to ARS patients.

We own full development and commercial rights to AZ-002, and we believe AZ-002 could qualify for orphan drug status. Orphan drug designation is available for drugs intended to treat rare diseases or conditions (i.e., generally those that affect fewer than 200,000 individuals in the United States at the time designation is sought). Drugs that receive orphan designation may be eligible for certain research tax credits and exemptions from certain fees and, upon approval, may receive 7 years of non-patent market exclusivity in the United States.

Development Status

Clinical Trials

We initiated a Phase 2a proof-of-concept study for AZ-002 in January 2015. The Phase 2a clinical trial is designed to be an in-clinic, randomized, double-blind, evaluation of patients with epilepsy. The primary aim of this study will be to assess the safety and pharmacodynamic electroencephalographic effects of a single dose of AZ-002 at different dose strengths. Data from this clinical trial are expected to serve as the basis for dose determination in potential future efficacy and safety clinical studies.

We have completed three clinical trials with AZ-002. In 2005, we completed a Phase 1 clinical trial of AZ-002 in healthy volunteers. The purpose of this trial was to assess the safety, tolerability and pharmacokinetic properties of AZ-002. Using a dose escalation design, five doses (0.125 mg to 2.0 mg) of AZ-002 or placebo were studied in a total of 50 subjects. Results from the trial showed that AZ-002 was generally well tolerated at all doses. There were no serious adverse events observed across all dose groups, and all of the side effects were rated as mild or moderate in severity. Reported side effects included dizziness, sleepiness, fatigue and unpleasant taste. Across all doses, the pharmacokinetic analyses revealed that dose proportional plasma concentration of alprazolam and peak plasma levels were generally reached within the first few minutes after dosing.

In 2008, we released the preliminary results from our Phase 2a clinical trial with AZ-002 in patients with panic disorder. The study did not meet its two primary endpoints, which were the effect of AZ-002 on the incidence of a doxapram-induced panic attack and the effect of AZ-002 on the duration of a doxapram-induced panic attack, both as compared with placebo. There were no serious adverse events in the clinical trial, and AZ-002 was well tolerated in the study patient population. As a result of these studies, we made the decision to stop development of AZ-002 for the possible treatment of panic attacks in patients with panic disorder.

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In 2009, we completed an abuse liability study with AZ-002. The objective of this clinical study was to compare the potential abuse liability of AZ-002, as compared to that of oral immediate-release alprazolam and Staccato placebo. This study was a Phase 1, single-center, randomized, double-blind, placebo-controlled, crossover abuse liability study of three inhaled doses of AZ-002, 0.5 mg, 1 mg, and 2 mg, three oral doses of immediate-release alprazolam (1 mg, 2 mg, and 4 mg), and Staccato placebo. The subjects participated in the study as outpatients. After completion of the screening/training session, two qualifying sessions evaluated effects of oral alprazolam 2 mg and oral placebo, and subjects who demonstrated a preference for alprazolam were identified. This phase of the study was double-blind. Only those subjects whose abuse liability measures indicated greater preference for oral alprazolam versus oral placebo were continued in the study. The subsequent phase of the study followed a crossover schedule planned according to a seven-treatment, seven-period Latin Square design. This phase of the study employed a double-blind, double-dummy design and included seven experimental sessions during which the effects of three doses of oral immediate-release alprazolam, three doses of AZ-002, and Staccato placebo were evaluated. A total of 14 subjects completed the study. The primary outcome measure was the categorical response to the question: “Rate the degree to which you would like to take the drug again.” Secondary outcome measures included questions from other questionnaires and rating scales.

Study validity (active controls statistically different from placebo) was confirmed for the primary outcome endpoint and was supported by the secondary outcome endpoint results.

Results of this study demonstrated that the abuse potential of 2 mg AZ-002 is generally similar to that of 4 mg oral alprazolam, but greater than that of 1 mg and 2 mg oral alprazolam; the abuse potential of 1 mg AZ-002 is generally similar to that of 1 mg and 2 mg oral alprazolam, but less than that of 4 mg oral alprazolam; the abuse potential of 0.5 mg AZ-002 is generally similar to that of 1 mg oral alprazolam, but less than that of 2 mg and 4 mg oral alprazolam. Overall, there was no apparent increase in abuse potential for AZ-002 compared with oral alprazolam, based on the results of the primary outcome endpoint. However, the FDA or other regulatory agencies may disagree with the results of this study, find the results inconclusive, or may require additional studies to confirm the lack of abuse potential of AZ-002.

Preclinical Studies

Alprazolam has been approved for marketing in oral tablet form. There are publicly available safety pharmacology, systemic toxicology, carcinogenicity and reproductive toxicology data that we believe we will be able to use for our regulatory filings. Therefore, our preclinical development plan was primarily focused on assessing the local tolerability of AZ-002. To date, our two preclinical inhalation toxicology studies with AZ-002 have indicated that it is generally well tolerated.

INSOMNIA PROGRAM: AZ-007 (Staccato zaleplon)

Market Opportunity

Insomnia is a prevalent disorder with almost $5 billion in worldwide sales of prescription medications each year. In a survey conducted by the National Sleep Foundation in 2009, results showed that 64% of the respondents experienced a minimum of one symptom of insomnia at least a few nights a week, with 41% reporting this occurring every night or almost every night and 31% using some sort of sleep aid at least a few nights per week, 18% of whom use a medication sleep aid. Of those, respondents complained primarily of

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waking up feeling unrefreshed (45%), being awake a lot during the night (46%), having difficulty falling asleep (29%), and waking up too early and not being able to get back to sleep (30%). Additionally, more than one-half of adults (54%) reported that they have driven at least once while drowsy in the past year, with almost a third (28%) reporting that they do so at least once per month, and 28% have nodded off or fallen asleep while driving. Of those who have driven drowsy, 38% reported using a sleep aid at least a few nights per week.

Although benzodiazepines have been the clinical standard in treatment for sleep disorders for decades, issues with drug misuse and dependency are common and concerning. Other current treatments for insomnia include non-benzodiazepine GABA-A receptor agonists, which include zolpidem, both immediate release and controlled-release tablets, zaleplon, and eszopiclone, which have less abuse potential and fewer side effects than classical benzodiazepines and can be used for longer term treatment. Patients and physicians surveyed in market research suggest that current oral forms of these leading insomnia medications can take from 30-60 minutes to work, while promotions for insomnia medications cite 20-30 minutes. Compounds with a longer half-life keep patients asleep longer. Those compounds that are dosed in the middle of the night have residual side effects that can cause a “hangover” feeling the next day.

We believe the opportunity in insomnia is a product which achieves a balance in treating patients so they can fall asleep quickly, whether at bedtime or in the middle of the night, while enabling them to function well the next day without a groggy feeling that can impact driving, employment or leisure activities. We believe there is a potentially large clinical need for a product which has the potential to lead to rapid and predictable onset of sleep in patients with insomnia, coupled with a predictable duration of sleep and rapid, clear awakening that has the potential to be satisfied by AZ-007.

Development Status

Clinical Studies

In April 2008, we announced positive results from a Phase 1 clinical trial of AZ-007. The AZ-007 Phase 1 clinical trial enrolled 40 healthy volunteers at a single U.S. clinical center. The purpose of this trial was to assess the safety, tolerability and pharmacokinetic parameters of a single dose of AZ-007. Using a double blind, randomized, dose-escalation trial design, 4 doses of zaleplon (ranging from 0.5 to 4.0 mg) were compared to placebo.

AZ-007 delivered an IV-like pharmacokinetic profile with a median time to peak venous concentration of 1.6 minutes. Zaleplon exposure was dose proportional across the 4 doses studied, as calculated by power analysis. Pharmacodynamics, measured as sedation assessed on a 100 mm visual-analog scale, showed onset of effect as early as 2 minutes after dosing with AZ-007.

The most common side effects, reported by at least 10% of the patients in any treatment group, were dizziness and somnolence. These side effects were generally mild to moderate in severity. These data indicated a rapid onset of effect, apparently directly related to the IV-like pharmacokinetics, and showed that AZ-007 was generally safe and well tolerated in this population of healthy volunteers.

In 2010, we initiated internal work to move AZ-007 to the current commercial production device, or CPD, and completed that work in 2011. In 2015, we plan to initiate a Phase 2 clinical study with AZ-007. The primary goal of this study will be to: (i) determine AZ-007’s effects and impact on sleep, as measured with polysomnography, (ii) to determine AZ-007’s residual effects after dosing, as measured in a driving simulator environment, and (iii) to collect additional safety data on AZ-007.

Preclinical Studies

Zaleplon, the active pharmaceutical ingredient in AZ-007, has been approved for marketing in oral form. There are publicly available safety pharmacology, systemic toxicology, carcinogenicity and reproductive toxicology data we will be able to use for our regulatory filings. Therefore, our preclinical development testing has been primarily focused on assessing the local tolerability of inhaled zaleplon. Our two preclinical inhalation toxicology studies with zaleplon have indicated that it was generally well tolerated.

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OUR PRODUCT CANDIDATE DEVELOPMENT AND COMMERCIAL STRATEGY

Key elements of our strategy include:

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Focus on Acute and Intermittent Conditions. We focus our development efforts on product candidates based on our Staccato system that are intended to address important unmet medical and patient needs in the treatment of acute and intermittent conditions in which we believe the Staccato technology has the potential to change clinical practice or provide value to patients and healthcare professionals, for example, by offering rapid onset, ease of use, noninvasive administration and, in some cases, patient titration of dosage.

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Establish Strategic Collaborations/Relationships. When appropriate, we intend to strategically collaborate with pharmaceutical and other companies for development funding or commercialization efforts. Collaborations, such as those with Ferrer and Teva, provide resources to address markets that may require greater sales or marketing resources than we are able to provide, or specific expertise to maximize the value of some product candidates. We may also choose to commercialize a product on our own with or without the services of a contract sales organization. We may also enter into strategic collaborations with other pharmaceutical companies to combine our Staccato system with their proprietary compounds.

Research and Development

Research and development expenditures made to advance ADASUVE and our product candidates, and, prior to commercial production of ADASUVE, develop our manufacturing capabilities during the last three years ended December 31, 2014, were as follows (in thousands):


	Year Ended December 31,
	2014		2013		2012
Total research and development	$	13,748	$	19,082	$	21,849

Beginning in the second quarter of 2013, certain quality and manufacturing expenses began to be classified as cost of goods sold or inventory rather than research and development expenses as a result of the start of commercial manufacturing for ADASUVE.

MANUFACTURING

We manufacture ADASUVE with components supplied by qualified vendors. We own all manufacturing rights to our product candidates and, subject to Teva’s co-exclusive right with us and our affiliates, to ADASUVE. The drug product manufacturing portion of the process is completed at our facility in Mountain View, California. We believe our manufacturing facility will have sufficient capacity to manufacture commercial scale batches of ADASUVE and to manufacture materials for toxicology studies and clinical trials for any future studies of our product candidates for at least the next two years.

For our single dose delivery platform utilized by ADASUVE, after inspection and release of incoming components, we assemble the components of the product and spray-coat the exterior of the heat package with a thin film of API (loxapine, in the case of ADASUVE). We then assemble the plastic airway housings around the coated heat package and insert the completed product in a pharmaceutical-grade foil pouch.

We believe we have developed quality assurance, quality control systems and regulatory compliance appropriate to the design, manufacture, packaging, labeling and storage of ADASUVE and our product candidates in compliance with applicable regulations and the appropriate level of current Good Manufacturing Practice, or cGMP. These systems include extensive requirements with respect to design, quality management, quality planning and organization, product design, manufacturing facilities, equipment, purchase and handling of components, production and process controls, packaging and labeling controls, device evaluation, distribution and record keeping.

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In 2007, we completed the construction of a cGMP compliant manufacturing facility located in Mountain View, California. In November 2007, we received a pharmaceutical manufacturing license from the California State Food and Drug Branch for this facility. The license was renewed in January 2015 and is valid until January 31, 2017.

In August 2012, the Spanish competent authorities, on behalf of the EMA, determined that our facility complied with the principles and guidelines of Good Manufacturing Practice set forth in Directive 2003/94/EC and issued an EU Certificate of Good Manufacturing Practices Compliance of a Manufacturer for our facility. This initial certificate is valid for three years, through May 15, 2015. In November 2012, the FDA completed a Pre-Approval Inspection of our facility, as part of the review process for the ADASUVE NDA. All issues related to this and other previous inspections were satisfactorily resolved, and in December 2012, we received FDA approval to market ADASUVE in the United States.

We outsource the production of the components of our single dose delivery platform, including the printed circuit boards, the molded plastic airways and the heat packages. We currently use single source suppliers for these components, as well as for the API used in ADASUVE and AZ-002. We do not carry a significant inventory of these components, and establishing additional or replacement suppliers for any of these components may not be accomplished quickly, or at all, and could cause significant additional expense. Any supply interruption from our vendors would limit our ability to manufacture ADASUVE, including for our post-approval clinical trials, and/or could delay clinical trials for, and regulatory approval of our product candidates that are in development.

The controller for our multiple dose delivery design includes the battery power source for heating the individual metal substrates, a microprocessor that directs the electric current to the appropriate metal substrate at the appropriate time, and an icon-based liquid crystal display that shows pertinent information to the user, such as the number of doses remaining in the dose cartridge and the controller status. We may need to develop modified versions of our devices for future product candidates.

Autoliv ASP, Inc.

In November 2007, we entered into a manufacturing and supply agreement, or the Manufacture Agreement, with Autoliv, relating to the commercial supply of chemical heat packages for our single dose Staccato device. Autoliv developed these chemical heat packages for us pursuant to a development agreement executed in October 2005.

Currently, Autoliv manufactures, assembles and tests the chemical heat packages solely for us in conformance with our specifications. We pay Autoliv a specified purchase price, which varies based on annual quantities ordered by us, per chemical heat package delivered. The Manufacture Agreement provides that during the term of the Manufacture Agreement, Autoliv will be our exclusive supplier of chemical heat packages. In addition, the Manufacture Agreement grants Autoliv the right to negotiate for the right to supply commercially any second generation chemical heat package, or a second generation product, and provides that we will pay Autoliv certain royalty payments if we manufacture second generation products ourselves or if we obtain second generation products from a third party manufacturer. Upon the expiration or termination of the Manufacture Agreement we will also be required, on an ongoing basis, to pay Autoliv certain royalty payments related to the manufacture of the chemical heat packages by us or third- party manufacturers.

In June 2010 and February 2011, we entered into agreements to amend the terms of the Manufacture Agreement, or the 2010 Amendment and the 2011 Amendment, respectively. Under the terms of the 2010 Amendment, we paid Autoliv $4.0 million and issued Autoliv a $4.0 million unsecured promissory note in return for a production line for the commercial manufacture of chemical heat packages. Each production line is comprised of two identical and self-sustaining “cells”, and the first such cell was completed, installed and qualified in connection with the 2010 Amendment. Under the terms of the 2011 Amendment, the original $4.0 million note was cancelled and a new unsecured promissory note with a reduced principal amount of $2.8 million, or the Second Note, was issued and production on the second cell ceased. The Second Note was paid in full in 2014.

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In December 2014, we amended the Manufacture Agreement with Autoliv, or the 2014 Amendment to extend the agreement through 2018. In addition, we have the right to engage a second source supplier and implement a manufacturing line transfer from Autoliv to manufacture and supply the chemical heat packages to us or our licensees.

GOVERNMENT REGULATION

FDA Product Approval Process

The testing, manufacturing, labeling, advertising, promotion, distribution, export and marketing of our product candidates are subject to extensive regulation by governmental authorities in the United States and other countries. Our product candidates include drug compounds incorporated into our delivery device and are considered “combination products” in the United States. We have agreed with the FDA that our product candidates will be reviewed by the FDA’s Center for Drug Evaluation and Research. The FDA regulates pharmaceutical products in the United States under the Federal Food, Drug and Cosmetic Act, or FDCA. The steps required before a drug may be approved for marketing in the United States generally include:

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preclinical laboratory studies and animal tests;

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the submission to the FDA of an IND for human clinical testing, which must become effective before human clinical trials commence;

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adequate and well-controlled human clinical trials to establish the safety and efficacy of the product;

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the submission to the FDA of an NDA;

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satisfactory completion of an FDA inspection of the manufacturing facilities at which the product is made to assess compliance with cGMP. In addition, the FDA may inspect clinical trial sites that generated the data in support of the NDA; and

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FDA review and approval of the NDA.

The testing and approval process requires substantial time, effort and financial resources, and the receipt and timing of any approval is uncertain. Preclinical studies include laboratory evaluations of the product candidate, as well as animal studies to assess the potential safety and efficacy of the product candidate. The results of the preclinical studies, together with manufacturing information and analytical data, are submitted to the FDA as part of the IND, which must become effective before clinical trials may commence. The IND will become effective automatically 30 days after receipt by the FDA, unless the FDA raises concerns or questions about the conduct of the trials as outlined in the IND prior to that time. In that case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can proceed.

Clinical trials typically begin with the administration of the product candidates to healthy volunteers or patients under the supervision of a qualified principal investigator. Before a clinical trial may begin, an independent institutional review board, or IRB, at or servicing each institution must review and approve each clinical trial. The IRB will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution.

Clinical trials typically are conducted in three sequential phases prior to approval, but the phases may overlap. A fourth, or post-approval, phase may include additional clinical studies. These phases generally include the following:

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Phase 1. Phase 1 clinical trials involve the initial introduction of the drug into human subjects, frequently healthy volunteers. These studies are designed to determine the metabolism and pharmacologic actions of the drug in humans, the adverse effects associated with increasing doses and, if possible, to gain early evidence of effectiveness. In Phase 1 clinical trials, the drug is usually tested for safety, including adverse effects, dosage tolerance, absorption, distribution, metabolism, excretion and pharmacodynamics.

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Phase 2. Phase 2 clinical trials usually involve studies in a limited patient population to (1) evaluate the efficacy of the drug for specific, targeted indications; (2) determine dosage tolerance and optimal dosage;

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and (3) identify possible adverse effects and safety risks. Although there are no statutory or regulatory definitions for Phase 2a and Phase 2b, Phase 2a is commonly used to describe a Phase 2 clinical trial designed to evaluate efficacy, adverse effects and safety risks and Phase 2b is commonly used to describe a subsequent Phase 2 clinical trial that also evaluates dosage tolerance and optimal dosage.

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Phase 3. If a compound is found to be potentially effective and to have an acceptable safety profile in Phase 2 clinical trials, the clinical trial program will be expanded to further demonstrate clinical efficacy, optimal dosage and safety within an expanded patient population at geographically dispersed clinical trial sites. Phase 3 clinical trials usually include several hundred to several thousand patients.

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Phase 4. Phase 4 clinical trials are studies required of, or agreed to by, a sponsor that are conducted after the FDA has approved a product for marketing. These studies are used to gain additional information from the treatment of patients in the intended therapeutic indication and to verify a clinical benefit in the case of drugs approved under accelerated approval regulations. If the FDA approves a product while a company has ongoing clinical trials that were not necessary for approval, a company may be able to use the data from these clinical trials to meet all or part of any Phase 4 clinical trial requirement. These clinical trials are often referred to as Phase 3/4 post-approval clinical trials. Failure to promptly conduct Phase 4 clinical trials could result in withdrawal of approval for products approved under accelerated approval regulations.

In the case of products for the treatment of severe or life threatening diseases, the initial clinical trials are sometimes conducted in patients rather than in healthy volunteers. Since these patients are already afflicted with the target disease, it is possible that such clinical trials may provide evidence of efficacy traditionally obtained in Phase 2 clinical trials. These trials are referred to frequently as Phase 1/2 clinical trials. The FDA may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

The results of preclinical studies and clinical trials, together with detailed information on the manufacture and composition of the product, are submitted to the FDA in the form of an NDA requesting approval to market the product. Generally, regulatory approval of a new drug by the FDA may follow one of three routes. The most traditional of these routes is the submission of a full NDA under Section 505(b)(1) of the FDCA. A second route, which is possible where an applicant chooses to rely in part on the FDA’s conclusion about the safety and effectiveness of previously approved drugs, is to submit a more limited NDA described in Section 505(b)(2) of the FDCA. The final route is the submission of an Abbreviated New Drug Application for products that are shown to be therapeutically equivalent to previously approved drug products as permitted under Section 505(j) of the FDCA. We do not expect any of our product candidates to be submitted under Section 505(j). Both Section 505(b)(1) and Section 505(b)(2) applications are required by the FDA to contain full reports of investigations of safety and effectiveness. However, in contrast to a traditional NDA submitted pursuant to Section 505(b)(1) in which the applicant submits all of the data demonstrating safety and effectiveness, an application submitted pursuant to Section 505(b)(2) can rely upon findings by the FDA that the reference drug is safe and effective. As a consequence, the preclinical and clinical development programs leading to the submission of an NDA under Section 505(b)(2) may be less expensive to carry out and may be concluded in a shorter period of time than programs required for a Section 505(b)(1) application. In its review of any NDA submissions, however, the FDA has broad discretion to require an applicant to generate additional data related to safety and efficacy, and it is impossible to predict the number or nature of the studies that may be required before the FDA will grant approval. Notwithstanding the approval of many products by the FDA pursuant to Section 505(b)(2), certain brand-name pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA changes its interpretation of Section 505(b)(2), this could delay or even prevent the FDA from approving any Section 505(b)(2) NDA that we submit.

To the extent that a Section 505(b)(2) applicant is relying on the FDA’s findings for an already-approved reference product, the applicant is required to certify to the FDA concerning any patents listed for the reference product in the FDA’s publication, Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. A certification that the new product will not infringe the reference product’s Orange Book-listed patents or that such patents are invalid is called a paragraph IV certification, and

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could be challenged in court by the patent owner or holder of the application of the reference product. This could delay the approval of any Section 505(b)(2) application we submit. In addition, any period of non-patent exclusivity applicable to the reference product might delay approval of any Section 505(b)(2) application we submit. Any Section 505(b)(1) or Section 505(b)(2) application we submit for a drug product containing a previously approved API might be eligible for three years of marketing exclusivity, provided new clinical investigations that were conducted or sponsored by us are deemed to be essential to the FDA’s approval of the application. Five years of data exclusivity are granted if the FDA approves an NDA for a new chemical entity. In addition, we are required to list in the Orange Book the patents that claim the approved drug product or drug substance, or that cover an approved method-of-use of the drug product. In order for a generic or 505(b)(2) applicant to rely on the FDA’s approval of any NDA we submit, the generic or 505(b)(2) applicant must certify to any Orange Book listed patents and might be subject to any non-patent exclusivity covering our approved drug product.

For the ADASUVE NDA, we followed, and in future submissions for ADASUVE and our other product candidates we plan to follow the development pathway permitted under the FDCA that we believe will maximize the commercial opportunities for these product candidates. We are currently pursuing the Section 505(b)(2) application route for our product candidates. As such, we have engaged and intend to continue to engage in discussions with the FDA to determine which, if any, portions of our development program can be modified, based on previous FDA findings of a drug’s safety and effectiveness.

Before approving an NDA, the FDA inspects the facilities at which the product is manufactured, whether ours or our third-party manufacturers’, and will not approve the product unless the manufacturing facility complies with cGMP and, where applicable to medical device components, the Quality System Regulation, or QSR. The FDA reviews all NDAs submitted before it accepts them for filing and may request additional information rather than accept an NDA for filing. Once the NDA submission has been accepted for filing, the FDA begins an in-depth review of the NDA. Under the goals and policies agreed to by the FDA under the Prescription Drug User Fee Act, or PDUFA, the FDA has 10 months in which to complete its initial review of a standard NDA and respond to the applicant, and six months for a priority NDA. Those time frames run from the date that FDA accepts an NDA for filing if the NDA is for a New Molecular Entity, or NME, and from the date of NDA submission for a non-NME NDA. The FDA does not always meet the PDUFA goal dates for standard and priority NDAs. The review process is often significantly extended by FDA requests for additional information or clarification. The FDA may delay approval of an NDA if applicable regulatory criteria are not satisfied, require additional testing or information and/or require post-marketing testing and surveillance to monitor safety or efficacy of a product. Also, if regulatory approval of a product is granted, such approval may include limitations on the indicated uses for which such product may be marketed. Once approved, the FDA may withdraw the product approval if compliance with regulatory requirements and conditions of approvals are not maintained or if safety problems occur after the product reaches the marketplace. In addition, the FDA may require testing, including Phase 4 studies or clinical trials, and surveillance programs to monitor the approved products, and may limit further marketing of the product based on the results of these post-marketing programs.

Post-Marketing Regulations

ADASUVE and any other product candidates that receive NDA approval will be limited to those diseases and conditions for which the product is effective, as demonstrated through clinical trials and as specified in the approved labeling. Even if that regulatory approval is obtained, a marketed product, its manufacturer and its manufacturing facilities, and those who market and promote the product, are subject to continual review and periodic inspections by the FDA and, in our case, the State of California. Discovery of previously unknown problems with a medicine, device, manufacturer or facility may result in restrictions on the marketing or manufacturing of an approved product, including costly recalls or withdrawal of the product from the market. The FDA has broad post-market regulatory and enforcement powers, including the ability to suspend or delay issuance of approvals, withdraw approvals, and through the Department of Justice, to initiate court actions seeking to seize products, enjoin violations and impose criminal penalties.

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Other Governmental Regulations

In addition to regulation by the FDA and certain state regulatory agencies, the United States Drug Enforcement Administration, or DEA, imposes various registration, recordkeeping and reporting requirements, procurement and manufacturing quotas, labeling and packaging requirements, security controls and a restriction on prescription refills on certain pharmaceutical products under the Controlled Substances Act, or CSA. The DEA regulates drug substances as Schedule I, II, III, IV or V substances, with FDA approved drugs in Schedules II through V. A principal factor in determining the particular requirements, if any, applicable to a substance under the CSA is its actual or potential abuse profile. Substances controlled in Schedule I and II have the highest potential for abuse and Schedule V substances the lowest potential for abuse relative to the substances in other schedules. Alprazolam and zaleplon, the APIs in AZ-002 and AZ-007, respectively, are regulated as Schedule IV substances and fentanyl, the API in AZ-003, is regulated as a Schedule II substance. Each of these product candidates is subject to DEA regulations relating to registration, security, recordkeeping, and distribution procedures, and, if approved, prescription restrictions and the DEA regulations may impact the availability of the scheduled substance for clinical trials and commercial distribution. As a Schedule II substance, fentanyl is subject to additional controls, including quotas on the amount of product that can be manufactured and additional limitations on prescription refills. We have received necessary registrations from the DEA for the manufacture of AZ-002, AZ-003 and AZ-007. The DEA periodically inspects facilities for compliance with its rules and regulations. Failure to comply with current and future CSA requirements and regulations of the DEA could lead to a variety of sanctions, including revocation, or denial of renewal, of DEA registrations, injunctions, or civil or criminal penalties, and could harm our business and financial condition.

The single dose design of our Staccato system uses what we refer to as “energetic materials” to generate the rapid heating necessary for vaporizing the drug while avoiding degradation. Manufacture of products containing these types of materials is controlled by the Bureau of Alcohol, Tobacco, Firearms and Explosives, or ATF, under 18 United States Code Chapter 40 and implementing regulations. Technically, the energetic materials used in our Staccato system are classified as “low explosives,” and we have been granted a license/permit by the ATF for their manufacture.

Additionally, due to inclusion of the energetic materials in our Staccato system, shipments of the single dose design of our Staccato system have been evaluated to determine if they are regulated by the Department of Transportation, or DOT, under Section 173.56, Title 49 of the United States Code of Federal Regulations. The single dose version of our Staccato device has been granted “Not Regulated as an Explosive” status by the DOT.

We have received funding for one or more research projects from a funding agency of the United States government, and inventions conceived or first actually reduced to practice in performance of the research project, or subject inventions, are subject to the rights and limitations of certain federal statutes and various implementing regulations known generally and collectively as the “Bayh-Dole Requirements.” As a funding recipient, we are subject to certain reporting requirements for subject inventions, and certain limitations are placed on assignment of the invention rights. In addition, the federal government retains a non-exclusive, irrevocable, paid-up license to practice any subject invention and, in exceptional cases, the federal government may seek to take title to the invention.

We will be subject to a variety of foreign regulations governing clinical trials and the marketing of any future products. The conduct of clinical trials in the EU is governed by Directive 2001/20/EC which imposes obligations and procedures that are similar to those provided in applicable U.S. laws. European Union Good Clinical Practice rules and EU Good Laboratory Practice obligations must also be respected during conduct of the trials. The conduct of clinical trials must be approved by the competent regulatory authorities and the competent Ethics Committees in the EU Member States in which clinical trials take place. All marketing authorisation holders will be required to comply with the requirements of the new EU Clinical Trials Regulation which will come into force no later than May 28, 2016. As a regulation, it will be directly binding in all EU Member States without the need for any related national implementing legislation. The new EU Clinical Trials Regulation, which will replace the current Directive 2001/20/EC, introduces a complete overhaul of the existing regulation of clinical trials for medicinal products in the EU, including a new coordinated procedure for authorisation of clinical trials that is reminiscent of the mutual recognition procedure for marketing authorisation of medicinal products.

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In the EU, in order to obtain marketing authorization for a medicinal product, applicants are required to submit applications for marketing authorization based on the ICH Common Technical Document to the relevant competent authorities, and must demonstrate the quality, safety and efficacy of the medicinal product. As part of the applications applicants must include a demonstration that studies have been conducted with the medicinal product in the pediatric population as provided by a Pediatric Investigation Plan approved by the Pediatric Committee of the EMA. Alternatively, confirmation that the applicant has been granted a waiver or deferral for the conduct of these studies must be provided.

Similarly to the United States, marketing authorization holders and manufacturers of medicinal products in the EU are subject to comprehensive regulatory oversight by the EMA and the competent authorities of the EU Member States. This oversight is conducted both before and after grant of manufacturing and marketing authorizations. It includes control of compliance with EU cGMP rules.

Failure to comply with EU and EU Member State laws governing the conduct of clinical trials, grant of marketing authorization for medicinal products and the marketing of such products, both before and after grant of marketing authorization, could result in administrative, civil or criminal penalties. These penalties could include refusal to authorize the conduct of clinical trials, refusal to grant marketing authorization, product withdrawals and recalls, product seizures, suspension or withdrawal of the marketing authorization, fines and criminal penalties.

Outside the United States and the EU, our ability to market a product depends upon receiving a marketing authorization from the appropriate regulatory authorities. The requirements governing the conduct of clinical trials, marketing authorization, pricing and reimbursement vary widely from country to country. In any country, however, we will only be permitted to commercialize our products if the appropriate regulatory authority is satisfied that we have presented adequate evidence of safety, quality and efficacy. Whether or not FDA approval or EC authorization has been obtained, approval of a product by the comparable regulatory authorities of foreign countries must be obtained prior to the commencement of marketing of the product in those countries. The time needed to secure approval may be longer or shorter than that required for FDA approval. The regulatory approval and oversight process in other countries includes all of the risks associated with the FDA process described above.

Federal Anti-Kickback, False Claims Act, Federal Physician Payment Sunshine Act, and Equivalent Foreign Regulations

In addition to FDA restrictions on marketing of pharmaceutical products, several other types of U.S. state and federal laws are relevant to certain marketing practices in the pharmaceutical industry. These laws include the Federal Anti-Kickback Statute, false claims statutes, and the Federal Physician Payment Sunshine Act. We are subject to these laws and they may affect our business. The Federal Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, lease, order or recommendation of, any good or service for which payment may be made under federal health care programs such as the Medicare and Medicaid 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. Violations of the Federal Anti-Kickback Statute are punishable by imprisonment, criminal fines, civil monetary penalties and exclusion from participation in federal healthcare programs. The Federal Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 and subsequent legislation, or collectively, the Healthcare Reform Act or PPACA, among other things, amends the intent requirement of the Federal Anti-Kickback Statute. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, PPACA provides that 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 false claims statutes. There are a number of statutory exceptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions; however, the exceptions and safe harbors are drawn narrowly, and practices that do not fit squarely within an exception or safe harbor may be subject to scrutiny.

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The Federal False Claims Act prohibits, among other things, any person from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment, or knowingly making, or causing to be made, a false record or statement material to a false or fraudulent claim. Several pharmaceutical and other healthcare companies have faced enforcement actions under these laws for allegedly inflating drug prices they report to pricing services, which in turn were used by the government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Federal Anti-Kickback Statute violations and certain marketing practices, including off-label promotion, also may implicate the Federal False Claims Act. Federal False Claims Act violations may result in imprisonment, criminal fines, civil monetary damages and penalties and exclusion from participation in federal healthcare programs. The majority of U.S. states also have statutes or regulations similar to the Federal Anti-Kickback Statute and False Claims Act, which apply to items and services reimbursed under Medicaid and other state programs. A number of states have Anti-Kickback Statutes that apply regardless of the payor.

In addition, the Federal Physician Payment Sunshine Act requires extensive tracking of physician and teaching hospital payments, maintenance of a payments database, and public reporting of the payment data. The system for reporting is called Open Payments and applies to pharmaceutical companies. Last year was the first year for reporting under the Open Payments system. Failure to comply with the reporting obligations may result in civil monetary penalties.

Several states now require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products in those states and to report gifts and payments to individual health care providers in those states. Some of these states also prohibit certain marketing related activities including the provision of gifts, meals, or other items to certain health care providers. In addition, some states require pharmaceutical companies to implement compliance programs or marketing codes.

In the EU, the advertising and promotion of our products is also subject to EU and EU Member States’ laws concerning promotion of medicinal products, interactions with physicians, misleading and comparative advertising and unfair commercial practices, as well as other EU Member State legislation that may apply to the advertising and promotion of medicinal products. These laws require that promotional materials and advertising in relation to medicinal products comply with the product’s Summary of Product Characteristics (SmPC) as approved by the competent authorities. The SmPC is the document that provides information to physicians concerning the safe and effective use of the medicinal product. It forms an intrinsic and integral part of the marketing authorization granted for the medicinal product. Promotion of a medicinal product that does not comply with the SmPC is considered to constitute off-label promotion. The off-label promotion of medicinal products is prohibited in the EU. The applicable laws at EU level and in the individual EU Member States also prohibit the direct-to-consumer advertising of prescription-only medicinal products. Violations of the rules governing the promotion of medicinal products in the EU could be penalized by administrative measures, fines and imprisonment. These laws may further limit or restrict communications concerning the advertising and promotion of our products to the general public and may also impose limitations on our promotional activities with healthcare professionals.

Failure to comply with the EU Member State laws implementing the Community Code on medicinal products, EU rules governing the promotion of medicinal products, interactions with physicians, misleading and comparative advertising and unfair commercial practices, with the EU Member State laws that apply to the promotion of medicinal products, statutory health insurance, bribery and anti-corruption or with other applicable regulatory requirements can result in enforcement action by the EU Member State authorities, which may include any of the following: fines, imprisonment, orders forfeiting products or prohibiting or suspending their supply to the market, or requiring the manufacturer to issue public warnings, or to conduct a product recall.

Interactions between pharmaceutical companies and physicians are also governed by strict laws, regulations, industry self-regulation codes of conduct and physicians’ codes of professional conduct in the individual EU Member States. The provision of benefits or advantages to physicians to induce or encourage the prescription, recommendation, endorsement, purchase, supply, order or use of medicinal products is prohibited in the EU. The provision of benefits or advantages to physicians is also governed by the national anti-bribery laws of the EU Member States. One example is the UK Bribery Act 2010. This Act applies to any company incorporated in or

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“carrying on business” in the UK, irrespective of where in the world the alleged bribery activity occurs. This Act could have implications for our interactions with physicians in and outside the UK. Violation of these laws could result in substantial fines and imprisonment.

Payments made to physicians in certain EU Member States must be publically disclosed. Moreover, agreements with physicians must often be the subject of prior notification and approval by the physician’s employer, his/her competent professional organization, and/or the competent authorities of the individual EU Member States. These requirements are provided in the national laws, industry codes, or professional codes of conduct, applicable in the EU Member States. Failure to comply with these requirements could result in reputational risk, public reprimands, administrative penalties, fines or imprisonment.

United States Healthcare Reform

In March 2010, the Healthcare Reform Act, or PPACA, was adopted in the United States. This law substantially changes the way healthcare is financed by both governmental and private insurers, and significantly impacts the pharmaceutical industry. The Healthcare Reform Act contains a number of provisions that are expected to impact our business and operations, in some cases in ways we cannot currently predict. Changes that may affect our business include those governing enrollment in federal and private healthcare programs, new Medicare reimbursement methods and rates, increased rebates and taxes on pharmaceutical products, and revised fraud and abuse and enforcement requirements. These changes will impact existing government healthcare programs and will result in the development of new programs, including Medicare payment for performance initiatives and improvements to the physician quality reporting system and feedback program.

Additional provisions of the Healthcare Reform Act may negatively affect our future revenues. For example, the Healthcare Reform Act makes changes to the Medicaid Drug Rebate Program, including increasing the minimum rebate from 15.1% to 23.1% of the average manufacturer price, or AMP, for most innovator products and from 11% to 13% for non-innovator products changed the calculation of the rebate for certain innovator products that qualify as line extensions of existing drugs, and capped the total rebate amount for innovator drugs at 100% of the average manufacturer price. We expect that the increased minimum rebate of 23.1% will apply to ADASUVE’s commercialization in the United States.

The Healthcare Reform Act also expanded the Public Health Service’s 340B drug pricing discount program, in which we expect to participate. We believe our licensees will participate as well. The 340B pricing program requires participating manufacturers to agree to charge statutorily-defined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs. The ceiling price can represent a significant discount and is based on the pricing data reporting to the Medicaid Drug Rebate Program. The Healthcare Reform Act expanded the 340B program to include additional types of covered entities: certain free-standing cancer hospitals, critical access hospitals, rural referral centers and sole community hospitals, each as defined by the Healthcare Reform Act. The Healthcare Reform Act exempts orphan drugs — those designated under section 526 of the FDCA — from the ceiling price requirements for these newly-eligible entities. We believe our product candidate in active development, AZ-002 (Staccato alprazolam), could qualify for orphan drug status. AZ-002 may not be granted, orphan drug status.

The Health Resources and Services Administration, or HRSA, which administers the 340B program, previously had issued a final regulation to implement the orphan drug exception that interpreted the orphan drug exception narrowly. That final regulation was vacated by the U.S. District Court for the District of Columbia on May 23, 2014 on the ground that HRSA did not have the authority to issue a regulation on this topic. On July 21 2014, HRSA issued an “interpretive” rule that again interprets the orphan drug exception narrowly, consistent with the invalidated final rule. Like the invalidated final rule, it exempts orphan drugs from the ceiling price requirements for the newly-eligible entities only when the orphan drug is used for its orphan indication. Under the interpretive rule, the newly-eligible entities are entitled to purchase orphan drugs at the ceiling price when the orphan drug is not used for its orphan indication. The uncertainty regarding how the statutory orphan drug exception will be applied will increase the complexity of compliance, will make compliance more time-consuming, and could negatively impact our results of operations. HRSA previously was expected to issue a comprehensive proposed regulation in 2014 that would have addressed many aspects of the 340B program.

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However, the invalidation of the orphan drug regulation on the ground that HRSA did not have rulemaking authority for that topic has raised questions regarding whether HRSA has the authority to issue the comprehensive regulation. HRSA has stated that in 2015 it plans to issue a proposed guidance for notice and comment that will address key policy issues raised by various stakeholders committed to the integrity of the 340B program. HRSA also states it is planning to issue proposed rules pertaining to civil monetary penalties for manufacturers, calculation of the 340B ceiling price and administrative dispute resolution. When the guidance is issued, it could affect our obligations under the 340B program in ways we cannot anticipate. In addition, legislation may be introduced that, if passed, would further expand the 340B program to additional covered entities or would require participating manufacturers to agree to provide 340B discounted pricing on drugs used in the inpatient setting.

Many of the Healthcare Reform Act’s most significant reforms started taking effect in last year with more still pending, and the details will be shaped significantly as the various provisions become active, especially given the political nature of the law. In 2012, the Supreme Court of the United States heard challenges to the constitutionality of the individual mandate and the viability of certain provisions of the Healthcare Reform Act. The Supreme Court’s decision upheld most of the Healthcare Reform Act and determined that requiring individuals to maintain “minimum essential” health insurance coverage or pay a penalty to the Internal Revenue Service was within Congress’s constitutional taxing authority. However, the Supreme Court struck down a provision in the Healthcare Reform Act that penalized states that choose not to expand their Medicaid programs through an increase in the Medicaid eligibility income limit from a state’s current eligibility levels to 133% of the federal poverty limit. As a result of the Supreme Court’s ruling, it is unclear whether states will expand their Medicaid programs by raising the income limit to 133% of the federal poverty level and whether there will be more uninsured patients in 2015 than anticipated when Congress passed the Healthcare Reform Act. For each state that does not choose to expand its Medicaid program, there will be fewer insured patients overall. The reduction in the number of insured patients could impact our sales, business and financial condition.

PHARMACEUTICAL PRICING AND REIMBURSEMENT

In both domestic and foreign markets, our ability to commercialize successfully and/or attract strategic collaborators for ADASUVE and our other product candidates depends in significant part on the availability of adequate coverage and reimbursement from third-party payors, including, in the United States, governmental payors such as the Medicare and Medicaid programs, managed care organizations, and private health insurers.

In the United States, the Medicare program is administered by the Centers for Medicare & Medicaid Services, or CMS. Coverage and reimbursement for products and services under Medicare are determined in accordance with the Social Security Act and pursuant to regulations promulgated by CMS, as well as the agency’s subregulatory coverage and reimbursement determinations. Medicare Part B provides limited coverage of outpatient drugs and biologicals that are furnished “incident to” a physician’s services. Generally, “incident to” drugs and biologicals are covered only if they satisfy certain criteria, including that they are of the type that is not usually self-administered by the patient and they are reasonable and necessary for a medically accepted diagnosis or treatment. CMS and Medicare contractors may limit coverage of ADASUVE for beneficiaries in accordance with the approved product labeling. In the past, state Medicaid programs were required to cover drugs and biologicals of manufacturers that entered into a Medicaid Drug Rebate Agreement, although such drugs and biologicals were still subject to prior authorization or other utilization controls.

Medicare Part B pays providers that administer covered Part B drugs and biologicals under a payment methodology using average sales price, or ASP, information. Manufacturers, including us when we or any collaborator commercialize one of our products, are required to provide ASP information to CMS on a quarterly basis. This information is used to compute Medicare payment rates, updated quarterly based on this ASP information. Until enough ASP data are available to calculate a payment rate, reimbursement is wholesale acquisition cost plus six percent. There also is a mechanism for comparison of the ASP for a product to the widely available market price and the Medicaid Average Manufacturer Price for the product, which could cause further decreases in Medicare payment rates.

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We anticipate that ADASUVE will be used only in hospital inpatient and hospital outpatient settings that are enrolled in the ADASUVE REMS and that have immediate access on-site to equipment and personnel trained to manage acute bronchospasm, including advanced airway management (intubation and mechanical ventilation). The Medicare statute establishes the payment rate for new drugs and biologicals administered in hospital outpatient departments that are granted “pass-through status” at the rate applicable in physicians’ offices (i.e., ASP plus six percent) for two to three years after FDA approval. ADASUVE has pass-through status under OPPS starting January 1, 2014. CMS establishes the payment rates for drugs and biologicals that do not have pass-through status by regulation. For 2015, these drugs are reimbursed at ASP plus six percent if they have an average cost per day exceeding $95; drugs with an average cost per day of less than $95 are not separately reimbursed in the hospital outpatient department setting. Drugs furnished in the hospital inpatient setting generally are not separately reimbursed but are paid for as part of the payment for the inpatient stay. CMS granted a C-code for ADASUVE, which will provide for reimbursement for the product used in emergency departments under a hospital’s OPPS.

The statutory methodology under which CMS establishes reimbursement rates is subject to change, particularly because of budgetary pressures facing the Medicare program and the federal government. As of April 1, 2013, Medicare payments for all items and services, including drugs and biologicals, were reduced by up to 2% under the sequestration required by the Budget Control Act of 2011, Pub. L. No. 112-25 as amended by the American Taxpayer Relief Act of 2012, Pub. L. 112-240, unless Congress acts to prevent the cuts. Congress also could enact further cuts, and, in fact, under the Bipartisan Budget Act of 2013, the cuts originally scheduled through 2021 were extended through 2023. The Medicare Modernization Act of 2003 made changes in reimbursement methodology that reduced the Medicare reimbursement rates for many drugs. In the past, Congress has considered additional reductions in Medicare reimbursement for drugs as part of legislation to reduce the budget deficit. Similar legislation could be enacted in the future. The Medicare regulations and interpretive determinations that determine how drugs and services are covered and reimbursed also are subject to change.

Third-party payors other than Medicare have a variety of methodologies for paying for drugs and biologicals. Payors also are increasingly considering new metrics as the basis for reimbursement rates, ASP, AMP and Actual Acquisition Cost. The existing data for reimbursement based on these metrics is relatively limited, although certain states have begun to survey acquisition cost data for the purpose of setting Medicaid reimbursement rates. CMS has made draft National Average Drug Acquisition Cost, or NADAC, and draft National Average Retail Price, or NARP, data publicly available on at least a monthly basis. In July 2013, CMS suspended the publication of draft NARP data, pending funding decisions. In November 2013, CMS moved to publishing final rather than draft NADAC data and has since made updated NADAC data publicly available on a weekly basis. Therefore, it may be difficult to project the impact of these evolving reimbursement mechanics on the willingness of payors to cover ADASUVE.

Third-party payors are increasingly challenging the prices charged for medical products and services and examining their cost effectiveness, in addition to their safety and efficacy. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the cost effectiveness of any future product candidates. Even with studies, our product candidates may be considered less safe, less effective or less cost effective than existing products, and third-party payors therefore may not provide coverage and reimbursement for our product candidates, in whole or in part. Teva is responsible for conducting any cost-effectiveness studies for ADASUVE in the United States.

Political, economic and regulatory influences are subjecting the healthcare industry in the United States to fundamental changes. There have been, and we expect there will continue to be, legislative and regulatory proposals and enactments to change the healthcare system in ways that could impact our ability to sell our products profitably. We anticipate that the U.S. Congress, state legislatures and the private sector will continue to consider and may adopt healthcare policies intended to curb rising healthcare costs. These cost containment measures include:

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controls on government funded reimbursement for medical products and services;

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new or increased requirements to pay prescription drug rebates to government health care programs;

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controls on healthcare providers;

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challenges to the pricing of medical products and services or limits or prohibitions on reimbursement for specific products and therapies through other means;

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requirements that health care providers try less expensive products or generics before a more expensive branded product;

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changes in or reform of drug importation laws;

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expansion of use of managed care systems in which healthcare providers contract to provide comprehensive healthcare for a fixed cost per person; and

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public funding for cost effectiveness research, which may be used by government and private third party payors to make coverage and payment decisions.

If we commercialize future product candidates ourselves, we expect to participate in the Medicaid Drug Rebate program, established by the Omnibus Budget Reconciliation Act of 1990 and amended by the Veterans Health Care Act of 1992 as well as subsequent legislation. We would also expect to participate in and have certain price reporting obligations to several state Medicaid supplemental rebate programs and other governmental pricing programs. Once we begin to participate in the Medicaid Drug Rebate program, we will be required to pay a rebate to each state Medicaid program for our covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program as a condition of having federal funds being made available to the states for our drugs under Medicaid and Medicare Part B. Those rebates will be based on pricing data that we will report on a monthly and quarterly basis to CMS, the federal agency that administers the Medicaid Drug Rebate program. These data will include the AMP and, in the case of innovator products, such as Staccato-technology based products, the best price, or BP, for each drug. We expect that a significant portion of Teva’s revenue from sales of ADASUVE will be obtained through government payors, including Medicaid, and any failure to qualify for reimbursement for ADASUVE under those programs would have a material adverse effect on future revenues from sales of ADASUVE.

Federal law also requires that a company that participates in the Medicaid rebate program report ASP information to CMS for certain categories of drugs that are paid under Part B of the Medicare program. Manufacturers calculate ASP based on a statutorily defined formula and interpretations of the statute by CMS as to what should or should not be considered in computing ASP. An ASP for each National Drug Code for a product that is subject to the ASP reporting requirement must be submitted to CMS no later than 30 days after the end of each calendar quarter. CMS uses these submissions to determine payment rates for drugs under Medicare Part B. Changes affecting the calculation of ASP could affect the ASP calculations for our products and the resulting Medicare payment rate, and could negatively impact our results of operations, once we begin to participate in the Medicare program.

Once we or any collaborator begin to participate in government pricing programs, we or any collaborator will be liable for errors associated with our submission of pricing data. If we or any collaborator are found to have knowingly submitted false AMP, ASP, or BP information to the government, we or any collaborator may be liable for civil monetary penalties in the amount of $100,000 per item of false information. If a manufacturer is found to have made a misrepresentation in the reporting of ASP, the statute provides for civil monetary penalties of up to $10,000 for each misrepresentation for each day in which the misrepresentation was applied. Failure to submit monthly/quarterly AMP, ASP, and BP data on a timely basis could result in a civil monetary penalty of $10,000 per day for each day the information is late beyond the due date. In the event that CMS were to terminate our rebate agreement after we or any collaborator begin to participate in the Medicaid program, no federal payments would be available under Medicaid or Medicare Part B for our covered outpatient drugs.

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well as hospitals that serve a disproportionate share of low-income patients. The 340B ceiling price is calculated using a statutory formula, which is based on the AMP and rebate amount for the covered outpatient drug as calculated under the Medicaid rebate program. Changes to the definition of AMP and the Medicaid rebate amount under PPACA and CMS’s issuance of final regulations implementing those changes also could affect our 340B ceiling price calculations and negatively impact our results of operations once we begin to participate in the 340B program.

As described above, the Healthcare Reform Act expanded the 340B program to include additional types of covered entities but exempts “orphan drugs” — those designated under section 526 of the FDCA — from the ceiling price requirements for these newly-eligible entities. We believe our product candidate in active development, AZ-002 (Staccato alprazolam), could qualify for orphan drug status. HRSA previously had issued a final regulation to implement the orphan drug exception that interpreted the orphan drug exception narrowly. That final regulation was vacated by the U.S. District Court for the District of Columbia on May 23, 2014 on the ground that HRSA did not have the authority to issue a regulation on this topic. On July 21 2014, HRSA issued an “interpretive” rule that again interprets the orphan drug exception narrowly, consistent with the invalidated final rule. Like the invalidated final rule, it exempts orphan drugs from the ceiling price requirements for the newly-eligible entities only when the orphan drug is used for its orphan indication. Under the interpretive rule, the newly-eligible entities are entitled to purchase orphan drugs at the ceiling price when the orphan drug is not used for its orphan indication. The uncertainty regarding how the statutory orphan drug exception will be applied will increase the complexity of compliance, will make compliance more time-consuming, and could negatively impact our results of operations. HRSA previously was expected to issue a comprehensive proposed regulation in 2014 that would have addressed many aspects of the 340B program. However, the invalidation of the orphan drug regulation on the ground that HRSA did not have rulemaking authority for that topic has raised questions regarding whether HRSA has the authority to issue the comprehensive regulation. HRSA has stated that in 2015 it plans to issue a proposed guidance for notice and comment that will address key policy issues raised by various stakeholders committed to the integrity of the 340B program. HRSA also states it is planning to issue proposed rules pertaining to civil monetary penalties for manufacturers, calculation of the 340B ceiling price and administrative dispute resolution. When the guidance is issued, it could affect or obligations under the 340B program in ways we cannot anticipate. In addition, legislation may be introduced that, if passed, would further expand the 340B program to additional covered entities or would require participating manufacturers to agree to provide 340B discounted pricing on drugs used in the inpatient setting.

In order to be eligible to have our products paid for with federal funds under the Medicaid and Medicare Part B programs and purchased by certain federal agencies and grantees, we anticipate that we will participate in the Department of Veterans Affairs, or VA, Federal Supply Schedule, or FSS, pricing program, established by Section 603 of the Veterans Health Care Act of 1992. Under this program, we will be obligated to make our product available for procurement on an FSS contract and charge a price to four federal agencies — VA, Department of Defense, Public Health Service, and Coast Guard — that is no higher than the statutory Federal Ceiling Price, or FCP. The FCP is based on the non-federal average manufacturer price, which we will be required to calculate and report to the VA on a quarterly and annual basis.

We expect to experience pricing pressures in the United States in connection with the sale of ADASUVE due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals. We are unable to predict what additional legislation, regulations or policies, if any, relating to the healthcare industry or third-party coverage and reimbursement may be enacted in the future or what effect such legislation, regulations or policies would have on our business. Any cost containment measures, including those listed above, or other healthcare system reforms that are adopted could have a material adverse effect on our ability to operate profitably.

In the EU the sole legal instrument at the EU level governing the pricing and reimbursement of medicinal products is Council Directive 89/105/EEC, or the Price Transparency Directive. The aim of this Directive is to ensure that pricing and reimbursement mechanisms established in the EU Member States are transparent and objective, do not hinder the free movement and trade of medicinal products in the EU and do not hinder, prevent or distort competition on the market. The Price Transparency Directive does not provide any guidance concerning the specific criteria on the basis of which pricing and reimbursement decisions are to be made in

Index to Financial Statements

individual EU Member States. Neither does it have any direct consequence for pricing nor reimbursement levels in individual EU Member States. The EU Member States are free to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices and/or reimbursement levels of medicinal products for human use. An EU Member State may approve a specific price or level of reimbursement for the medicinal product, or alternatively adopt a system of direct or indirect controls on the profitability of the company responsible for placing the medicinal product on the market, including volume-based arrangements and reference pricing mechanisms.

Health Technology Assessment, or HTA, of medicinal products is becoming an increasingly common part of the pricing and reimbursement procedures in some EU Member States. These EU Member States include the United Kingdom, France, Germany and Sweden. The HTA process in the EU Member States is governed by the national laws of these countries. HTA is the procedure according to which the assessment of the public health impact, therapeutic impact and the economic and societal impact of use of a given medicinal product in the national healthcare systems of the individual country is conducted. HTA generally focuses on the clinical efficacy and effectiveness, safety, cost, and cost-effectiveness of individual medicinal products as well as their potential implications for the healthcare system. Those elements of medicinal products are compared with other treatment options available on the market.

The outcome of HTA regarding specific medicinal products will often influence the pricing and reimbursement status granted to these medicinal products by the competent authorities of individual EU Member States. The extent to which pricing and reimbursement decisions are influenced by the HTA of the specific medicinal product vary among EU Member States.

In 2011, Directive 2011/24/EU was adopted at EU level. This Directive concerns the application of patients’ rights in cross-border healthcare. The Directive is intended to establish rules for facilitating access to safe and high-quality cross-border healthcare in the EU. It also provides for the establishment of a voluntary network of national authorities or bodies responsible for HTA in the individual EU Member States. The purpose of the network is to facilitate and support the exchange of scientific information concerning HTAs. This could lead to harmonization among EU Member States of the criteria taken into account in the conduct of HTA and their impact on pricing and reimbursement decisions.

Pricing for ADASUVE has already been approved by the competent authorities in certain individual EU Member States in which ADASUVE is being marketed.

PATENTS AND PROPRIETARY RIGHTS

We actively seek to patent the technologies, inventions and improvements we consider important to the development of our business. In addition, we rely on trade secrets and contractual arrangements to protect our proprietary information. Some areas for which we seek patent protection include:

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the Staccato system and its components;

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methods of using the Staccato system;

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the aerosolized form of drug compounds produced by the Staccato system; and

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methods of making and using the drug containing aerosols, including methods of administering the aerosols to a patient.

As of March 2, 2015, we held 198 issued and allowed U.S. and international patents. Most of our patents are directed to compositions for delivery of an aerosol comprising drugs other than our primary product candidates described below, and cover the process for producing those aerosols using the Staccato system. As of March 2, 2015, we held 10 additional pending patent applications in the United States. As of March 2, 2015, we also held 9 pending corresponding foreign patent applications that will permit us to pursue additional patents outside of the United States. The claims in these various patents and patent applications are directed to various aspects of our drug delivery devices and their components, methods of using our devices, drug containing aerosol compositions and methods of making and using such compositions.

Index to Financial Statements

ADASUVE (Staccato loxapine)

One of our issued U.S. patents covers compositions for delivery of a condensation aerosol comprising loxapine and covers the process for producing such condensation aerosol using the Staccato system technology. This patent expires in October 2021. An application for patent term extension has been applied for, which could extend the expiration for the patent to 2026. Counterparts to this patent are in force in a number of foreign jurisdictions, including Europe. We also have four other U.S. patents directed to condensation aerosol compositions for delivery of loxapine, kits containing devices for forming such compositions and methods of administering such compositions. In total, we reference 12 patents for ADASUVE in the Orange Book. The latest expiration date for the Orange Book listed patents is 2026.

AZ-002 (Staccato alprazolam)

One of our issued U.S. patents covers compositions for delivery of a condensation aerosol comprising alprazolam and covers the process for producing such condensation aerosol using the Staccato system technology. This patent will not expire until 2022. Counterparts to this patent are in force in a number of foreign jurisdictions, including Europe. We also have three other U.S. patents directed to condensation aerosol compositions for delivery of alprazolam, kits containing devices for forming such compositions, and methods of administering such compositions.

AZ-007 (Staccato zaleplon)

One of our issued U.S. patents covers compositions for delivery of a condensation aerosol comprising zaleplon and covers the process for producing such condensation aerosol using the Staccato system technology. This patent will not expire until 2022. Counterparts to this patent are in force in a number of foreign jurisdictions, including Europe. We also have three other U.S. patents directed to condensation aerosol compositions for delivery of zaleplon, kits containing devices for forming such compositions, and methods of administering such compositions.

COMPETITION

The pharmaceutical and biotechnology industries are intensely competitive. Many pharmaceutical companies, biotechnology companies, public and private universities, government agencies and research organizations are actively engaged in research and development of products targeting the same markets as ADASUVE and our other product candidates. Many of these organizations have substantially greater financial, research, drug development, manufacturing and marketing resources than we have. Large pharmaceutical companies in particular have extensive experience in clinical testing, obtaining regulatory approvals for drugs, and commercial capabilities. Our ability to compete successfully will depend largely on our ability to:

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develop products that are superior to other products in the market;

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attract and retain qualified scientific, product development, manufacturing, quality and commercial personnel;

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obtain patent and/or other proprietary protection covering our future products and technologies;

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obtain required regulatory approvals;

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successfully collaborate with pharmaceutical and biotechnology companies in the development and commercialization of new products; and

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successfully commercialize or enter into agreements that result in third parties successfully commercializing our approved products.

We expect ADASUVE and any future products we develop to compete on the basis of, among other things, product efficacy, speed of onset and safety, time to market, price, extent of adverse side effects experienced and convenience of treatment procedures. One or more of our competitors may develop products based upon the principles underlying our proprietary technologies earlier than we do, obtain approvals for such products from the FDA, the EC or third country authorities more rapidly than we do or develop alternative products or therapies

Index to Financial Statements

that are safer, more effective and/or more cost effective than ADASUVE or any future products developed by us. In addition, our ability to compete may be affected if insurers and other third-party payors encourage the use of generic or other products through other routes of administration. ADASUVE competes with various injectable formulations of other antipsychotic and benzodiazepine drugs and oral, orally disintegrating tablet and liquid formulations of other antipsychotic drugs and benzodiazepine drugs. Only the injectable antipsychotics are approved for the treatment of agitation.

Any future products developed by us would compete with a number of alternative drugs and therapies, including the following:

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AZ-002 would compete with the oral tablet form of alprazolam and with other benzodiazepines in various formulations, including IV and rectal gel;

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AZ-007 would compete with prescription non-benzodiazepine GABA-A receptor agonists selective melatonin receptor agonists, orexin receptor antagonists, histamine (H1) receptor antagonists that are approved or in development, and possibly over-the-counter sleep aids;

Many of these existing drugs have substantial current sales and long histories of effective and safe use. As patent protection expires for these drugs, we will also compete with their generic versions. In addition to currently marketed drugs and their generic versions, we believe there are a number of drug candidates in clinical trials that, if approved in the future, would compete with ADASUVE or any future product candidates we may develop. In addition, after patent protection and non-patent exclusivity expire for our products, we may face direct generic competition, or competition from sponsors relying to some extent on our approval by filing NDAs under section 505(b)(2) of the FDCA.

CORPORATE INFORMATION

We were incorporated in the state of Delaware on December 19, 2000 as FaxMed, Inc. In June 2001, we changed our name to Alexza Corporation and in December 2001 we became Alexza Molecular Delivery Corporation. In July 2005, we changed our name to Alexza Pharmaceuticals, Inc.

Employees

As of March 2, 2015, we had 81 full time employees, 7 of whom held Ph.D. or M.D. degrees, 18 of whom were engaged in full time research and development activities and 38 of whom were engaged in commercial manufacturing, supply chain and quality functions and we had no part-time employees. None of our employees are represented by a labor union, and we consider our employee relations to be good.

Available Information

Our website address is www.alexza.com; however, information found on, or that can be accessed through, our website is not incorporated by reference into this Annual Report. We file electronically with the Securities and Exchange Commission, or SEC, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. We make available free of charge on or through our website copies of these reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov. You may also read and copy any of our materials filed with the SEC at the SEC’s Public References Room at 100 F Street, NW, Washington, DC 20549. Information regarding the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.

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Item 1A.

Risk Factors

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this Annual Report, before deciding whether to invest in shares of our common stock. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of operations. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Relating to Our Business

We have concluded that due to our need for additional capital, and the uncertainties surrounding our ability to raise such funding, substantial doubt exists as to our ability to continue as a going concern.

We have incurred significant losses from operations since our inception and expect losses to continue for the foreseeable future. As of December 31, 2014, we had cash, cash equivalents, marketable securities and restricted cash of $37.5 million and working capital of $30.3 million. We believe that, based on our cash, cash equivalents, marketable securities and restricted cash balances at December 31, 2014, estimated product revenues, milestone payments associated with the sale of ADASUVE and our current expected cash usage, we have sufficient capital resources to meet our anticipated cash needs into the fourth quarter of 2015. We have incurred significant losses from operations since our inception and expect losses to continue for the foreseeable future. As of December 31, 2014, we had cash, cash equivalents, marketable securities and restricted cash of $37.5 million and working capital of $30.3 million. We believe that, based on our cash, cash equivalents, marketable securities and restricted cash balances at December 31, 2014, estimated product revenues, milestone payments associated with the sale of ADASUVE and our current expected cash usage, we have sufficient capital resources to meet our anticipated cash needs into the fourth quarter of 2015. In light of our ongoing costs, investments in ADASUVE manufacturing and product candidate development, and our projected working capital needs, we expect to need to source additional capital to finance our ongoing operations in the next twelve months. We may not be able to source sufficient capital on acceptable terms, or at all, to continue to pursue approval to commercialize ADASUVE in the United States or other countries, to continue development of our other product candidates or to continue operations. We plan to source additional capital which may be used to fund strategic initiatives, operations and working capital, development of product candidates or continued development of our commercial manufacturing capabilities. In addition to product revenues, royalties and milestone payments, we may finance our operations through the sale of equity securities, utilization of debt arrangements, or additional distribution or licensing collaborations. Such funding may not be available or may be on terms that are not favorable to us. Our inability to source capital as and when needed could have a negative impact on our financial condition, results of operations or our ability to execute on our strategic initiatives.

Our audited financial statements for the fiscal year ended December 31, 2014 were prepared on a going concern basis in accordance with United States generally accepted accounting principles. The going concern basis of presentation assumes that we will continue in operation for the next twelve months and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern. Our operating and capital plans for the next twelve months call for cash expenditure to exceed our current cash, cash equivalents, marketable securities and working capital. We concluded that due to our need for additional capital, and the uncertainties surrounding our ability to raise such funding, substantial doubt exists as to our ability to continue as a going concern. We may be forced to reduce our operating expenses, raise additional funds, principally through the additional sales of our securities or debt financings, or enter into an additional corporate partnership to meet our working capital needs. However, we cannot guarantee that we will be able to obtain sufficient additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory

Index to Financial Statements

to us. If we are unable to raise sufficient additional capital or complete a strategic transaction, we may be unable to continue to fund our operations, develop our product candidates or realize value from our assets and discharge our liabilities in the normal course of business. These uncertainties raise substantial doubt about our ability to continue as a going concern. If we become unable to continue as a going concern, we may have to liquidate our assets, and might realize significantly less than the values at which they are carried on our financial statements, and stockholders may lose all or part of their investment in our common stock.

Our near-term prospects are dependent on ADASUVE. If we or our collaborators are unable to successfully commercialize ADASUVE for the acute treatment of agitation in adults with schizophrenia or bipolar disease, our ability to generate significant revenue or achieve profitability will be adversely affected.

ADASUVE is our only product approved for marketing in the United States, the EU and certain Latin American countries, and our ability to generate revenue in the near term is entirely dependent upon sales of ADASUVE. We do not have any product approved for marketing outside of the United States, the EU or Latin America. We or our collaborators may not be able to successfully commercialize ADASUVE for a number of reasons, including:

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we or our collaborators may not be able to establish or demonstrate in the medical community the safety and efficacy of ADASUVE and any potential advantages over existing therapeutics and products currently in clinical development;

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doctors may be hesitant to prescribe ADASUVE until results from our post-approval studies are available or other long term data regarding efficacy and safety become available;

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results from our post-approval studies may fail to verify the clinical benefit of ADASUVE for the treatment of agitation in patients with bipolar disorder and schizophrenia or may reveal unforeseen safety issues;

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our limited experience in marketing, selling and distributing ADASUVE;

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reimbursement and coverage policies of government and private payers such as Medicare, Medicaid, insurance companies, health maintenance organizations and other plan administrators;

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the relative price of ADASUVE as compared to alternative treatment options;

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the reliability of our estimates, including the frequency of agitation in many patients with bipolar disorder and schizophrenia;

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we or our collaborators may not have, or may not choose to dedicate, adequate financial or other resources to successfully commercialize ADASUVE; and

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we may not be able to manufacture ADASUVE in commercial quantities or at acceptable costs.

If we or our collaborators are unable to successfully commercialize ADASUVE for the treatment of agitation in adults with schizophrenia or bipolar disorder, our ability to generate revenue from royalties and product sales and achieve profitability will be adversely affected and our stock price would likely decline.

We have a history of net losses. We expect to continue to incur substantial and increasing net losses for the foreseeable future, and we may never achieve or maintain profitability.

We are not profitable and have incurred significant net losses in each year since our inception, including net losses of $36.7 million, $39.6 million, and $28.0 million for the years ended December 31, 2014, 2013, and 2012, respectively. As of December 31, 2014, we had an accumulated deficit of $411.0 million and a stockholders’ deficit of $51.7 million. We expect to continue to incur substantial net losses and negative operating cash flow through at least 2016. These losses and negative operating cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.

Because of the numerous risks and uncertainties associated with the commercialization of ADASUVE by Teva and Ferrer, our ability to manufacture commercial quantities of ADASUVE and conduct pharmaceutical

Index to Financial Statements

product development, we are unable to predict accurately the timing or amount of future revenues or expenses, or when, or if, we will be able to achieve or maintain profitability. To date, we have not generated any significant product or royalty revenue. We have financed our operations primarily through the sale of equity securities, equipment financing, debt financing, collaboration and licensing agreements, and government grants. The size of our future net losses will depend, in part, on the rate of growth or contraction of our expenses and the level and rate of growth, if any, of our revenues. Revenues from strategic collaborations are uncertain because we may not enter into any additional strategic collaborations or current collaborations may have different results than we anticipate. If we or our collaborators are unable to successfully commercialize ADASUVE or one or more of our product candidates or if sales revenue from ADASUVE or any product candidate that receives marketing approval is insufficient, we will not achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability.

Our operating results are unpredictable and may fluctuate. If our operating results are below the expectations of securities analysts or investors, the trading price of our stock could decline.

Our operating results are difficult to predict and will likely fluctuate from quarter to quarter and year to year. ADASUVE sales will be difficult to predict from period to period. For example, we did not have any shipments of ADASUVE in the fourth quarter of 2014. Product sales recognized during the fourth quarter of 2014 will represented units of ADASUVE that were shipped during the third quarter and accepted in the fourth quarter by our collaborators. We believe that our quarterly and annual results of operations may be negatively affected by a variety of factors, including:

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a failure to achieve a sufficient level of demand by patients and healthcare providers for ADASUVE;

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the timing and level of investment in our or our collaborators’ sales and marketing efforts to support ADASUVE sales;

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the timing and level of investment in our or our collaborators’ research and development activities involving ADASUVE; and

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expenditures we may incur to acquire or develop additional products.

In addition, we measure compensation cost for stock-based awards made to employees at the grant date of the award, based on the fair value of the award, and recognize the cost as an expense over the employee’s requisite service period. As the variables that we use as a basis for valuing these awards change over time, including our underlying stock price, the magnitude of the expense that we must recognize may vary significantly. Any such variance from one period to the next could cause a significant fluctuation in our operating results.

For these reasons, it is difficult for us to accurately forecast future profits or losses. As a result, it is possible that in some quarters our operating results could be below the expectations of securities analysts or investors, which could cause the trading price of our common stock to decline, perhaps substantially.

We will need substantial additional capital in the future. If additional capital is not available, we will have to delay, reduce or cease operations.

We will need to source additional capital to fund our operations, to develop our product candidates and to develop and expand our commercial manufacturing capabilities. Our future capital requirements will be substantial and will depend on many factors including:

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Teva’s success in commercializing ADASUVE in the United States;

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Teva’s executing the ADASUVE REMS program to the satisfaction of the FDA;

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Ferrer’s success in commercializing ADASUVE in the Ferrer Territories;

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the terms and success of any future licensing arrangement that we may enter into for the commercial rights for ADASUVE outside the United States and the Ferrer Territories;

Index to Financial Statements

•

the development costs for our other product candidates;

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the cost and timing of complying with our post-approval commitments;

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the cost and timing of complying with the process for renewal of marketing authorization in the EU;

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the scope, rate of progress, results and costs of our preclinical studies, clinical trials and other research and development activities;

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the scope, rate of progress, results and costs of our commercial manufacturing development and commercial manufacturing activities;

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payments received under our collaborations with Ferrer and Teva and any future strategic collaborations;

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the continuation of the Ferrer and Teva collaborations under their agreed terms;

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the filing, prosecution and enforcement of patent claims; and

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the costs associated with commercializing our other product candidates, if they receive regulatory approval.

We believe that, based on our cash, cash equivalents, marketable securities and restricted cash balances at December 31, 2014, estimated product revenues and milestone payments associated with the sale of ADASUVE and our current expected cash usage, we have sufficient capital resources to meet our anticipated cash needs into the fourth quarter of 2015. Changing circumstances may cause us to consume capital significantly faster or slower than we currently anticipate, or to alter our operations. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available financial resources sooner than we currently expect. The key assumptions underlying these estimates include:

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continuation of our Teva and Ferrer collaborations;

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no unexpected costs related to the development of our commercial manufacturing capability; and

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no unbudgeted growth in the number of our employees during this period.

We may never be able to generate a sufficient amount of product or royalty revenue to cover our expenses. We did not generate any product revenues until the second quarter of 2013 and did not generate any royalty revenues until the second quarter of 2014. We had no shipments of ADASUVE in the fourth quarter of 2014. Product sales recognized during the fourth quarter of 2014 represented units of ADASUVE that were shipped late in the third quarter and tested and accepted in the fourth quarter by our collaborators. In addition, any royalty and milestone payments payable under the Teva Agreement will first be applied to repaying principal and interest on the $45.0 million of non-recourse notes that our wholly-owned subsidiary issued in our March 2014 royalty securitization financing before we are able to utilize any royalty or milestone payments under the Teva Agreement for general corporate purposes. We did not recognize any royalty revenues during the second or third quarter of 2014. Until we generate sufficient revenues to cover expenses, we expect to finance our future cash needs through public or private equity offerings, debt financings, strategic collaborations or licensing arrangements. Any financing transaction may contain unfavorable terms. For example, the terms of certain warrants we have issued in previous financings could require us to pay warrant holders a significant portion of the proceeds in a change of control transaction, potentially materially reducing the proceeds available to holders of our common stock. If we source additional funds by issuing equity securities our stockholders’ equity will be diluted and debt financing, if available, may involve restrictive covenants. If we source additional funds through strategic collaborations, we may be required to relinquish rights to ADASUVE, our product candidates or our technologies, or to grant licenses on terms that are not favorable to us. Complying with the terms of the foregoing rights and restrictions may make it more difficult to complete certain types of transactions and result in delays to our fundraising efforts.

Index to Financial Statements

We do not have sales and marketing capabilities, and consequently must rely on commercial collaborations to sell our products, and we and our collaborators may be unable to generate significant product revenue.

In December 2012, the FDA granted marketing approval for ADASUVE in the United States for the acute treatment of agitation associated with schizophrenia or bipolar I disorder in adults. The approval of ADASUVE is our first regulatory approval. We do not have a sales and marketing organization and as a company, we do not have significant experience in the sales and distribution of pharmaceutical products.

We have exclusively licensed the ADASUVE U.S. commercialization rights to Teva, which we believe will have a significant impact on the ultimate success of ADASUVE in the United States. Teva announced the U.S. launch of ADASUVE in March 2014. If Teva is unable to commercialize ADASUVE successfully in the United States or Teva is unable to fulfill the post-marketing obligations that were required by the FDA as part of the ADASUVE NDA approval, our revenue will suffer and our stock price may decline. Teva’s commercialization efforts could also have an effect on investors’ perception of potential sales of ADASUVE outside the United States, which could also cause a decline in our stock price and may make it more difficult for us to enter into additional strategic collaborations.

There are risks involved with utilizing Teva to sell our product. By licensing the U.S. commercialization rights to Teva, we may generate fewer revenues from the royalties and milestone payments under the Teva Agreement than if we commercialized ADASUVE on our own. Additionally, Teva may not fulfill its obligations or carry out selling and marketing activities as diligently as we would like. We could also become involved in disputes with Teva, which could lead to delays in or termination of commercialization programs and time-consuming and expensive litigation or arbitration. If Teva terminates or breaches its agreement, or otherwise fails to complete its obligations in a timely manner, the chances of successfully selling or marketing ADASUVE would be materially and adversely affected. Teva has the right to terminate the Teva Agreement with or without cause, upon 120 day notice. If Teva exercises this right, our business and operations and stock price may be negatively affected.

In February 2013, the EC granted a marketing authorization for ADASUVE, as ADASUVE (Staccato loxapine) 4.5 mg or 9.1 mg, inhalation powder, pre-dispensed. In October 2011, we entered into a commercial collaboration with Ferrer pursuant to the Ferrer Agreement, to commercialize ADASUVE in the Ferrer Territories. Ferrer or its distributors currently markets ADASUVE in Austria, Denmark, Finland, France, Germany, Latvia, Lithuania, Norway, Poland, Romania, Spain, Sweden and Guatemala. We expect Ferrer to launch ADASUVE in additional countries in the Ferrer Territories in 2014 and 2015. If Ferrer is unable to commercialize ADASUVE successfully in the various Ferrer Territories or we are unable to fulfill the post-marketing authorization commitments that were required as part of the marketing authorization granted for ADASUVE in the EU, our revenue will suffer and our stock price may decline.

We also intend to seek international distribution collaborators in addition to Ferrer for ADASUVE and our product candidates. If we are unable to enter into an international distribution collaboration, we will be unable to generate revenues from countries outside the United States and the Ferrer Territories.

If we enter into additional strategic collaborations, we may be required to relinquish important rights to and control over the development of ADASUVE or our product candidates or otherwise be subject to terms unfavorable to us.

Our relationships with Teva and Ferrer are, and any other strategic collaborations with pharmaceutical or biotechnology companies we may establish will be, subject to a number of risks including:

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business combinations or significant changes in a strategic collaborator’s business strategy may adversely affect a strategic collaborator’s willingness or ability to complete its obligations under any arrangement;

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we may not be able to control the amount or timing of resources that our strategic collaborators devote to the development or commercialization of ADASUVE or our product candidates;

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strategic collaborators may delay clinical trials, provide insufficient funding, terminate a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new version of a product candidate for clinical testing;

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strategic collaborators may not pursue further development and commercialization of products resulting from the strategic collaboration arrangement or may elect to discontinue research and development programs;

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strategic collaborators may not commit adequate resources to the marketing and distribution of any future products, limiting our potential revenues from these products;

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disputes may arise between us and our strategic collaborators that result in the delay or termination of the research, development or commercialization of ADASUVE or our product candidates or that result in costly litigation or arbitration that diverts management’s attention and consumes resources;

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strategic collaborators may experience financial difficulties;

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strategic collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in a manner that could jeopardize or invalidate our proprietary information or expose us to potential litigation;

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strategic collaborators could independently move forward with a competing product candidate developed either independently or in collaboration with others, including our competitors; and

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strategic collaborators, including Teva or Ferrer, could terminate the arrangement or allow it to expire, which would delay and may increase the cost of developing our product candidates or commercializing ADASUVE.

The REMS program for ADASUVE imposes, and any REMS on any other approved products may impose, regulatory burdens on the distribution and sales of ADASUVE or any other approved products and also on healthcare providers that may make the products commercially unattractive or impractical.

As a condition of FDA approval, Teva is required to have a REMS program for ADASUVE, and we may be required to implement a REMS program for any other product candidates we may develop. A REMS may include various elements, such as distribution of a medication guide or a patient package insert; implementation of a communication plan to educate healthcare providers of the drug’s risks; imposition of limitations on who may prescribe or dispense the drug, including training and certification requirements; or other measures that the FDA deems necessary to assure the safe use of the drug. The FDA has a wide degree of discretion in deciding which elements are necessary for the safe use of a product, and it may impose elements that significantly burden our ability to commercialize the product, or that burden healthcare providers to the extent that use of the product is severely curtailed.

For ADASUVE, the REMS program contains measures to ensure that the product is administered only in healthcare facilities enrolled in the ADASUVE REMS program that have immediate on-site access to equipment and personnel trained to manage acute bronchospasm, including advanced airway management (intubation and mechanical ventilation). The REMS program may not allow commercialization and use of ADASUVE in a commercially feasible manner. In the future, the FDA could impose additional REMS elements, such as if the REMS proves inadequate in managing the risk of bronchospasm associated with ADASUVE or if new safety risks emerge, and such additional elements could substantially burden or even eliminate our ability to commercialize ADASUVE in a feasible manner.

If we or our collaborators are unable to successfully complete the ADASUVE post-marketing studies required by the FDA and EC, or if data generated from the post-marketing studies indicate safety concerns, our sales could be diminished and our ability to generate a profit could be negatively affected.

As a condition of U.S. ADASUVE approval, there are several required post-marketing studies, including a 10,000 patient observational clinical trial that is designed to gather patient safety data based on the “real-world” use of ADASUVE in the hospital setting and a clinical program designed to evaluate the safety and efficacy of ADASUVE in agitated adolescent patients. The data derived from any post-approval study or trial could result in additional restrictions on the commercialization of ADASUVE through changes to the approved ADASUVE

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label, additional goals or elements in the REMS program, the imposition of additional post-approval studies or trials, or even the withdrawal of the approval of ADASUVE. Our business, operations and stock price may be negatively affected if any of these or similar events occur.

As a condition of the ADASUVE EU marketing authorisation, we are responsible for conducting and funding the post-approval studies, including (i) a benzodiazepine interaction study, which has been completed, (ii) a controlled study to determine ADASUVE’s effect on cardiac rhythms, or a thorough QTc study, with two doses of ADASUVE, which has been completed, (iii) a clinical program designed to evaluate the safety and efficacy of ADASUVE in agitated adolescent patients, (iv) an observational clinical trial, and (v) a drug utilization clinical trial. Results of the benzodiazepine interaction study and the thorough QTc study have been submitted to the EMA.

If we or our collaborators are unable to fulfill the FDA or EU post-marketing obligations, or do not fulfill these obligations within an appropriate time, or if the EMA determines from the results of our completed benzodiazepine interaction study or our completed thorough QTc study that ADASUVE poses or may pose actual or possible safety risks to some patients, the NDA could be suspended, withdrawn, or limited, and the current marketing authorization in the EU could be varied, suspended or withdrawn and our business, operations and stock price may be negatively affected.

If we do not produce our commercial devices cost effectively, we will never be profitable.

ADASUVE and our Staccato system-based product candidates contain electronic and other components in addition to the API. The cost to produce ADASUVE and our product candidates, and any additional approved products, will likely be higher per dose than the cost to produce intravenous or oral tablet products. This higher cost of goods may prevent us or our collaborators from ever selling any products at a profit. The development and production of our technology entail a number of technical challenges, including achieving adequate dependability in our production, that may be expensive or time consuming to solve. Any delay in or failure to develop and manufacture any future products in a cost effective way could prevent us from generating any meaningful revenues and prevent us from becoming profitable.

In October 2011, we committed to sell ADASUVE to Ferrer for a fixed transfer price, which is below our current production costs, and in May 2013, we committed to supply ADASUVE to Teva at a price based on costs of commercial production, which transfer price will convert to a fixed price upon achievement of costs equal to a specified per-unit price. Our future manufacturing costs per unit will be dependent on future demand of ADASUVE. If we and our collaborators do not generate sufficient demand, our manufacturing costs will exceed the fixed transfer price and will result in losses. If we are unable to generate profits from manufacturing our products, we may be required to seek alternative manufacturing strategies.

The availability and amount of reimbursement for ADASUVE and our product candidates and the manner in which government and private payors may reimburse for our potential products is uncertain.

Many of the patients in the United States who seek treatment with ADASUVE or any other of our products that are approved for marketing will be eligible for Medicare benefits. Other patients may be covered by private health plans. The Medicare program is administered by CMS, and coverage and reimbursement for products and services under Medicare are determined pursuant to statute, regulations promulgated by CMS, and CMS’s subregulatory coverage and reimbursement determinations. CMS’s regulations and interpretive determinations are subject to change, as are the procedures and criteria by which CMS makes coverage and reimbursement determinations and the reimbursement amounts established by statute, particularly because of budgetary pressures facing the Medicare program. For example, we anticipate that ADASUVE will be used only in the hospital inpatient and hospital outpatient settings. In the hospital inpatient setting, Medicare does not provide separate reimbursement for drugs but pays for them as part of the payment for the hospital stay. In the hospital outpatient setting, the statute establishes the payment rate for new drugs and biologicals administered incident to a physician’s service that are granted “pass-through status” at the rate applicable in physicians’ offices (i.e., ASP plus six percent) for two to three years after FDA approval. For drugs and biologicals that do not have

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pass-through status, CMS establishes the payment rates by regulation. For 2015, these drugs are reimbursed at ASP plus six percent if they have an average cost per day exceeding $95; drugs with an average cost per day of less than $95 are not separately reimbursed. In future years, CMS could change both the payment rate and the average cost threshold, and these changes could adversely affect payment for ADASUVE. In addition, the President has proposed and Congress has considered amending the statute to reduce Medicare’s payment rates for drugs and biologicals, and if such legislation is enacted, it could adversely affect payment for ADASUVE. Moreover, ADASUVE is different from many drugs covered by Medicare Part B because it is administered by a healthcare professional through a disposable inhaler.

Effective April 1, 2013, Medicare payments for all items and services, including drugs and biologicals, were reduced by up to 2% under the sequestration (i.e., automatic spending reductions) required by the Budget Control Act of 2011, Pub. L. No. 112-25, or BCA, as amended by the American Taxpayer Relief Act of 2012, Pub. L. 112-240, or ATRA. The BCA requires sequestration for most federal programs, excluding Medicaid, Social Security, and certain other programs, because Congress failed to enact legislation by January 15, 2012, to reduce federal deficits by $1.2 trillion over ten years. The BCA caps the cuts to Medicare payments or items and services at 2%, and requires the cuts to be implemented on the first day of the first month following the issuance of a sequestration order. The ATRA delayed implementation of sequestration from January 2, 2013, to March 1, 2013, and as a result, the Medicare cuts took effect April 1, 2013, and will remain in effect unless Congress enacts legislation to cancel the cuts. The cuts were originally scheduled to occur through 2021, but under the Bipartisan Budget Act of 2013, these cuts were extended through 2023. These cuts could adversely impact payment for ADASUVE and related procedures.

In March 2014, Teva announced the U.S. launch of ADASUVE. We expect ADASUVE to experience pricing pressures in the United States due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals. We cannot be sure that reimbursement amounts, or the lack of reimbursement, will not reduce the demand for, or the price of, ADASUVE or any future products. If reimbursement is not available or is available only to limited levels, we or any collaborator may not be able to effectively commercialize ADASUVE or any future products, In addition, if we or any collaborator fail to successfully secure and maintain reimbursement coverage for ADASUVE or any future products or are significantly delayed in doing so, we or any collaborator will have difficulty achieving market acceptance of our products and our business will be harmed.

Payors also are increasingly considering new metrics as the basis for reimbursement rates, such as ASP, AMP and Actual Acquisition Cost. The existing data for reimbursement based on these metrics is relatively limited, although certain states have begun to survey acquisition cost data for the purpose of setting Medicaid reimbursement rates. CMS has made draft National Average Drug Acquisition Cost, or NADAC, and draft National Average Retail Price, or NARP, data publicly available on at least a monthly basis. In July 2013, CMS suspended the publication of draft NARP data, pending funding decisions. In November 2013, CMS moved to publishing final rather than draft NADAC data and has since made updated NADAC data publicly available on a weekly basis. Therefore, it may be difficult to project the impact of these evolving reimbursement mechanics on the willingness of payors to cover ADASUVE or any future products. As discussed below, once we or any collaborator begin to participate in government pricing programs, recent legislative changes to the 340B drug pricing program, and the Medicaid Drug Rebate program also could impact our revenues. We anticipate that a significant portion of our revenue from sales of ADASUVE will be obtained through government payors, including Medicaid, and any failure to qualify for reimbursement for ADASUVE under those programs would have a material negative effect on revenues from sales of ADASUVE.

The EU Member States are free to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices and/or reimbursement levels of medicinal products for human use. An EU Member State may approve a specific price or level of reimbursement for the medicinal product, or alternatively adopt a system of direct or indirect controls on the profitability of the company responsible for placing the medicinal product on the market, including volume-based arrangements and reference pricing mechanisms. We anticipate that pricing and reimbursement decisions concerning ADASUVE in the EU will have a significant impact on the sales of the product in the EU. Failure to obtain pricing and

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reimbursement for ADASUVE at an appropriate level in any of the EU Member States would, in part due to EU parallel trade rules, have a material adverse effect on revenues from sales of ADASUVE.

Healthcare law and policy changes, including those based on recently enacted legislation, may impact our business in ways that we cannot currently predict and these changes could have a material adverse effect on our business and financial condition.

Healthcare costs have risen significantly over the past decade. In March 2010, the Healthcare Reform Act, or PPACA, was adopted in the United States. The Healthcare Reform Act substantially changes the way health care is financed by both governmental and private insurers, and significantly impacts the pharmaceutical industry. The Healthcare Reform Act contains a number of provisions that are expected to impact our business and operations, in some cases in ways we cannot currently predict. Changes that may affect our business include those governing enrollment in federal and private healthcare programs, new Medicare reimbursement methods and rates, increased rebates and taxes on pharmaceutical products, expansion of the 340B program, and revised fraud and abuse and enforcement requirements. These changes will impact existing government healthcare programs and will result in the development of new programs, including Medicare payment for performance initiatives and improvements to the physician quality reporting system and feedback program.

We anticipate that with Teva’s commercialization of ADASUVE in the United States or with other potential product candidates, some of our revenue and the revenue from our collaborators may be derived from U.S. government healthcare programs, including Medicare. We expect that the Healthcare Reform Act and other healthcare reform measures that may be adopted in the future could have an adverse effect on our industry generally and the ability to successfully commercialize ADASUVE or our product candidates or could limit or eliminate our spending on development projects.

The Healthcare Reform Act made significant changes to the Medicaid Drug Rebate program, in which we expect to participate. Effective March 23, 2010, rebate liability expanded from fee-for-service Medicaid utilization to include the utilization of Medicaid managed care organizations as well. With regard to the amount of the rebates owed, the Healthcare Reform Act increased the minimum Medicaid rebate from 15.1% to 23.1% of the average manufacturer price for most innovator products and from 11% to 13% for non-innovator products; changed the calculation of the rebate for certain innovator products that qualify as line extensions of existing drugs; and capped the total rebate amount for innovator drugs at 100% of the average manufacturer price. We expect that the increased minimum rebate of 23.1% will apply to ADASUVE. Finally, the Healthcare Reform Act requires pharmaceutical manufacturers of branded prescription drugs to pay a branded prescription drug fee to the federal government beginning in 2011. Each individual pharmaceutical manufacturer pays a prorated share of the branded prescription drug fee of $3.0 billion in 2015 (and set to increase in ensuing years), based on the dollar value of its branded prescription drug sales to certain federal programs identified in the law. Additional provisions of the Healthcare Reform Act, some of which became effective in 2011, may negatively affect our future revenues.

The Healthcare Reform Act also expanded the Public Health Service’s 340B drug pricing discount program, which we expect to participate in. The 340B pricing program requires participating manufacturers to agree to charge statutorily-defined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs. The Healthcare Reform Act expanded the 340B program to include additional types of covered entities: certain free-standing cancer hospitals, critical access hospitals, rural referral centers and sole community hospitals, each as defined by the Healthcare Reform Act. The Healthcare Reform Act, as drafted, exempted “orphan drugs” — those designated under section 526 of the FDCA — from the ceiling price requirements for these newly-eligible entities.

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with the invalidated final rule. Like the invalidated final rule, it exempts orphan drugs from the ceiling price requirements for the newly-eligible entities only when the orphan drug is used for its orphan indication. Under the interpretive rule, the newly-eligible entities are entitled to purchase orphan drugs at the ceiling price when the orphan drug is not used for its orphan indication. The uncertainty regarding how the statutory orphan drug exception will be applied will increase the complexity of compliance, will make compliance more time-consuming, and could negatively impact our results of operations. HRSA previously was expected to issue a comprehensive proposed regulation in 2014 that would have addressed many aspects of the 340B program. However, the invalidation of the orphan drug regulation on the ground that HRSA did not have rulemaking authority for that topic has raised questions regarding whether HRSA has the authority to issue the comprehensive regulation. We have applied for orphan drug status for AZ-002, and expect to apply for orphan drug status in the EU. There can be no assurance that AZ-002 will receive such designation, and should HRSA successfully attempt to limit the scope of the orphan drug exception in the future, this might have a negative impact on our business.

The Healthcare Reform Act also obligates the Secretary of the HHS to create regulations and processes to improve the integrity of the 340B program and to update the agreement that manufacturers must sign to participate in the 340B program to obligate a manufacturer to offer the 340B price to covered entities if the manufacturer makes the drug available to any other purchaser at any price and to report to the government the ceiling prices for its drugs. HRSA has stated on its website that in 2015 it plans to issue a proposed guidance for notice and comment that will address key policy issues raised by various stakeholders committed to the integrity of the 340B program. HRSA also states it is planning to issue proposed rules pertaining to civil monetary penalties for manufacturers, calculation of the 340B ceiling price, and administrative dispute resolution. When this guidance is issued, it could affect our obligations under the 340B program in ways we cannot anticipate. In addition, legislation may be introduced that, if passed, would further expand the 340B program to additional covered entities or would require participating manufacturers to agree to provide 340B discounted pricing on drugs used in the inpatient setting.

Many of the Healthcare Reform Act’s most significant reforms started taking effect last year with more still pending, and the details will be shaped significantly as the various provisions become active, especially given the political nature of the law. In 2012, the Supreme Court of the United States heard challenges to the constitutionality of the individual mandate and the viability of certain provisions of the Healthcare Reform Act. The Supreme Court’s decision upheld most of the Healthcare Reform Act and determined that requiring individuals to maintain “minimum essential” health insurance coverage or pay a penalty to the Internal Revenue Service was within Congress’s constitutional taxing authority. However, the Supreme Court struck down a provision in the Healthcare Reform Act that penalized states that choose not to expand their Medicaid programs through an increase in the Medicaid eligibility income limit from a state’s current eligibility levels to 133% of the federal poverty limit. As a result of the Supreme Court’s ruling, it is unclear whether states will expand their Medicaid programs by raising the income limit to 133% of the federal poverty level and whether there will be more uninsured patients in 2015 than anticipated when Congress passed the Healthcare Reform Act. For each state that does not choose to expand its Medicaid program, there will be fewer insured patients overall. The reduction in the number of insured patients could impact the sales, business and financial condition.

While the constitutionality of key provisions of the Healthcare Reform Act was upheld by the Supreme Court, legislative changes to it remain possible. We expect that the Healthcare Reform Act, as currently enacted or as it may be amended in the future, and other healthcare reform measures that may be adopted in the future could have a material adverse effect on our industry generally and on our ability to successfully commercialize our product candidates or could limit or eliminate our future spending on development projects.

In addition to the Healthcare Reform Act, there will continue to be proposals by legislators at both the federal and state levels, regulators and third-party payors to keep these costs down while expanding individual healthcare benefits. Certain of these changes could impose limitations on the prices we will be able to charge for ADASUVE or any other product candidates that are approved or the amounts of reimbursement available for these products from governmental agencies or third-party payors, or may increase the tax obligations on life sciences companies such as ours. While it is too early to predict specifically what effect the Health Reform Act

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and its implementation or any future legislation or policies will have on our business, we believe that healthcare reform may have an adverse effect on our business and financial condition.

If future products are regulated solely as medical devices and we fail to complete the required IRS forms for exemptions, make timely semi-monthly payments of collected excise taxes, or submit quarterly reports as required by the Medical Device Excise Tax, we may be subject to penalties, such as Section 6656 penalties for any failure to make timely deposits.

Section 4191 of the Internal Revenue Code, enacted by Section 1405 of the Health Care and Education Reconciliation Act of 2010, Public Law 111-152 (124 Stat. 1029 (2010)), in conjunction with the Patient Protection and Affordable Care Act, Public Law 111-148 (124 Stat. 119 (2010)), imposed as of January 1, 2013, an excise tax on the sale of certain medical devices. The excise tax imposed by Section 4191 is 2.3% of the price for which a taxable medical device is sold within the U.S.

If FDA determines that any future company product is regulated as a medical device, the excise tax will apply to future sales of any company medical device listed with the FDA under Section 510(j) of the Federal Food, Drug, and Cosmetic Act and 21 C.F.R. Part 807, unless the device falls within an exemption from the tax, such as the exemption governing direct retail sale of devices to consumers or for foreign sales of these devices. We will need to assess to what extent this excise tax may impact the sales price and distribution agreements under which any of our products are sold in the U.S. If any product is regulated as a medical device, we expect general and administrative expense to increase due to the medical device excise tax. We will need to submit IRS forms applicable to relevant exemptions, make semi-monthly payments of any collected excise taxes, and make timely (quarterly) reports to the IRS regarding the excise tax. To the extent we do not comply with the requirements of the Medical Device Excise Tax we may be subject to penalties.

If we or any collaborator fail to comply with reporting and payment obligations under the Medicaid Drug Rebate program or other governmental pricing programs, including programs developed by countries outside the United States, after we or any collaborator begin to participate in such programs, we or any collaborator could be subject to additional reimbursement requirements, penalties, sanctions and fines which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We expect to participate, or any collaborator to participate, in the Medicaid Drug Rebate program, established by the Omnibus Budget Reconciliation Act of 1990 and amended by the Veterans Health Care Act of 1992 as well as subsequent legislation. We also expect to participate, or any collaborator to participate, in and have certain price reporting obligations to several state Medicaid supplemental rebate programs, and we anticipate that we will have obligations to report ASP for the Medicare program for future product candidates. Under the Medicaid Drug Rebate program, we will be required to pay a rebate to each state Medicaid program for our covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program as a condition of having federal funds being made available to the states for our drugs under Medicaid and Medicare Part B. Those rebates will be based on pricing data that we will report on a monthly and quarterly basis to CMS, the federal agency that administers the Medicaid Drug Rebate program. These data will include the AMP and, in the case of innovator products, the best price, or BP, for each drug. The rebate liability resulting from this reporting will negatively impact our financial results.

The PPACA made significant changes to the Medicaid Drug Rebate program. Effective March 23, 2010, rebate liability expanded from fee-for-service Medicaid utilization to include the utilization of Medicaid managed care organizations as well. With regard to the amount of the rebates owed, the PPACA increased the minimum Medicaid rebate from 15.1% to 23.1% of the average manufacturer price for most innovator products and from 11% to 13% for non-innovator products; changed the calculation of the rebate for certain innovator products that qualify as line extensions of existing drugs; and capped the total rebate amount for innovator drugs at 100% of the average manufacturer price. We expect that the increased minimum rebate of 23.1% will apply to ADASUVE. In addition, the PPACA and subsequent legislation changed the definition of AMP. Finally, the PPACA requires pharmaceutical manufacturers of branded prescription drugs to pay a new branded prescription

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drug fee to the federal government beginning in 2011. Each individual pharmaceutical manufacturer will pay a prorated share of the branded prescription drug fee of $3.0 billion in 2014 (and set to increase in ensuing years) based on the dollar value of its branded prescription drug sales to certain federal programs identified in the law. Additional provisions of the Healthcare Reform Act, some of which became effective in 2011, may negatively affect our future revenues.

In the future, Congress could enact legislation that further increases Medicaid drug rebates or other costs and charges associated with participating in the Medicaid Drug Rebate program. The issuance of regulations and coverage expansion by various governmental agencies relating to the Medicaid Drug Rebate program will increase our costs and the complexity of compliance, will be time-consuming, and could have a material adverse effect on our results of operations.

Federal law requires that any company that participates in the Medicaid Drug Rebate Program also participate in the Public Health Service’s 340B drug pricing discount program in order for federal funds to be available for the manufacturer’s drugs under Medicaid and Medicare Part B. The 340B pricing program requires participating manufacturers to agree to charge statutorily-defined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs. These 340B covered entities include a variety of community health clinics and other entities that receive health services grants from the Public Health Service, as well as hospitals that serve a disproportionate share of low-income patients. The 340B ceiling price is calculated using a statutory formula, which is based on the average manufacturer price and rebate amount for the covered outpatient drug as calculated under the Medicaid rebate program. Changes to the definition of average manufacturer price and the Medicaid rebate amount under PPACA and CMS’s issuance of final regulations implementing those changes also could affect our 340B ceiling price calculations and negatively impact our results of operations once we or any collaborator begin to participate in the 340B program.

Compliance with the regulations associated with the 340B program will increase our costs and the complexity of compliance, will be time-consuming, and could have a material adverse effect on our results of operations once we or any collaborator begin to participate in the 340B program.

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Federal law also requires that a company that participates in the Medicaid Drug Rebate Program report ASP information to CMS for certain categories of drugs that are paid under Part B of the Medicare program. We anticipate that ADASUVE will fall into that category. Manufacturers calculate ASP based on a statutorily defined formula and interpretations of the statute by CMS as to what should or should not be considered in computing ASP. An ASP for each National Drug Code for a product that is subject to the ASP reporting requirement must be submitted to CMS no later than 30 days after the end of each calendar quarter. CMS uses these submissions to determine payment rates for drugs under Medicare Part B. Once we or any collaborator begin to participate in the Medicare program, changes affecting the calculation of ASP could affect the ASP calculations for our products and the resulting Medicare payment rate, and could negatively impact our results of operations once we begin to participate in the Medicare program.

Pricing and rebate calculations vary among products and programs. The calculations are complex and are often subject to interpretation by governmental or regulatory agencies and the courts. Once we or any collaborator begin to participate in the Medicaid program, the Medicaid rebate amount will be computed each quarter based on our submission to the CMS of our current AMP and BP for the quarter. If we become aware that our reporting for prior quarters was incorrect, or has changed as a result of recalculation of the pricing data, we or any collaborator will be obligated to resubmit the corrected data for a period not to exceed 12 quarters from the quarter in which the data originally were due. Such restatements and recalculations would serve to increase our costs for complying with the laws and regulations governing the Medicaid rebate program. Once we begin to participate in the Medicaid program, any corrections to our rebate calculations could result in an overage or underage in our rebate liability for past quarters, depending on the nature of the correction. Price recalculations also may affect the price that we or any collaborator will be required to charge certain safety-net providers under the Public Health Service 340B drug discount program.

Once we or any collaborator begin to participate in government pricing programs, we or any collaborator will be liable for errors associated with our submission of pricing data. In addition to retroactive rebates and the potential for 340B program refunds, if we or any collaborator are found to have knowingly submitted false average manufacturer price, average sales price, or best price information to the government, we or any collaborator may be liable for civil monetary penalties in the amount of $100,000 per item of false information. If a manufacturer is found to have made a misrepresentation in the reporting of ASP, the statute provides for civil monetary penalties of up to $10,000 for each misrepresentation for each day in which the misrepresentation was applied. Failure to submit monthly/quarterly average manufacturer price, average sales price, and best price data on a timely basis could result in a civil monetary penalty of $10,000 per day for each day the information is late beyond the due date. In the event that CMS were to terminate our rebate agreement after we or any collaborator begin to participate in the Medicaid program, no federal payments would be available under Medicaid or Medicare Part B for our covered outpatient drugs.

In September 2010, CMS and the Office of the Inspector General indicated that they intend to pursue more aggressively companies who fail to report these data to the government in a timely manner. Governmental agencies may also make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid. We cannot assure you that our or any collaborator’s submissions, once we or any collaborator begin to submit pricing data to CMS, will not be found by CMS to be incomplete or incorrect.

Federal law requires that for a company to be eligible to have its products paid for with federal funds under the Medicaid and Medicare Part B programs, as well as to be purchased by certain federal agencies and grantees, it also must participate in the Department of Veterans Affairs (VA) Federal Supply Schedule, or FSS, pricing program. To participate, we or any collaborator will be required to enter into an FSS contract with the VA, under which we must make our innovator “covered drugs,” such as ADASUVE or other product candidates, available to the “Big Four” federal agencies — the VA, the Department of Defense, or DoD, the Public Health Service, and the Coast Guard — at pricing that is capped pursuant to a statutory federal ceiling price, or FCP, formula set forth in Section 603 of the Veterans Health Care Act of 1992, or VHCA. The FCP is based on a weighted average wholesaler price known as the “non-federal average manufacturer price,” or Non-FAMP, which manufacturers are required to report on a quarterly and annual basis to the VA. If a company misstates

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Non-FAMPs or FCPs it must restate these figures. Pursuant to the VHCA, knowing provision of false information in connection with a Non-FAMP filing can subject a manufacturer to penalties of $100,000 for each item of false information.

FSS contracts are federal procurement contracts that include standard government terms and conditions, separate pricing for each product, and extensive disclosure and certification requirements. All items on FSS contracts are subject to a standard FSS contract clause that requires FSS contract price reductions under certain circumstances where pricing is reduced to an agreed “tracking customer.” Further, in addition to the “Big Four” agencies, all other federal agencies and some non-federal entities are authorized to access FSS contracts. FSS contractors are permitted to charge FSS purchasers other than the Big Four agencies “negotiated pricing” for covered drugs that is not capped by the FCP; instead, such pricing is negotiated based on a mandatory disclosure of the contractor’s commercial “most favored customer” pricing. We cannot anticipate the pricing structure we will enter into with respect to our products. The FSS contract price may have a material adverse effect on future revenues from sales of ADASUVE.

Once we or any collaborator enter into an FSS contract, if we or any collaborator overcharge the government in connection with the FSS contract, whether due to a misstated FCP or otherwise, we or any collaborator will be required to refund the difference to the government. Failure to make necessary disclosures and/or to identify contract overcharges could result in allegations under the Federal False Claims Act and other laws and regulations. Unexpected refunds to the government, and responding to a government investigation or enforcement action, would be expensive and time-consuming, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

If we or any collaborators fail to gain market acceptance among physicians, patients, third-party payors and the medical community, we will not become profitable.

The Staccato system is a fundamentally new method of drug delivery. ADASUVE or any future product based on our Staccato system may not gain market acceptance among physicians, patients, third-party payors and the medical community. If these products do not achieve an adequate level of acceptance, we will not meet our revenue guidance nor will we generate sufficient product or royalty revenues to become profitable. The degree of market acceptance of ADASUVE or any of our product candidates, if approved for commercial sale, will depend on a number of factors, including:

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the ability of our collaborators’ sales forces to convince potential purchasers of ADASUVE’s advantages over other treatments;

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demonstration of acceptable quality, safety and efficacy in clinical trials and meeting applicable regulatory standards for approval;

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the existence, prevalence and severity of any side effects;

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potential or perceived advantages or disadvantages compared to alternative treatments;

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therapeutic or other improvements of ADASUVE over existing or future drugs used to treat the same or similar conditions;

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perceptions about the relationship or similarity between ADASUVE or our product candidates and the parent drug compound upon which ADASUVE or our product candidate is based;

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the timing of market entry relative to competitive treatments;

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the ability to produce ADASUVE or any future products in commercial quantities at an acceptable cost, or at all;

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the ability to offer ADASUVE or any future products for sale at competitive prices;

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relative convenience, product dependability and ease of administration;

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the restrictions imposed on ADASUVE by the REMS program and labeling requirements;

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•

the strength of marketing and distribution support;

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acceptance by patients, the medical community or third-party payors;

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the sufficiency of coverage and reimbursement of ADASUVE or our product candidates by governmental and other third-party payors; and

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the product labeling, including the package insert, and the marketing restrictions required by the FDA or regulatory authorities in other countries.

We are subject to significant ongoing regulatory obligations and oversight, which may result in significant additional expense and limit our and our collaborators’ ability to commercialize our products.

We and our collaborators are subject to significant ongoing regulatory obligations, such as safety reporting requirements, periodic and annual reporting requirements, and regulatory oversight of the promotion and marketing of our products. In addition, the manufacture, labeling, packaging, distribution, import, export, adverse event reporting, storage, advertising, promotion and recordkeeping for ADASUVE and any of our product candidates that may be approved by the FDA or foreign regulatory authorities will be subject to extensive and ongoing regulatory requirements. Teva has agreed to take responsibility at its expense to complete several post-marketing requirements that were a condition to FDA approval of ADASUVE, including the responsibility for conducting a 10,000 patient observational clinical trial designed to gather patient safety data based on the real-world use of ADASUVE, as well as a clinical program addressing the safety and efficacy of ADASUVE in agitated adolescent patients. As a condition of grant of EU marketing authorization for ADASUVE by the EC, we are responsible for the conduct and funding of post-authorization studies, including (i) a benzodiazepine interaction study, which has been completed, (ii) a controlled study to determine ADASUVE’s effect on cardiac rhythms, or a thorough QTc study, with two doses of ADASUVE, which has been completed, (iii) a clinical program designed to evaluate the safety and efficacy of ADASUVE in agitated adolescent patients, (iv) an observational clinical trial, and (v) a drug utilization clinical trial.

The FDA and foreign regulatory authorities may also impose significant restrictions on the indicated uses or marketing of our future products, or impose requirements for burdensome post-approval study commitments. For example, ADASUVE’s U.S. labeling contains a “boxed warning” regarding the risks of bronchospasm caused by the product and the increased risk of death for elderly patients with dementia-related psychosis. Boxed warnings are used to highlight warning information that is especially important to the prescriber. Products with boxed warnings are subject to more restrictive advertising and promotion regulations than products without such warnings. The terms of any product approval, including labeling, may be more restrictive than we desire and could affect the commercial potential of the product. If we become aware of previously unknown problems with any of our products in the United States or overseas or at our contract manufacturers’ facilities, a regulatory agency may impose labeling changes or restrictions on our products, our collaborators, our manufacturers or on us. In such an instance, we could experience a significant drop in the sales of the affected products, our product revenues and reputation in the marketplace may suffer, and we could become the target of lawsuits.

The FDA and other governmental authorities, including foreign regulatory authorities, also actively enforce regulations prohibiting off-label promotion, and governments have levied large civil and criminal fines against companies for alleged improper promotion. Governments have also required companies to enter into corporate integrity agreements and/or non-prosecution agreements that impose significant reporting and other burdens on the affected companies.

We and our commercial collaborators are also subject to regulation by regional, national, state and local agencies, including the Drug Enforcement Administration, or DEA, the Department of Justice, the Federal Trade Commission, the Office of Inspector General of the U.S. Department of Health and Human Services and other regulatory bodies, as well as governmental authorities in those foreign countries in which we may in the future commercialize our products. The FDCA, the Public Health Service Act, the Social Security Act, and other federal and state statutes and regulations govern to varying degrees the research, development, manufacturing and commercial activities relating to prescription pharmaceutical products, including preclinical testing,

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approval, production, labeling, sale, distribution, import, export, post-market surveillance, advertising, dissemination of information, promotion, marketing, and pricing to government purchasers and government healthcare programs. Any manufacturing, licensing, or commercialization collaborators we have or may in the future have, including Teva and Ferrer, will be subject to many of the same requirements.

The Federal 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 companies on one hand and prescribers, purchasers and formulary managers on the other. Further, the Healthcare Reform Act, among other things, amends the intent requirement of the Federal Anti-Kickback Statute. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the Healthcare Reform Act provides that 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 false claims statutes. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common manufacturer business arrangements and activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration may be subject to scrutiny if they do not qualify for an exemption or safe harbor. We intend to comply with the exemptions and safe harbors whenever possible, but our practices or those of our commercial collaborators may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability and may be subject to scrutiny.

The Federal False Claims Act prohibits 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. Many pharmaceutical and other healthcare companies have been investigated and have reached substantial financial settlements with the federal government under these laws for a variety of alleged marketing activities, including providing free product to customers with the expectation that the customers would bill federal programs for the product; providing consulting fees, grants, free travel, and other benefits to physicians to induce them to prescribe the company’s products; and inflating prices reported to private price publication services, which are used to set drug payment rates under government healthcare programs. Companies have been prosecuted for causing false claims to be submitted because of the marketing of their products for unapproved uses. Pharmaceutical and other healthcare companies have also been prosecuted on other legal theories of Medicare and Medicaid fraud.

The majority of U.S. states also have statutes or regulations similar to the Federal Anti-Kickback Statute and Federal False Claims Act, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Several states now require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products in those states and to report gifts and payments to individual health care providers in those states. Some of these states also prohibit certain marketing related activities including the provision of gifts, meals, or other items to certain health care providers. In addition, California, Connecticut, Nevada and Massachusetts require pharmaceutical companies to implement compliance programs or marketing codes.

Compliance with various federal and state laws is difficult and time consuming, and companies that violate them may face substantial penalties. The potential sanctions include civil monetary penalties, exclusion of a company’s products from reimbursement under government programs, criminal fines and imprisonment. Because of the breadth of these laws and the lack of extensive legal guidance in the form of regulations or court decisions, it is possible that some of our business activities or those of our commercial collaborators could be subject to challenge under one or more of these laws. Such a challenge could have a material adverse effect on our business and financial condition and growth prospects.

We or our commercial collaborators could become subject to government investigations and related subpoenas. Such subpoenas are often associated with previously filed qui tam actions, or lawsuits filed under seal under the Federal False Claims Act. Qui tam actions are brought by private plaintiffs suing on behalf of the

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federal government for alleged Federal False Claims Act violations. The time and expense associated with responding to such subpoenas, and any related qui tam or other actions, may be extensive, and we cannot predict the results of our review of the responsive documents and underlying facts or the results of such actions. Responding to government investigations, defending any claims raised, and any resulting fines, restitution, damages and penalties, settlement payments or administrative actions, as well as any related actions brought by stockholders or other third parties, could have a material impact on our reputation, business and financial condition and divert the attention of our management from operating our business.

The number and complexity of both federal and state laws continues to increase, and additional governmental resources are being added to enforce these laws and to prosecute companies and individuals who are believed to be violating them. In particular, the Healthcare Reform Act includes a number of provisions aimed at strengthening the government’s ability to pursue anti-kickback and false claims cases against pharmaceutical manufacturers and other healthcare entities, including substantially increased funding for healthcare fraud enforcement activities, enhanced investigative powers, amendments to the False Claims Act that make it easier for the government and whistleblowers to pursue cases for alleged kickback and false claim violations and, since last year, payments made on or after August 1, 2013, public reporting of payments by pharmaceutical manufacturers to physicians and teaching hospitals nationwide. While it is too early to predict what effect these changes will have on our business, we anticipate that government scrutiny of pharmaceutical sales and marketing practices will continue for the foreseeable future and subject us and our commercial collaborators to the risk of government investigations and enforcement actions. Responding to a government investigation or enforcement action would be expensive and time-consuming, and could have a material adverse effect on our business and financial condition and growth prospects.

Similar restrictions are imposed on the promotion and marketing of medicinal products in the EU and other countries. The applicable laws at EU level and in the individual EU Member States require promotional materials and advertising concerning medicinal products to comply with the product’s Summary of Product Characteristics, or SmPC, as approved by the competent authorities. The SmPC is the document that provides information to physicians concerning the safe and effective use of a medicinal product. Promotion of a medicinal product which does not comply with the SmPC is considered to constitute off-label promotion. The off-label promotion of medicinal products is prohibited in the EU. The applicable laws at both EU level and in the individual EU Member States also prohibit the direct-to-consumer advertising of prescription-only medicinal products. Violations of the rules governing the promotion of medicinal products in the EU could be penalized by administrative measures, fines and imprisonment.

Interactions between pharmaceutical companies and physicians are also governed by strict laws, regulations, industry self-regulation codes of conduct and physicians’ codes of professional conduct in the individual EU Member States. The provision of any inducement to physicians to prescribe, recommend, endorse, order, purchase, supply, use or administer a medicinal product is prohibited. A number of EU Member States have introduced additional rules requiring pharmaceutical companies to publically disclose their interactions with physicians and to obtain approval from employers, professional organizations and/or competent authorities before entering into agreements with physicians. Violations of these rules could lead to the imposition of fines or imprisonment.

Laws, including those governing promotion, marketing and anti-kickback provisions, industry regulations and professional codes of conduct are often strictly enforced. Increasing regulatory scrutiny of the promotional activities of pharmaceutical companies has been observed in a number of EU Member States. The Bribery Act in the United Kingdom entered into force on 1 July 2011. This Act applies to any company incorporated in or “carrying on business” in the UK, irrespective of where in the world the alleged bribery activity occurs. Even though we strive for complete and continuous adherence to all laws and rules during our promotion and marketing activities, this Act could have implications for our interactions or those of Ferrer with physicians both in and outside the UK.

Payments made to physicians in certain EU Member States must be publically disclosed and this obligation will expand to other EU Member States. Moreover, agreements with physicians must often be the subject of prior notification and approval by the physician’s employer, his/her competent professional organization, and/or the

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competent authorities of the individual EU Member States. These requirements are provided in the national laws, industry codes, or professional codes of conduct, applicable in the EU Member States. Failure to comply with these requirements could result in reputational risk, public reprimands, administrative penalties, fines or imprisonment. Even in those countries where we are not directly responsible for the promotion and marketing of our products, inappropriate activity by our international distribution collaborators can have implications for us.

If we or any collaborators fail to comply with applicable federal, state, local, or foreign regulatory requirements, we or they could be subject to a range of regulatory actions that could affect our or any collaborators’ ability to commercialize our products and could harm or prevent sales of the affected products, or could substantially increase the costs and expenses of commercializing and marketing our products. Any threatened or actual government enforcement action could also generate adverse publicity and require that we devote substantial resources that could otherwise be used in other aspects of our business.

We could be adversely affected by violations of applicable anti-corruption laws such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010.

Anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010, generally prohibit directly or indirectly giving, offering, or promising anything of value to improperly induce the recipient to act, or refrain from acting, in a manner that would confer a commercial advantage. The anti-bribery provisions of the U.S. Foreign Corrupt Practices Act generally prohibit directly or indirectly giving, offering or promising an inducement to a public official (broadly interpreted) to corruptly influence the official’s actions in order to obtain a commercial advantage. The U.K. Bribery Act of 2010 prohibits both domestic and international bribery, as well as bribery in both the private and public sectors. In addition, an organization that “fails to prevent bribery” by anyone associated with the organization may be charged under the U.K. Bribery Act unless the organization can establish the defense of having implemented “adequate procedures” to prevent bribery. In recent years, the U.S. Government has brought enforcement actions that resulted in significant monetary penalties against several multinational healthcare companies for violations of the U.S. Foreign Corrupt Practices Act stemming from illegal payments and other illegal benefits provided to non-U.S. healthcare professionals. We plan to adopt and implement policies and procedures designed to ensure that those involved in the marketing, sale, and distribution of our products are both aware of these legal requirements and committed to complying therewith. However, we cannot assure that these policies and procedures will protect us from potentially illegal acts committed by individual employees or agents. If we were found to be liable for anti-corruption law violations, we could be subject to criminal or civil penalties or other consequences that could have a material adverse effect on our business and financial condition.

If we do not establish additional strategic collaborations, we will have to undertake additional development and future commercialization efforts on our own, which would be costly and delay our ability to commercialize any future products.

An element of our business strategy is our intent to selectively collaborate with pharmaceutical, biotechnology and other companies to obtain assistance for the development and commercialization of ADASUVE and our product candidates. In October 2011, we entered into the Ferrer Agreement with Ferrer for the commercialization of ADASUVE in the Ferrer Territories. In May 2013, we entered into a commercial collaboration with Teva, granting Teva an exclusive license to develop and commercialize ADASUVE in the United States. We may never enter into additional strategic collaborations with third parties to develop and commercialize ADASUVE or our product candidates. Other than Teva and Ferrer, we do not currently have any strategic collaborations for ADASUVE or any of our product candidates.

We face significant competition in seeking appropriate strategic collaborators, and these strategic collaborations can be intricate and time consuming to negotiate and document. We may not be able to negotiate additional strategic collaborations on acceptable terms, or at all. We are unable to predict when, if ever, we will enter into any additional strategic collaborations because of the numerous risks and uncertainties associated with establishing strategic collaborations. We are currently seeking collaborations to commercialize ADASUVE outside of the United States and the Ferrer Territories. If we are unable to negotiate additional strategic

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collaborations for ADASUVE outside of the United States and the Ferrer Territories, we may be unable to maximize ADASUVE’s commercial potential.

If we are unable to negotiate additional collaborations for ADASUVE or our product candidates we may be forced to curtail the development of a particular candidate, reduce or delay its development program, or one or more of our other development programs, delay its commercialization, or undertake development or commercialization activities at our own expense. In addition, we will bear all the risk related to the development of a product candidate. If we elect to increase our expenditures to fund development or commercialization activities on our own, we will need to obtain additional capital, which may not be available to us on acceptable terms, or at all. If we do not have sufficient funds, we will not be able to bring ADASUVE or our product candidates to market successfully and generate revenue or profit.

ADASUVE and any of our product candidates approved for marketing remain subject to ongoing regulatory review in the United States, the EU or in other countries. If we or any collaborators fail to comply with the regulations, we could lose these approvals, and the sale of any future products could be suspended. If approval is denied or limited in a country, or if a country imposes post-marketing requirements, that decision could negatively affect our ability to market our product in such countries.

Even with regulatory approval to market a particular product candidate, the FDA, the EC or another foreign regulatory authority could condition approval on conducting additional costly post-approval studies or trials or could limit the scope of our approved labeling or could impose burdensome post-approval obligations, such as those required in the United States and in the post-marketing obligations required as part of a marketing authorization in the EU. Moreover, the product may later cause adverse effects that limit or prevent its widespread use, force us to withdraw it from the market, cause the FDA, the EC or another foreign regulatory authority to impose additional obligations or restriction on marketing, or impede or delay our ability to obtain regulatory approvals in additional countries. In addition, we will continue to be subject to FDA, EMA, EC and other foreign regulatory authority regulations, as well as periodic inspections to ensure adherence to applicable regulations. After receiving marketing approval, the FDA, the EC and other foreign regulatory authorities could impose extensive regulatory requirements on the manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion, distribution, and record keeping related to the product. The approval of the ADASUVE NDA requires Teva to implement, administer and assess at regular intervals a REMS program that, among other things, limits the use of ADASUVE to healthcare facilities enrolled in the ADASUVE REMS program.

As a condition to FDA approval of ADASUVE, Teva also has several post-approval commitments and requirements, including a 10,000 patient observational clinical trial designed to gather patient safety data based on the real-world use of ADASUVE, as well as a clinical program addressing the safety and efficacy of ADASUVE in agitated adolescent patients.

As a condition to marketing authorization for ADASUVE granted by the EC in the EU, we are responsible for the conduct and funding of post-marketing studies, including (i) a benzodiazepine interaction study, which has been completed, (ii) a controlled study to determine ADASUVE’s effect on cardiac rhythms, or a thorough QTc study, with two doses of ADASUVE, which has been completed, (iii) a clinical program designed to evaluate the safety and efficacy of ADASUVE in agitated adolescent patients, (iv) an observational clinical study, and (v) a drug utilization study. Results of the benzodiazepine interaction study and the thorough QTc study have been submitted to the EMA.

The costs associated with development and approval of study protocols and the completion of studies and clinical trials are significant. There are risks involved with relying on our own capabilities to perform the tasks required by the post-market studies for ADASUVE, as well as with entering into arrangements with third parties to perform these services. If Teva enters into an arrangement with a third party or parties to perform the tasks required for the ADASUVE post-market studies and trials, the expense of such outsourcing could be significant, decreasing the profitability of ADASUVE. Additionally, any third party with whom we may collaborate may not fulfill its obligations or carry out activities sufficiently to satisfy FDA, EC, EMA or other U.S. or foreign regulatory authority standards, which could result in increased expenses needed to remediate any deficiencies or

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could even result in an FDA, EC, EMA or other U.S. or foreign regulatory authority enforcement action, including the imposition of civil money penalties and the withdrawal of approval of the product in the U.S. Finally, the data derived from any post-market study or trial could result in additional restrictions on the commercialization of ADASUVE through changes to the approved ADASUVE label, a more burdensome REMS program, the imposition of additional post-market studies or trials, or could even lead to the withdrawal of the approval of the product.

If we or any collaborators fail to comply with the regulatory requirements of the FDA, the EMA, the EC or other applicable U.S. and foreign regulatory authorities, or previously unknown problems with any future products, suppliers or manufacturing processes are discovered, we or our collaborators could be subject to administrative or judicially imposed sanctions, including:

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restrictions on the products, suppliers or manufacturing processes;

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warning letters or untitled letters;

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injunctions, consent decrees, or the imposition of civil or criminal penalties;

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fines;

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product seizures, detentions or import or export bans;

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voluntary or mandatory product recalls and publicity requirements;

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variation, suspension or withdrawal of regulatory approvals;

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required variations of the clinical trial protocol

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suspension or termination of any clinical trials of the products;

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total or partial suspension of production;

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refusal to approve pending applications for marketing approval of new drugs or supplements to approved applications; and

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denial of permission to file an application or supplement in a jurisdiction.

If we or our collaborators were subject to administrative or judicially-imposed sanctions arising out of enforcement of the FDA, EU or other applicable U.S. and foreign laws, it could impair our ability to manufacture and the ability of our collaborators to successfully market ADASUVE, even if such an enforcement action does not relate specifically to ADASUVE. Such enforcement could have a significant impact on our financial condition and results.

Problems with the third parties that manufacture the API in ADASUVE or our product candidates may delay our clinical trials or subject us to liability.

We do not currently own or operate manufacturing facilities for clinical or commercial production of the API used in ADASUVE or any of our product candidates. We have no experience in API manufacturing, and we lack the resources and the capability to manufacture any of the APIs used in ADASUVE and our product candidates, on either a clinical or commercial scale. As a result, we rely on third parties to supply the API used in ADASUVE and each of our product candidates. We expect to continue to depend on third parties to supply the API for ADASUVE and our current and future product candidates and to supply the API for ADASUVE in commercial quantities.

An API manufacturer must meet high precision and quality standards for that API to meet regulatory specifications and comply with regulatory requirements. A contract manufacturer is subject to ongoing periodic unannounced inspection by the FDA and corresponding state and foreign authorities to ensure strict compliance with cGMP and other applicable government regulations and corresponding foreign standards. Additionally, a contract manufacturer must pass a pre-approval inspection by the FDA and corresponding foreign authorities to ensure strict compliance with cGMP prior to the FDA’s or corresponding foreign authorities’ approval of any

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product candidate for marketing. A contract manufacturer’s failure to conform to cGMP could result in a refusal by the FDA or a corresponding foreign authority to approve or a delay in their approval of a product candidate for marketing. We are ultimately responsible for confirming that the APIs used in ADASUVE and our product candidates are manufactured in accordance with applicable regulations.

Our third-party suppliers may not carry out their contractual obligations or meet our deadlines. In addition, the API they supply to us may not meet our specifications and quality policies and procedures or they may not be able to supply the API in commercial quantities. If we need to find alternative suppliers of the API used in ADASUVE or any of our product candidates, we may not be able to contract for such supplies on acceptable terms, if at all. Any such failure to supply or delay caused by such contract manufacturers would have an adverse effect on our ability to continue clinical development of our product candidates or commercialize ADASUVE.

If our third-party drug suppliers fail to achieve and maintain high manufacturing standards in compliance with cGMP regulations, we could be subject to certain product liability claims in the event such failure to comply resulted in defective products that caused injury or harm.

Unless our preclinical studies demonstrate an acceptable safety profile of our product candidates, we will not be able to pursue clinical development or commercialize our product candidates.

We must satisfy the FDA and other regulatory authorities abroad, through extensive preclinical studies, that our product candidates have an acceptable safety profile. Our Staccato system creates a condensation aerosol from drug compounds, and there currently are no approved products that use a similar method of drug delivery other than ADASUVE. Companies developing other inhalation products have not defined or successfully completed the types of preclinical studies we believe will be required for submission to regulatory authorities as we seek approval to conduct our clinical trials. We may not have conducted or may not conduct in the future the types of preclinical testing ultimately required by regulatory authorities, or future preclinical tests may indicate that our product candidates are not safe for use in humans. Preclinical testing is expensive, can take many years and has an uncertain outcome. In addition, success in initial preclinical testing does not ensure that later preclinical testing will be successful.

We may experience numerous unforeseen events during, or as a result of, the preclinical testing process, which could delay or prevent our ability to develop or commercialize our product candidates, including:

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our preclinical testing may produce inconclusive or negative safety results, which may require us to conduct additional preclinical testing or to abandon product candidates that we believed to be promising;

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our product candidates may have unfavorable pharmacology, toxicology or carcinogenicity; and

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our product candidates may cause undesirable side effects.

Any such events would increase our costs and could delay or prevent our ability to conduct clinical testing and commercialize our product candidates, which could adversely impact our business, financial condition and results of operations.

Failure or delay in commencing or completing clinical trials for our product candidates could harm our business.

Other than for ADASUVE, we have not completed all the clinical trials necessary to support an application with the FDA or other regulatory authorities abroad for approval to market any of our product candidates other than for ADASUVE in the United States and the European Union. Future clinical trials may be delayed or terminated as a result of many factors, including:

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insufficient financial resources to fund such trials;

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

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regulators, Ethics Committees or institutional review boards may not authorize us to commence a clinical trial;

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regulators, Ethics Committees or institutional review boards may suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or concerns about patient safety;

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we may suspend or terminate our clinical trials if we believe that they expose the participating patients to unacceptable health risks;

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we may experience slower than expected patient enrollment or lack of a sufficient number of patients who meet the enrollment criteria for our clinical trials;

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patients may not complete clinical trials due to safety issues, side effects, dissatisfaction with the product candidate, or other reasons;

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we may have difficulty in maintaining contact with patients after treatment, preventing us from collecting the data required by our study protocol;

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product candidates may demonstrate a lack of efficacy during clinical trials;

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we may experience governmental or regulatory delays, failure to obtain regulatory approval or changes in regulatory requirements, policy and guidelines; and

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we may experience delays in our ability to manufacture clinical trial materials in a timely manner as a result of ongoing process and design enhancements to our Staccato system.

Any delay in commencing or completing clinical trials for our product candidates could delay commercialization of our product candidates and harm our business, financial condition and results of operations. It is possible that none of our product candidates will successfully complete clinical trials or receive regulatory approval, which would severely harm our business, financial condition and results of operations.

If our product candidates do not meet safety and efficacy endpoints in clinical trials, they will not receive regulatory approval, and we will be unable to market them.

The clinical development and regulatory approval process is extremely expensive and takes many years. Prior clinical trial program designs and results are not necessarily predictive of future clinical trial designs or results. Initial results may not be confirmed upon full analysis of the detailed results of a trial. Product candidates in later stage clinical trials may fail to show the desired safety and efficacy despite having progressed through initial clinical trials with acceptable endpoints. Whether an approval will be granted, and the timing of such approval cannot be accurately predicted. If we fail to obtain regulatory approval for ADASUVE in markets outside of the United States and the Ferrer Territories or for our other product candidates in any markets where we seek regulatory approval, we will be unable to market and sell them in those locations and therefore we may never be profitable.

As part of the regulatory process, we must conduct clinical trials for each product candidate to demonstrate safety and efficacy to the satisfaction of the FDA, the EMA, the EC and other regulatory authorities abroad. The number and design of clinical trials that will be required varies depending on the product candidate, the condition being evaluated, the trial results and regulations applicable to any particular product candidate. In June 2008, we announced that our Phase 2a proof-of-concept clinical trial of AZ-002 (Staccato alprazolam) did not meet either of its two primary endpoints. In September 2009, we announced that our Phase 2b clinical trial of AZ-104 (Staccato loxapine, low-dose) for the treatment of migraine did not meet its primary endpoint.

If our product candidates fail to show a clinically significant benefit compared to placebo, they will not be approved for marketing.

The design of our clinical trials is based on many assumptions about the expected effect of our product candidates, and if those assumptions prove incorrect, the clinical trials may not produce statistically significant results. For example, in 2008 we released the preliminary results from our Phase 2a clinical trial with AZ-002 in patients with panic disorder, a separate indication from our current AZ-002 indication of ARS. The study did not

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meet its two primary endpoints, which were the effect of AZ-002 on the incidence of a doxapram-induced panic attack and the effect of AZ-002 on the duration of a doxapram-induced panic attack, both as compared with placebo. Our Staccato system is not similar to other approved drug delivery methods, and there is no precedent for the application of detailed regulatory requirements to our product candidates. We cannot assure you that the design of, or data collected from, the clinical trials of our product candidates will be sufficient to support the FDA, the EC and other foreign regulatory approvals.

Regulatory authorities may not approve our product candidates even if they meet safety and efficacy endpoints in clinical trials.

The FDA, the EC and other foreign regulatory agencies can delay, limit or deny marketing approval for many reasons, including:

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a product candidate may not be considered to have a favorable risk-benefit ratio;

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the manufacturing processes or facilities we have selected may not meet the applicable requirements; and

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changes in their approval policies or adoption of new regulations may require additional work on our part.

Part of the regulatory approval process includes compliance inspections of manufacturing facilities, processes, and products to ensure adherence to applicable regulations and guidelines. The regulatory agency may delay, limit or deny marketing approval of our other product candidates as a result of such inspections. Any delay in, or failure to receive or maintain, approval for any of our product candidates could prevent us from ever generating meaningful revenues or achieving profitability.

Our product candidates may not be approved even if they achieve their endpoints in clinical trials. Regulatory agencies, including the FDA, the EMA, the EC or their advisors may disagree with our trial design and our interpretations of data from preclinical studies and clinical trials. Regulatory agencies may change requirements for approval even after a clinical trial design has been approved. For example, ADASUVE and our other product candidates combine drug and device components in a manner that the FDA considers to meet the definition of a combination product under FDA regulations. The FDA exercises significant discretion over the regulation of combination products, including the discretion to require separate marketing applications for the drug and device components in a combination product. ADASUVE and our product candidates are being regulated as drug products under the NDA process administered by the FDA. The FDA could in the future require additional regulation of ADASUVE or our product candidates under the medical device provisions of the FDCA. Our systems are designed to comply with cGMP and, where applicable, the QSR, which sets forth the FDA’s cGMP requirements for medical devices, and other applicable government regulations and corresponding foreign standards. If we fail to comply with these regulations, it could have a material adverse effect on our business and financial condition.

Regulatory agencies also may approve a product candidate for fewer or more limited indications than requested or may grant approval subject to the performance of post-marketing studies, such as the FDA’s requirement that we perform a Phase 4 observational study and a study in adolescent patients for ADASUVE. Similarly, as a condition to the marketing authorization for ADASUVE in the EU, we are responsible for the conduct and funding of post-authorization studies, including (i) a benzodiazepine interaction study, which has been completed, (ii) a controlled study to determine ADASUVE’s effect on cardiac rhythms, or a thorough QTc study, with two doses of ADASUVE, which has been completed, (iii) a clinical program designed to evaluate the safety and efficacy of ADASUVE in agitated adolescent patients, (iv) an observational clinical study, and (v) a drug utilization study. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates.

We rely on third parties to conduct our preclinical studies and our clinical trials. If these third parties do not perform as contractually required or expected, we may not be able to obtain regulatory approval for our product candidates, or we may be delayed in doing so.

We rely on third parties, such as contract research organizations, medical institutions, academic institutions, clinical investigators and contract laboratories, to conduct our preclinical studies and clinical trials. We are

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responsible for confirming that our preclinical studies are conducted in accordance with applicable regulations and that each of our clinical trials is conducted in accordance with its general investigational plan and protocol. The FDA and equivalent other country regulatory authorities require us to comply with regulations and standards, commonly referred to as Good Laboratory Practices, or GLP, for conducting and recording the results of our preclinical studies and with Good Clinical Practices, or GCP, for conducting, monitoring, recording and reporting the results of clinical trials, to assure that data and reported results are accurate and that the clinical trial participants are adequately protected. Our reliance on third parties does not relieve us of these responsibilities. If the third parties conducting our clinical trials do not perform their contractual duties or obligations, do not meet expected deadlines, fail to comply with the FDA or and equivalent other country regulatory authorities GLP or GCP regulations and standards, do not adhere to our clinical trial protocols or otherwise fail to generate reliable clinical data, we may need to enter into new arrangements with alternative third parties and our clinical trials may be extended, delayed or terminated or may need to be repeated, and we may not be able to obtain regulatory approval for or commercialize the product candidate being tested in such trials.

If we experience problems with the manufacturers of components of ADASUVE or our product candidates, our ability to supply ADASUVE and our other product candidates will be impaired, our sales may be lower than expected and our development programs may be delayed and we may be subject to liability.

We outsource the manufacturing of the components of our Staccato system, including the printed circuit boards, the plastic airways, and the chemical heat packages to be used in our commercial single dose device. We have no experience in the manufacturing of components, other than our chemical heat packages, and we currently lack the resources and the capability to manufacture them, on either a clinical or commercial scale. As a result, we rely on third parties to supply these components. We expect to continue to depend on third parties to supply these components for ADASUVE and our current product candidates and any devices based on the Staccato system we develop in the foreseeable future.

The third-party suppliers of the components of our Staccato system must meet high precision and quality standards for our finished devices to comply with regulatory requirements. A contract manufacturer is subject to ongoing periodic unannounced inspection by the FDA and corresponding state and foreign authorities to ensure that our finished devices remain in strict compliance with the QSR, and other applicable government regulations and corresponding foreign standards. We are ultimately responsible for confirming that the components used in the Staccato system are manufactured in accordance with specifications, standards and procedures necessary to ensure that our finished devices comply with the QSR or other applicable regulations.

Our third party suppliers may not comply with their contractual obligations or meet our deadlines, or the components they supply to us may not meet our specifications and quality policies and procedures. If we need to find alternative suppliers of the components used in the Staccato system, we may not be able to contract for such components on acceptable terms, if at all. Any such failure to supply or delay caused by such contract manufacturers would have an adverse effect on our ability to manufacture commercial quantities of ADASUVE and on our ability to continue clinical development of our product candidates or commercialize ADASUVE. In April 2014, we contracted with Autoliv to build two additional manufacturing cells, but we or a third party may not be able to use the cells to manufacture heat packages of sufficient quality, in sufficient quantity or at low enough cost to become profitable.

In addition, the heat packages used in the single dose version of our Staccato system are manufactured using certain energetic, or highly combustible, materials that are used to generate the rapid heating necessary for vaporizing the drug compound while avoiding degradation. Manufacture of products containing energetic materials is regulated by the U.S. government. We have entered into a manufacture agreement with Autoliv for the manufacture of the heat packages in the commercial design of our single dose version of our Staccato system. If Autoliv fails to manufacture the heat packages to the necessary specifications, or does not carry out its contractual obligations to supply our heat packages to us, or if the FDA requires different manufacturing or quality standards than those set forth in our manufacture agreement, our clinical trials or commercialization efforts may be delayed, suspended or terminated while we seek additional suitable manufacturers of our heat packages, which may prevent us from commercializing ADASUVE or our product candidates that utilize the single dose version of the Staccato system.

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Product candidates that we may develop may require expensive carcinogenicity tests.

We combine small molecule drugs with our Staccato system to create proprietary product candidates. Some of these drugs may not have previously undergone carcinogenicity testing that is now generally required for marketing approval. We may be required to perform carcinogenicity testing with product candidates incorporating drugs that have not undergone carcinogenicity testing or may be required to do additional carcinogenicity testing for drugs that have undergone such testing. Any carcinogenicity testing we are required to complete will increase the costs to develop a particular product candidate and may delay or halt the development of such product candidate.

If some or all of our patents expire, are invalidated or are unenforceable, or if some or all of our patent applications do not yield issued patents or yield patents with narrow claims, competitors may develop competing products using our or similar intellectual property and our business will suffer.

Our success will depend in part on our ability to obtain and maintain patent and trade secret protection for our technologies, ADASUVE and our product candidates both in the United States and other countries. We do not know whether any patents will issue from any of our pending or future patent applications. In addition, a third party may successfully circumvent our patents. Our rights under any issued patents may not provide us with sufficient protection against competitive products or otherwise cover commercially valuable products or processes.

The degree of protection for our proprietary technologies, ADASUVE and our product candidates is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:

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

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

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

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the claims of our issued patents may be narrower than as filed and not sufficiently broad to prevent third parties from circumventing them;

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

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we may not develop additional proprietary technologies or drug candidates that are patentable;

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our patent applications or patents may be subject to interference, opposition or similar administrative proceedings;

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any patents issued to us or our potential strategic collaborators may not provide a basis for commercially viable products or may be challenged by third parties in the course of litigation or administrative proceedings such as reexaminations or interferences; and

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the patents of others may have an adverse effect on our ability to do business.

On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The United States Patent and Trademark Office has developed regulations and procedures to govern administration of the Leahy-Smith Act, but many of the substantive changes to patent law associated with the Leahy-Smith Act, particularly the first inventor to file provisions, only became effective 18 months after its enactment. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.

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Even if valid and enforceable patents cover ADASUVE, our product candidates and our technologies, the patents will provide protection only for a limited amount of time.

The Teva Agreement provides Teva with the first right to enforce certain of the Alexza patents listed in the FDA Orange Book as well as product-specific patents related to ADASUVE that may be identified and prosecuted during the term of the Teva Agreement. While Teva may not settle any such enforcement action without our consent, there can be no assurance that Teva would enforce the ADASUVE patents in the same manner or with the same strategy as we might if we maintained the sole right to control litigation against potential third-party infringers. Our current patents or any future patents that may be issued regarding ADASUVE or our product candidates or methods of using them, can be challenged by our competitors who can argue that our patents are invalid and/or unenforceable. Third parties may challenge our rights to, or the scope or validity of, our patents. Patents also may not protect ADASUVE or our product candidates if competitors devise ways of making these or similar product candidates without legally infringing our patents. The FDCA and the FDA regulations and policies provide incentives to manufacturers to challenge patent validity or create modified, non-infringing versions of a drug or device in order to facilitate the approval of generic substitutes. These same types of incentives encourage manufacturers to submit new drug applications that rely on literature and clinical data not prepared for or by the drug sponsor.

Our potential strategic collaborators’ ability to obtain patents is uncertain because, to date, some legal principles remain unresolved, there has not been a consistent policy regarding the breadth or interpretation of claims allowed in patents in the United States, and the specific content of patents and patent applications that are necessary to support and interpret patent claims is highly uncertain due to the complex nature of the relevant legal, scientific and factual issues. Furthermore, the policies governing pharmaceutical and medical device patents outside the United States may be even more uncertain. Changes in either patent laws or interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection.

We also rely on trade secrets to protect our technology, especially where we do not believe that patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. The employees, consultants, contractors, outside scientific collaborators and other advisors of our company and our strategic collaborators may unintentionally or willfully disclose our confidential information to competitors. Enforcing a claim that a third party illegally obtained and is using our trade secrets is expensive and time consuming and the outcome is unpredictable. Failure to protect or maintain trade secret protection could adversely affect our competitive business position.

Our research and development collaborators may have rights to publish data and other information in which we have rights. In addition, we sometimes engage individuals or entities to conduct research that may be relevant to our business. The ability of these individuals or entities to publish or otherwise publicly disclose data and other information generated during the course of their research is subject to certain contractual limitations. These contractual provisions may be insufficient or inadequate to protect our trade secrets and may impair our patent rights. If we do not apply for patent protection prior to such publication or if we cannot otherwise maintain the confidentiality of our technology and other confidential information, then our ability to receive patent protection or protect our proprietary information may be jeopardized.

Litigation or other proceedings or third-party claims of intellectual property infringement could require us to spend time and money and could shut down some of our operations.

Our commercial success depends in part on not infringing patents and proprietary rights of third parties. Others have filed, and in the future are likely to file, patent applications covering products that are similar to ADASUVE or our product candidates, as well as methods of making or using similar or identical products. We are aware of certain pending U.S. patent applications related generally to a systemic respiratory delivery of loxapine. If these patent applications result in issued patents and we wish to use the claimed technology, we would need to obtain a license from the third party. We may not be able to obtain these licenses at a reasonable cost, if at all.

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In addition, administrative proceedings, such as interferences and reexaminations before the U.S. Patent and Trademark Office, could limit the scope of our patent rights. We may incur substantial costs and diversion of management and technical personnel as a result of our involvement in such proceedings. In particular, our patents and patent applications may be subject to interferences in which the priority of invention may be awarded to a third party. We do not know whether our patents and patent applications would be entitled to priority over patents or patent applications held by such a third party. Our issued patents may also be subject to reexamination proceedings. We do not know whether our patents would survive reexamination in light of new questions of patentability that may be raised following their issuance.

Third parties may assert that we are employing their proprietary technology or their proprietary products without authorization. In addition, third parties may already have or may obtain patents in the future and claim that use of our technologies or our products infringes these patents. We could incur substantial costs and diversion of management and technical personnel in defending against any of these claims. Furthermore, parties making claims against us may be able to obtain injunctive or other equitable relief, which could effectively block our ability to further develop, commercialize and sell any future products and could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties. We may not be able to obtain these licenses at a reasonable cost, if at all. In that event, we could encounter delays in product introductions while we attempt to develop alternative methods or products. In the event we cannot develop alternative methods or products, we may be effectively blocked from developing, commercializing or selling any future products. Defense of any lawsuit or failure to obtain any of these licenses would be expensive and could prevent us from commercializing any future products.

We review from time to time publicly available information concerning the technological development efforts of other companies in our industry. If we determine that these efforts violate our intellectual property or other rights, we intend to take appropriate action, which could include litigation. Any action we take could result in substantial costs and diversion of management and technical personnel in enforcing our patents or other intellectual property rights against others. Furthermore, the outcome of any action we take to protect our rights may not be resolved in our favor.

Competition in the pharmaceutical industry is intense. If our competitors are able to develop and market products that are more effective, safer or less costly than ADASUVE or any future products that we may develop, our commercial opportunity will be reduced or eliminated.

We face competition from established as well as emerging pharmaceutical and biotechnology companies, academic institutions, government agencies and private and public research institutions. Our commercial opportunity will be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer side effects or are less expensive than ADASUVE or any future products that we may develop and commercialize. In addition, significant delays in the development or commercialization of ADASUVE or our product candidates could allow our competitors to bring products to market before us and impair our ability to commercialize ADASUVE or our product candidates.

We anticipate that ADASUVE will compete with various injectable formulations of other antipsychotic and benzodiazepine drugs and oral, orally-disintegrating tablet and liquid formulations of other antipsychotic drugs and benzodiazepine drugs. Only the injectable antipsychotics are approved for the treatment of agitation.

We anticipate that, if approved, AZ-002 would compete with the oral tablet forms of alprazolam and possibly IV, oral and rectal forms of other benzodiazepines.

We anticipate that, if approved, AZ-007 would compete with non-benzodiazepine GABA-A receptor agonists, selective melatonin receptor agonists, orexin receptor antagonists or histamine (H1) receptor antagonists that are approved or in development. We are aware of more than 13 approved generic versions of zolpidem, or zaleplon, oral tablets, including one version of zolpidem intended to treat middle of the night awakening, that has been approved by the FDA. Additionally, we are aware of one product that completed Phase 2 development for the treatment of insomnia.

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Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Established pharmaceutical companies may invest heavily to discover quickly and develop novel compounds or drug delivery technology that could make ADASUVE or our product candidates obsolete. Smaller or early stage companies may also prove to be significant competitors, particularly through strategic collaborations with large and established companies. In addition, these third parties compete with us in recruiting and retaining qualified scientific, sales, marketing, and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies and technology licenses complementary to our programs or advantageous to our business. Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA or equivalent other country regulatory authorities’ approval or discovering, developing and commercializing products before we do. If we are not able to compete effectively against our current and future competitors, our business will not grow and our financial condition will suffer.

If we lose our key personnel or are unable to attract and retain additional personnel, we may be unable to develop or commercialize ADASUVE or our product candidates.

We are highly dependent on our President and Chief Executive Officer, Thomas B. King, the loss of whose services might adversely impact the achievement of our objectives. In addition, recruiting and retaining qualified clinical, scientific and engineering personnel to manage clinical trials of our product candidates and to perform future research and development work will be critical to our success. There is currently a shortage of skilled executives in our industry, which is likely to continue. As a result, competition for skilled personnel is intense and the turnover rate can be high. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced management and clinical, scientific and engineering personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. In addition, we do not have employment agreements with any of our employees, and they could leave our employment at will. We have change of control agreements with our executive officers and vice presidents that provide for certain benefits upon termination or a change in role or responsibility in connection with a change of control of our company. We do not maintain life insurance policies on any employees. Failure to attract and retain personnel would prevent us from developing and commercializing ADASUVE and our product candidates.

If plaintiffs bring product liability claims or lawsuits (including, but not limited to, consumer protection, mass tort or class actions) against us or our collaborators, we may incur substantial liabilities and may be required to limit commercialization of ADASUVE or product candidates that we may develop.

As the supplier of ADASUVE to Teva and Ferrer, we are obligated to deliver commercial supply from a qualified manufacturing facility in accordance with certain specifications. In addition, we are obligated to supply ADASUVE free from product defects or manufacturing defects from our manufacture of ADASUVE. The development, manufacture, testing, marketing and sale of combination pharmaceutical and medical device products, like ADASUVE, entail significant risk of product liability claims, lawsuits (including, but not limited to consumer protection, mass tort or class actions), safety alerts or recalls. We may be held liable if any product we develop or manufacture causes injury or is found otherwise unsuitable or unsafe during product design testing, manufacturing, marketing or sale, including, but not limited to quality issues, component failures, manufacturing flaws, unanticipated or improper uses of ADASUVE or any future products, design defects, inadequate disclosure of product-related risks or product-related information, or for unlawful, unfair or fraudulent competition or business practices relating to such products. Side effects of, or design or manufacturing defects in, the products tested or commercialized by us or any collaborator could result in exacerbation of a clinical trial participant or patient’s condition, serious injury or impairment, even death and/or out-of-pocket expenditures. This could result in product liability claims, lawsuits, safety alerts and/or recalls for ADASUVE or any future products, including those in clinical testing, to be commercialized, or already commercialized. Product liability claims or lawsuits may be brought by individuals seeking relief for themselves, by persons seeking to represent a class of claimants/plaintiffs, or by a large number of individual claimants in a coordinated or mass tort litigation or class action. We cannot predict the frequency, outcome, or cost to defend or resolve such product liability claims or lawsuits.

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While we have not had to defend against any product liability claims or other lawsuits to date, we face greater risk of product liability claims or lawsuits as we or any collaborator commercialize ADASUVE or other future products. As ADASUVE or any future product is more widely prescribed, we believe it is likely that product liability claims or lawsuits will eventually be brought against us. Regardless of merit or eventual outcome, such claims or lawsuits may result in decreased demand for any products or product candidates that we may develop, injury to our reputation, withdrawal of clinical trials, issuance of safety alerts, recall of products under investigation or already commercialized, costs and legal fees to defend and resolve litigation, injunctive relief, disgorgement of profits, or substantial monetary awards to clinical trial participants or patients, loss of revenue, and the inability to commercialize any products we develop. Safety alerts or recalls could result in the FDA or similar government agencies in the United States, or abroad, investigating or bringing enforcement actions regarding any products and/or practices, with resulting significant costs and negative publicity, all of which could materially adversely affect us.

Product liability insurance is expensive, can be difficult to obtain and may not be available in the future on acceptable terms, if at all. We currently have product liability insurance that covers commercial product and clinical trials. Partly as a result of product liability lawsuits related to pharmaceutical and medical device products, product liability and other types of insurance have become more difficult and costly for pharmaceutical and medical device companies to obtain. Insurance may be prohibitively expensive, or may not fully cover our potential liabilities. Inability to maintain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims or lawsuits could impede or negatively affect the commercialization of ADASUVE or our product candidates. If we are sued for any injury caused by any product, our liability could exceed our insurance coverage and total assets. In addition, there is no guarantee that insurers will pay for defense and indemnity of claims or lawsuits or that coverage will be adequate or otherwise available.

A successful claim or lawsuit brought against us in excess of available insurance coverage could subject us to significant liabilities and could have a materially adverse effect on our business, financial condition, results of operations and growth prospects. Such claims could also harm our reputation and the reputation of ADASUVE or any future products, adversely affecting our ability to develop and market any products successfully. In addition, defending a product liability claim or lawsuit is expensive and can divert the attention of key employees from operating our business.

Product recalls and safety alerts may be issued at our discretion or at the discretion of our suppliers, collaborators, government agencies, and other entities that have regulatory authority for medical device and pharmaceutical sales. Any recall of ADASUVE could materially adversely affect our business by rendering us unable to sell ADASUVE for some time, causing us to incur significant recall costs and by adversely affecting our reputation. A recall could also result in product liability claims.

Our product candidate AZ-002 contains a drug substance that is regulated by the U.S. Drug Enforcement Administration. Failure to comply with applicable regulations and requirements could harm our business.

The Controlled Substances Act imposes various registration, recordkeeping and reporting requirements, procurement and manufacturing quotas, labeling and packaging requirements, security controls and a restriction on prescription refills on certain pharmaceutical products. The DEA regulates drug substances as Schedule I, II, III, IV or V substances, with Schedule I substances considered to present the highest potential for abuse and Schedule V substances the lowest potential for abuse relative to the other schedules in the CSA. Alprazolam, the API in AZ-002, is regulated as a Schedule IV substance and zaleplon, the API in AZ-007, is regulated as a Schedule IV substance. AZ-002 and AZ-007 are subject to DEA regulations relating to registration, security, record keeping and reporting, distribution and, if approved, physician prescription procedures, and DEA regulations may impact the availability of the scheduled substance available for clinical trials and commercial distribution. The DEA periodically inspects facilities for compliance with its rules and regulations. Failure to comply with current and future regulations of the DEA could lead to a variety of sanctions, including revocation, or denial of renewal, of DEA registrations, injunctions, or civil or criminal penalties and could harm our business, financial condition and results of operations.

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The single dose version of our Staccato system contains materials that are regulated by the U.S. government, and failure to comply with applicable regulations could harm our business.

The single dose version of our Staccato system uses energetic materials to generate the rapid heating necessary for vaporizing the drug, while avoiding degradation. Manufacture of products containing energetic materials is controlled by the Bureau of Alcohol, Tobacco, Firearms and Explosives, or ATF. Technically, the energetic materials used in our Staccato system are classified as “low explosives,” and the ATF has granted us a license/permit for the manufacture of such low explosives. Additionally, due to inclusion of the energetic materials in our Staccato system, the United States Department of Transportation, or DOT, might regulate shipments of the single dose version of our Staccato system. However, the DOT has granted the single dose version of our Staccato system “Not Regulated as an Explosive” status. Failure to comply with the current and future regulations of the ATF or DOT could subject us to future liabilities and could harm our business, financial condition and results of operations. Furthermore, these regulations could restrict our ability to expand our facilities or construct new facilities or could require us to incur other significant expenses in order to maintain compliance.

We use hazardous chemicals and highly combustible materials in our business. Any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly.

Our research and development processes involve the controlled use of hazardous materials, including chemicals. We also use energetic materials in the manufacture of the chemical heat packages that are used in our single dose devices. Our operations produce hazardous waste. We cannot eliminate the risk of accidental contamination or discharge or injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use of these materials and our liability may exceed our total assets. Compliance with environmental and other laws and regulations may be expensive, and current or future regulations may impair our research, development or production efforts.

Certain of our suppliers are working with these types of hazardous and energetic materials in connection with our component manufacturing agreements. In the event of a lawsuit or investigation, we could be held responsible for any injury caused to persons or property by exposure to, or release of, these hazardous and energetic materials. Further, under certain circumstances, we have agreed to indemnify our suppliers against damages and other liabilities arising out of development activities or products produced in connection with these agreements.

We identified a material weakness in our internal control over financial reporting, and our business and stock price may be adversely affected if we do not adequately address this weakness or if we have other material weaknesses or significant deficiencies in our internal control over financial reporting.

As described in our Management’s Annual Report on Internal Control Over Financial Reporting at Item 9A of this Annual Report on Form 10-K, we identified a material weakness in our internal control over financial reporting as of December 31, 2014. The existence of this or one or more other material weaknesses or significant deficiencies could result in errors in our financial statements, and substantial costs and resources may be required to rectify any internal control deficiencies. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our stock could decline significantly, we may be unable to obtain additional financing to operate and expand our business, and our business and financial condition could be harmed.

We will need to implement additional systems, procedures and controls in the future as we grow and to satisfy new reporting requirements as a commercial entity.

Numerous laws and regulations affect commercial companies, including, but not limited to, the Federal Anti-Kickback, False Claims Act, the Federal Physician Payment Sunshine Act, the U.S. Foreign Corrupt

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Practices Act and the U.K. Bribery Act of 2010. The rules make it more difficult and costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage as compared to the policies generally available to public companies. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees or as executive officers.

Compliance with the Federal Anti-Kickback, False Claims Act, the Federal Physician Payment Sunshine Act, the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010 and other regulations will continue to increase our costs and require additional management resources. As we grow, we will need to continue to implement additional reporting systems, procedures and controls to satisfy new reporting requirements. We currently do not have an internal audit group. In addition, we may need to hire additional legal and accounting staff with appropriate experience and technical knowledge, and we cannot assure you that if additional staffing is necessary that we will be able to do so in a timely fashion.

Our business is subject to complex corporate governance, public disclosure and accounting requirements that could adversely affect our business and financial results.

We are subject to changing rules and regulations of federal and state governments, the SEC, and the NASDAQ Capital Market. These entities have issued a significant number of new and increasingly complex requirements and regulations over the course of the last several years and continue to develop additional regulations and requirements. On July 21, 2010, the Dodd-Frank Wall Street Reform and Protection Act, or the Dodd-Frank Act, was enacted. The Dodd-Frank Act contains significant corporate governance and executive compensation-related provisions, some of which the SEC, has implemented by adopting additional rules and regulations in areas such as the compensation of executives, referred to as “say-on-pay.” We cannot assure you that we are or will be in compliance with all potentially applicable regulations. If we fail to comply with the Sarbanes Oxley Act of 2002, the Dodd-Frank Act and associated SEC rules, or any other regulations or if our interpretations of these rules and regulations differ from the regulating bodies, we could be subject to a range of consequences, including restrictions on our ability to sell equity securities or otherwise raise capital funds, the de-listing of our common stock from the NASDAQ Capital Market, suspension or termination of our clinical trials, restrictions on future products or our manufacturing processes, significant fines, or other sanctions or litigation. Any of such consequences could have a material adverse effect on our business, results of operations and the price of our common stock. Our efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses and a diversion of management’s time from other business activities.

Our facility is located near known earthquake fault zones, and the occurrence of an earthquake or other catastrophic disaster could damage our facility and equipment, which could cause us to curtail or cease operations.

Our facility, which is the location where the final manufacturing of our product occurs, is located in the San Francisco Bay Area near known earthquake fault zones and, therefore, is vulnerable to damage from earthquakes. We are also vulnerable to damage from other types of disasters, such as power loss, fire, floods and similar events. If any disaster were to occur, our ability to operate our business could be seriously impaired. We currently may not have adequate insurance to cover our losses resulting from disasters or other similar significant business interruptions, and we do not plan to purchase additional insurance to cover such losses due to the cost of obtaining such coverage. Any significant losses that are not recoverable under our insurance policies could seriously impair our business, financial condition and results of operations.

Significant disruptions of information technology systems or breaches of data security could adversely affect our business.

We are increasingly dependent on information technology systems and infrastructure, including mobile technologies, to operate our business. In the ordinary course of our business, we collect, store and transmit large amounts of confidential information, including intellectual property, proprietary business information and

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personal information. It is critical that we do so in a secure manner to maintain the confidentiality and integrity of such confidential information. We have also outsourced elements of our information technology infrastructure, and as a result we manage a number of third party vendors who may or could have access to our confidential information. The size and complexity of our information technology systems, and those of third-party vendors with whom we contract, make such systems potentially vulnerable to breakdown, malicious intrusion, security breaches and other cyber attacks. In addition, the prevalent use of mobile devices that access confidential information increases the risk of data security breaches, which could lead to the loss of confidential information, trade secrets or other intellectual property. While we have implemented security measures to protect our data security and information technology systems, such measures may not prevent the adverse effect of such events. Significant disruptions of our information technology systems or breaches of data security could adversely affect our business. Such disruptions could also result in government investigations, fines, or penalties, and/or lawsuits directly or indirectly related to breach of data security, also adversely affecting our business.

EU Member States and other jurisdictions have adopted data protection laws and regulations which impose significant compliance obligations. For example, the EU Data Protection Directive, as implemented into national laws by the EU Member States, imposes strict obligations and restrictions on the ability to collect, analyze and transfer personal data, including health data from clinical trials and adverse event reporting. Furthermore, there is a growth towards the public disclosure of clinical trial data in the EU which adds to the complexity of processing health data from clinical trials. Such public disclosure obligations are provided in the new EU Clinical Trials Regulation, EMA disclosure initiatives, and voluntary commitments by industry. Data protection authorities from the different EU Member States may interpret the EU Data Protection Directive and national laws differently, which adds to the complexity of processing personal data in the EU. Moreover, guidance on implementation and compliance practices are often updated or otherwise revised. Failing to comply with these laws could lead to government enforcement actions and significant penalties against us, and adversely impact our operating results. The EU Data Protection Directive prohibits the transfer of personal data to countries outside of the European Economic Area, or EEA that are not considered by the European Commission to provide an adequate level of data protection. This includes the United States. A proposal for an EU Data Protection Regulation, intended to replace the current EU Data Protection Directive, is currently under consideration and, if adopted, could lead to additional and stricter requirements and penalties in the event of non-compliance.

Regulations related to conflict minerals could adversely impact our business.

The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of tin, tantalum, tungsten and gold, known as conflict minerals, originating from the Democratic Republic of Congo, or the DRC, and adjoining countries. As a result, in August 2012 the SEC adopted annual disclosure and reporting requirements for public companies that use conflict minerals mined from the DRC and adjoining countries in their products. We have determined that we use at least one of these conflict minerals in the manufacture of ADASUVE and our other product candidates, although we have not yet determined the source of the conflict minerals that we use. These new disclosure requirements require us to use diligent efforts to determine which conflict minerals we use and the source of those conflict minerals, and disclose the results of our findings. There are and will be costs associated with complying with these disclosure requirements, including those costs incurred in conducting diligent efforts to determine which conflict minerals we use and the sources of conflict minerals used in ADASUVE and our other product candidates. Further, the implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in ADASUVE and our other product candidates. As there may be only a limited number of suppliers offering conflict free conflict minerals, and we cannot be sure that we will be able to obtain necessary conflict free conflict minerals in sufficient quantities or at competitive prices. In addition, we may face reputational challenges if we determine that ADASUVE and our other product candidates contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in ADASUVE and our other product candidates through the procedures we may implement. If we determine to redesign ADASUVE and our other product candidates to not use conflict minerals, we would incur costs associated with doing so.

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Risks Relating to Owning Our Common Stock

Our stock price has been and may continue to be extremely volatile.

Our common stock price has experienced large fluctuations. In addition, the trading prices of life science and biotechnology company stocks in general have experienced extreme price fluctuations in recent years. The valuations of many life science companies without consistent product revenues and earnings are extraordinarily high based on conventional valuation standards, such as price to revenue ratios. These trading prices and valuations may not be sustained. Any negative change in the public’s perception of the prospects of life science or biotechnology companies could depress our stock price regardless of our results of operations. Other broad market and industry factors may decrease the trading price of our common stock, regardless of our performance. Market fluctuations, as well as general political and economic conditions such as terrorism, military conflict, recession or interest rate or currency rate fluctuations, also may decrease the trading price of our common stock. In addition, our stock price could be subject to wide fluctuations in response to various factors, including:

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the success of the commercial launches of ADASUVE in the United States and the Ferrer Territories;

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our and our collaborators’ ability to complete and implement our post-approval commitments for ADASUVE;

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the process and outcome of our post-approval commitments for ADASUVE;

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our ability to manufacture ADASUVE at a cost effective price;

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actual or anticipated regulatory approvals or non-approvals of our product candidates or competing products;

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actual or anticipated cash depletion of our financial resources;

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actual or anticipated results and timing of our clinical trials;

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changes in laws or regulations applicable to ADASUVE or our product candidates;

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changes in the expected or actual timing of our development programs such as for AZ-002, including delays or cancellations of clinical trials for our product candidates;

•

period to period fluctuations in our operating results;

•

announcements of new technological innovations or new products by us or our competitors;

•

changes in financial estimates or recommendations by securities analysts;

•

conditions or trends in the life science and biotechnology industries;

•

changes in the market valuations of other life science or biotechnology companies;

•

developments in domestic and international governmental policy or regulations;

•

announcements by us or our competitors of significant acquisitions, strategic collaborations, joint ventures or capital commitments;

•

additions or departures of key personnel;

•

difficulty, or increased costs, associated with replacing Autoliv as the supplier of chemical heat packages for ADASUVE and other product candidates;

•

disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

•

sales of our common stock (or other securities) by us; and

•

sales and distributions of our common stock by our stockholders.

Index to Financial Statements

In the past, stockholders have often instituted securities class action litigation after periods of volatility in the market price of a company’s securities. If a stockholder files a securities class action suit against us, we would incur substantial legal fees, and our management’s attention and resources would be diverted from operating our business in order to respond to the litigation.

If we sell shares of our common stock in future financings, existing common stockholders will experience immediate dilution and, as a result, our stock price may go down.

We will need to source additional capital to fund our operations to develop our product candidates and to develop our manufacturing capabilities. We may obtain such financing through the sale of our equity securities from time to time. As a result, our existing common stockholders will experience immediate dilution upon any such issuance. For example, in February 2012, we issued 4,400,000 shares of our common stock and warrants to purchase up to an additional 4,400,000 shares of our common stock in an underwritten public offering; in March 2012, we issued 241,936 shares of our common stock in a private placement to Ferrer; in July 2012 we issued 80,429 shares of our common stock to Azimuth in consideration for its execution and delivery of the Purchase Agreement; in August and September 2012, we issued an aggregate of 3,489,860 shares of our common stock to Azimuth under the Purchase Agreement; in May 2013, we issued 1,437,481 shares of our common stock to Azimuth under the Purchase Agreement; and in October 2014, we issued 2,000,000 shares of our common stock in a private placement to Ferrer. If we enter into other financing transactions in which we issue equity securities in the future, our existing common stockholders will experience immediate dilution upon any such issuance.

If we fail to maintain compliance with the listing requirements of The NASDAQ Capital Market, we may be delisted and the price of our common stock and our ability to access the capital markets could be negatively impacted.

On January 31, 2012, we received a notice from The NASDAQ Stock Market indicating that our common stock had not met the $1.00 per share minimum closing bid price requirement for 30 consecutive business days and that, if we were unable to demonstrate compliance with this requirement during the applicable grace periods, our common stock would be delisted after that time. We were notified that we had regained compliance with the minimum closing bid requirement on June 27, 2012 after our one-for-ten reverse stock split. On October 27, 2014, we received a notice from The NASDAQ Stock Market indicating that the total market value of our listed securities had not met the minimum value of $50 million for any of the 30 consecutive business days prior to that date.

In February 2015, we transferred the listing of our common stock to The NASDAQ Capital Market. To maintain the listing of our common stock on The NASDAQ Capital Market, we are required to meet certain listing requirements, including, among others:

•

a minimum closing bid price of $1.00 per share, and

•

a market value of publicly held shares (excluding shares held by our executive officers, directors and 10% or more stockholders) of at least $1 million and

In addition to the above requirements, we must meet at least one of the following requirements:

•

stockholders’ equity of at least $2.5 million; or

•

a market value of listed securities of at least $35 million; or

•

net income from continuing operations of $500,000.

There can be no assurance that we will be successful in maintaining our listing of the Common Stock on The Nasdaq Capital Market. If we are not successful in maintaining our listing, it could impair the liquidity and market price of our Common Stock. In addition, the delisting of our Common Stock from a national exchange could materially adversely affect our ability to access capital markets. As of March 2, 2015, the total market value of our publicly held shares of our common stock (excluding shares held by our executive officers, directors, affiliates and 10% or more stockholders) was $34.6 million, the total market value of our listed securities was $39.8 million and the closing bid price of our common stock was $2.05 per share. As of December 31, 2014, we had a stockholders’ deficit of $49.7 million.

Index to Financial Statements

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

We lease a building with 64,104 square feet of manufacturing, office, and laboratory facilities in Mountain View, California, which we began to occupy in the fourth quarter of 2007. The lease expires on March 31, 2018, and we have two options to extend the lease for five years each.

Item 3.

Legal Proceedings

None.

Item 4.

Mine Safety Disclosures

None.

Index to Financial Statements

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Item 5A.

Quarterly Stock Price Information and Registered Stockholders

Our common stock trades on The NASDAQ Capital Market under the symbol “ALXA.” For the fiscal year ended December 31, 2014, our common stock was traded on The NASDAQ Global Market under the symbol “ALXA.” The following table sets forth, for the periods indicated, the high and low sales prices of our common stock.


2014	High		Low
First Quarter	$	5.93	$	4.20
Second Quarter		4.65		3.92
Third Quarter		5.27		2.28
Fourth Quarter		2.96		1.25

2013	High		Low
First Quarter	$	5.15	$	4.03
Second Quarter		6.65		4.15
Third Quarter		5.52		4.16
Fourth Quarter		5.35		4.12

As of December 31, 2014, there were 98 holders of record of our common stock. We have not paid cash dividends on our common stock since our inception, and we do not anticipate paying any in the foreseeable future.

Recent Sales of Unregistered Securities

None

Index to Financial Statements

Performance Graph

The following graph compares the cumulative 5-year total return provided to stockholders of Alexza Pharmaceuticals, Inc.’s common stock relative to the cumulative total returns of the NASDAQ Composite index and the NASDAQ Biotechnology index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes on December 31, 2009 and its relative performance is tracked through December 31, 2014.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN^*

Among Alexza Pharmaceuticals, Inc., the NASDAQ Composite Index,

and the NASDAQ Biotechnology Index

LOGO

*	$100 invested on 12/31/08 in stock or index, including reinvestment of dividends.

Fiscal year ending December 31.

12/09

12/10

12/11

12/12

12/13

12/14

Alexza Pharmaceuticals, Inc.

100.00

52.08

34.58

20.63

19.71

6.21

NASDAQ Composite

100.00

117.61

118.70

139.00

196.83

223.74

NASDAQ Biotechnology

100.00

106.73

122.40

166.72

286.55

379.71

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

Item 5B.

Use of Proceeds from the Sale of Registered Securities

None.

Item 5C.

Treasury Stock

None.

Index to Financial Statements

Item 6.

Selected Financial Data


	Year Ended December 31,
	2014			2013			2012			2011			2010
	(In thousands, except per share data)
Consolidated Statement of Comprehensive Loss Data:
Revenue
Collaboration revenue	$	2,997		$	46,965		$	4,070		$	5,660		$	42,876
Product sales		2,564			874			—			—			—

Total revenue		5,561			47,839			4,070			5,660			42,876
Operating expenses:
Cost of goods sold		15,925			11,209			—			—			—
Research and development		13,748			19,082			21,849			28,262			33,528
General and administrative		13,344			15,778			11,093			11,766			14,000

Total operating expenses		43,017			46,069			32,942			40,028			47,528
Loss from operations		(37,456	)		1,770			(28,872	)		(34,368	)		(4,652	)
Change in fair value of contingent consideration liability		8,149			(39,913	)		1,900			(4,000	)		4,838
Interest income/(expense) and other income/(expense), net		(7,425	)		(1,472	)		(1,006	)		(2,163	)		(1,667	)

Net loss	$	(36,732	)	$	(39,615	)	$	(27,978	)	$	(40,531	)	$	(1,481	)

Other Comprehensive Loss
Change in unrealized income (loss) on marketable securities		(4	)		1			—			(2	)		3

Comprehensive loss	$	(36,736	)	$	(39,614	)	$	(27,978	)	$	(40,533	)	$	(1,478	)

Basic and diluted net loss per share attributable to Alexza common stockholders	$	(2.07	)	$	(2.38	)	$	(2.24	)	$	(5.97	)	$	(0.27	)

Shares used to compute basic and diluted net loss per share attributable to Alexza common stockholders		17,784			16,669			12,472			6,787			5,542


	December 31,
	2014			2013			2012			2011			2010
	(In thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities	$	34,774		$	25,884		$	17,715		$	16,903		$	41,449
Working capital (deficit)		30,268			16,015			4,900			(7,396	)		8,031
Total assets		61,560			47,072			40,551			48,605			68,482
Noncurrent portion of financing obligations		63,767			10,744			—			—			—
Accumulated deficit		(410,960	)		(374,228	)		(334,613	)		(306,635	)		(266,104	)

Index to Financial Statements

Item 7.

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that are based upon current expectations. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential” or “continue” or the negative of these terms or other comparable terminology. Forward-looking statements involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Overview

ADASUVE has been developed for the treatment of agitation associated with schizophrenia or bipolar disorder and has been approved for marketing in the United States by the U.S. Food and Drug Administration, or FDA, in the European Union, or EU, by the European Commission, or EC, and in several countries in Latin America. In the United States and the EU and Latin America, ADASUVE is approved for similar indications. It is approved with a different number of dose strengths and has different risk mitigation and management plans in the United States and the EU and Latin America. ADASUVE is our only approved product.

We have two product candidates in active development. AZ-002 (Staccato alprazolam) is being developed for the management of patients with acute repetitive seizures, sometimes called cluster seizures, or ARS. A Phase 2a proof-of-concept study for AZ-002 in patients with epilepsy was initiated in January 2015. AZ-007 (Staccato zaleplon) is being developed for the treatment of insomnia in patients who have difficulty falling asleep, including patients who awake in the middle of the night and have difficulty falling back asleep. We expect to initiate a clinical study for AZ-007 in 2015.

Index to Financial Statements

AGITATION — ADASUVE (Staccato loxapine)

Commercialization Strategy Overview

In February 2013, the European Commission, or the EC, granted marketing authorization for ADASUVE in the EU. ADASUVE, 4.5 mg and 9.1 mg inhalation powder loxapine, pre-dispensed, is authorized in the EU for the rapid control of mild-to-moderate agitation in adult patients with schizophrenia or bipolar disorder. The ADASUVE marketing authorization requires that patients receive regular treatment immediately after control of acute agitation symptoms, and that ADASUVE is administered only in a hospital setting under the supervision of a healthcare professional. The ADASUVE marketing authorization also states that a short- acting beta-agonist bronchodilator treatment should be available for treatment of possible severe respiratory side-effects, such as bronchospasm. The EC granted the marketing authorization for ADASUVE on the basis of the positive opinion issued by the European Medicines Agency, or EMA, in December 2012 and is valid in all 28 EU Member States, plus Iceland, Liechtenstein and Norway. Beginning in August 2014, Ferrer began to receive individual country approvals in Latin America. As of March 1, 2015, Ferrer has received seven individual Latin American country approvals, including, Chile, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras and Paraguay.

We have primary responsibility for certain post-approval requirements outlined in the marketing authorisation for ADASUVE. Two of the five requirements have been completed and the data submitted to the European Medicines Agency, or the EMA. Work on the three additional requirements is ongoing.


	2013		2014		Total
EU		27,638		21,209		48,847
US		9,307		74,097		83,404

Total		36,945		95,306		132,251

Index to Financial Statements

Financing update

In May 2013, we entered into a License and Supply Agreement with Teva, or the Teva Agreement. Concurrent with entering into the Teva Agreement, we entered into the Teva Note. Under the terms of the Teva Note, we may, upon written notice to Teva, draw upon the Teva Note to fund agreed operating budgets related to ADASUVE. The aggregate draw-downs may total up to $25.0 million and will be due and payable on the fifth anniversary of the signing of the Teva Note. We may prepay, from time to time, up to one-half of the total amounts advanced plus the related interest outstanding at any time prior to the maturity date. At the maturity date, Teva will have the right to convert the then outstanding amounts into shares of Alexza common stock at a conversion price of $4.4833 per share. The Teva Note bears simple interest of 4% per year. The effective interest rate of the Teva Note, which takes into consideration the beneficial conversion feature and the right-to-borrow discounts, is 13.9%. We have two years from the effective date of the Teva Note to receive advances. In 2013, we drew $15.0 million against the Teva Note and in 2014 we drew the remaining $10 million against the Teva Note, $5 million in March 2014 and June 2014.

In March 2014, we completed a royalty securitization financing, which consisted of a private placement to qualified institutional buyers and accredited institutional investors of $45.0 million of non-recourse notes issued by our wholly-owned subsidiary, or the Notes, and warrants to purchase 345,661 shares of our common stock at a price of $0.01 per share exercisable for five years from the date of issuance. The Notes bear interest at 12.25% per annum payable quarterly beginning June 15, 2014. All royalty and milestone payments received under the Teva Agreement, after paying interest, administrative fees, and any applicable taxes, will be applied to principal and interest payments on the Notes until the Notes have been paid in full. From the proceeds of the transaction, we established a $6.9 million interest reserve account to cover potential shortfall in interest payments. Any remaining amounts in the interest reserve account will be released to us commencing June 15, 2015, subject to meeting certain net sales targets for ADASUVE, or, if not previously released, on or after December 15, 2015, irrespective of ADASUVE net sales. All other payments of principal and interest on the Notes will be made from royalty revenues from sales in the U.S. of ADASUVE, as well as potential U.S. commercialization and regulatory milestone payments due to Alexza. The Notes are secured by the right to receive royalty and milestone payments under the Teva Agreement and our equity ownership in the wholly-owned subsidiary. The Notes have no other recourse to us. The Notes may not be redeemed at our option until after March 18, 2016, and may be redeemed after that date subject to the achievement of certain milestones and the payment of a redemption premium for any redemption occurring prior to March 19, 2019. The Notes are not convertible into Alexza equity, nor have we guaranteed them. After fees and expenses, the net proceeds to us were approximately $41 million before the establishment of the interest reserve account.

In October 2014, we entered into an amendment of the Ferrer Agreement and entered into a stock purchase agreement with Ferrer. Pursuant to the amendment and the stock purchase agreement, Ferrer purchased 2,000,000 shares of our common stock for $4.00 per share, in exchange for the elimination of certain future potential milestone payments under the Ferrer Agreement. We paid the former shareholders of Symphony Allegro $865,000 related to this this stock sale.

Critical Accounting Estimates and Judgments

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect

Index to Financial Statements

the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments related to development costs. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making assumptions about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 3 of the notes to consolidated financial statements, we believe the following accounting policies are critical to the process of making significant estimates and judgments in preparation of our financial statements.

Revenue Recognition

We recognize revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the fee is fixed or determinable; and (iv) collectability is reasonably assured. Prior to the second quarter of 2013, our revenue consisted primarily of amounts earned from collaboration agreements and under research grants with the National Institutes of Health. Beginning in the second quarter of 2013, we also have revenue from product sales and beginning in the first quarter of 2014, we also have royalty revenues.

For collaboration agreements, revenues for non-refundable upfront license fee payments, where we continue to have performance obligations, are recognized as performance occurs and obligations are completed. Revenues for non-refundable upfront license fee payments where we do not have significant future performance obligations are recognized when the agreement is signed and the payments are due.

For multiple element arrangements, such as collaboration agreements in which a collaborator may purchase several deliverables, we account for each deliverable as a separate unit of accounting if both of the following criteria are met: (i) the delivered item or items have value to the customer on a standalone basis; and (ii) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. We evaluate how the consideration should be allocated among the units of accounting and allocate revenue to each non-contingent element based upon the relative selling price of each element. We determine the relative selling price for each deliverable using (i) vendor-specific objective evidence, or VSOE, of selling price if it exists; (ii) third-party evidence, or TPE, of selling price if it exists; or (iii) our best estimated selling price for that deliverable if neither VSOE nor TPE of selling price exists for that deliverable. We then recognize the revenue allocated to each element when the four basic revenue criteria described above are met for each element.

For milestone payments received in connection with our collaboration agreements, we have elected to adopt the milestone method of accounting under Financial Accounting Standards Board Accounting Standards Codification 605-28, Milestone Method. Under the milestone method, revenues for payments which meet the definition of a milestone will be recognized as the respective milestones are achieved.

We recognize product revenue as follows:

•

Persuasive Evidence of an Arrangement. We currently sell product through license and supply agreements with our collaborators, Ferrer and Teva. Persuasive evidence of an arrangement is generally determined by the receipt of an approved purchase order from the collaborator in connection with the terms of the license and supply agreements.

•

Index to Financial Statements

accepted the product. Once we have demonstrated over the course of time an ability to reliably produce the product to collaborator specifications, we will consider delivery to have occurred upon shipment in the absence of any other relevant shipment or acceptance terms.

•

Sales Price Fixed or Determinable. Sales prices for product shipments are determined by the license and supply agreements and documented in the purchase orders. After the collaborator acceptance period has ended or the collaborator has positively accepted the product, our collaborators do not have any product return or replacement rights, including for expired products.

•

Collectability. Payment for the product is contractually obligated under the license and supply agreements. We will monitor payment histories for our collaborators and specific issues as they arise to determine whether collection is probable for a specific transaction and defer revenue as necessary.

Royalty revenue from our collaboration agreements will be recognized as we receive information from our collaborators regarding product sales.

Significant management judgment is used in the determination of revenue to be recognized and the period in which it is recognized.

Inventory

Inventory is stated at standard cost, which approximates actual cost, determined on a first-in first-out basis, not in excess of market value. Inventory includes the direct costs incurred to manufacture products combined with allocated manufacturing overhead, which consists of indirect costs, including labor and facility overhead. We are in the early stages of commercialization and have incurred significantly higher than normal indirect costs in the production of our inventory due to start-up manufacturing costs and low production volumes and expect to continue to incur higher than normal indirect costs until we get closer to our normal manufacturing capacity. The carrying cost of inventory is reduced so as to not be in excess of market value of the inventory as determined by the contractual transfer prices to Ferrer and Teva. The excess over the market value is written off to cost of goods sold. All material purchases and costs associated with the manufacturing process incurred prior to the approval of ADASUVE in December 2012 were expensed as a component of research and development expense.

Preclinical Study and Clinical Trial Accruals

We estimate our preclinical study and clinical trial expenses based on our estimates of the services received pursuant to contracts with multiple research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on our behalf. The financial terms of these agreements vary from contract to contract and may result in uneven payment flows. Preclinical study and clinical trial expenses include the following:

•

fees paid to contract research organizations in connection with preclinical studies;

•

fees paid to contract research organizations and other clinical sites in connection with clinical trials; and

•

fees paid to contract manufacturers in connection with the production of components and drug materials for preclinical studies and clinical trials.

We record accruals for these preclinical study and clinical trial costs based upon the estimated amount of work completed. All such costs are charged to research and development expenses based on these estimates. Costs related to patient enrollment in clinical trials are accrued as patients are entered in the trial. We monitor patient enrollment levels and related activities to the extent possible through internal reviews, correspondence and discussions with research institutions and clinical research organizations. However, if we have incomplete or inaccurate information, we may underestimate or overestimate activity levels associated with various preclinical studies and clinical trials at a given point in time. In this event, we could record significant research and development expenses in future periods when the actual activity level becomes known. To date, we have not made any material adjustments to our estimates of preclinical study and clinical trial costs. We make good faith estimates which we believe to be accurate, but the actual costs and timing of clinical trials are highly uncertain, subject to risk and may change depending upon a number of factors, including our clinical development plan.

Index to Financial Statements

Share-Based Compensation

We currently use the Black-Scholes option pricing model to determine the fair value of stock options and purchase rights issued under our 2005 Employee Stock Purchase Plan. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rates and expected dividends.

The estimated fair value of restricted stock unit awards is calculated based on the market price of our common stock on the date of grant, reduced by the present value of dividends expected to be paid on our common stock prior to vesting of the restricted stock unit. Our current estimate assumes no dividends will be paid prior to the vesting of the restricted stock unit.

We estimate the expected term of options based on the historical term periods of options that have been granted but are no longer outstanding and the estimated terms of outstanding options. We estimate the volatility of our stock based on our actual historical volatility since our initial public offering. We base the risk-free interest rate that we use in the option pricing model on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option pricing model.

We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. All share-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

If factors change and we employ different assumptions for estimating share-based compensation expense in future periods or if we decide to use a different valuation model, the expenses in future periods may differ significantly from what we have recorded in the current period and could materially affect our operating loss, net loss and net loss per share.

Contingent Consideration Liability

In August 2009, we completed our purchase of all of the outstanding equity of Symphony Allegro Inc., or Allegro, and in exchange we: (i) issued to the former stockholders of Allegro 1,000,000 shares of our common stock; (ii) issued to the former stockholders of Allegro 5-year warrants to purchase 500,000 shares of our common stock with an exercise price of $22.60 per share; and (iii) will pay to the former stockholders of Allegro certain percentages of cash payments that may be generated from future collaboration transactions pertaining to ADASUVE/AZ-104 (Staccato loxapine) or AZ-002 (Staccato alprazolam).

We estimate the fair value of the liability associated with the contingent cash payments to the former stockholders of Allegro, or contingent consideration liability, on a quarterly basis using a probability-weighted discounted cash flow model. We derive multiple cash flow scenarios for each of the product candidates subject to the cash payments and apply a probability to each of the scenarios. These probability and risk adjusted weighted average cash flows are then discounted utilizing our estimated weighted average cost of capital, or WACC. Our WACC considers our cash position, competition, risk of substitute products, and risk associated with the financing of the development projects. We determined the initial discount rate to be 18% and applied this rate to the probability adjusted cash flow scenarios and, in 2013, reduced the discount rate to 16.5% to reflect our reduced WACC. During the fourth quarter of 2014, to reflect our current WACC, we increased the discount rate to 20%. The increase in our discount rate reflects the impact of our current financial condition, market capitalization and our estimated increase in borrowing costs. This change resulted in a non-operating, non-cash gain of $6.4 million in 2014.

Index to Financial Statements

We record any changes in the fair value of the contingent consideration liability in earnings in the period of the change. Certain events including, but not limited to, clinical trial results, FDA approval or non-approval of our submissions, the timing and terms of any strategic collaboration agreement, the commercial success of ADASUVE, AZ-104 or AZ-002 and the discount rate assumption could have a material impact on the fair value of the contingent consideration liability, and as a result, our results of operations and financial position.

Results of Operations

Comparison of Years Ended December 31, 2014, 2013 and 2012

Revenue

Revenue for the years ended December 31, 2014, 2013 and 2012 consisted of the following (in thousands):


	Year Ended December 31,
	2014		2013		2012
Product revenue	$	2,564	$	874	$	—
Amortization of deferred revenue		1,987		2,915		4,070
Milestone revenue		1,000		1,250		—
Royalty revenue		10		—		—
Licencing revenue		—		42,800		—

Total revenue	$	5,561	$	47,839	$	4,070

Product Revenue We began shipping commercial units and recognizing revenue on ADASUVE product shipments to Ferrer in the second quarter of 2013 and to Teva in the fourth quarter of 2013. The increase in 2014 as compared to 2013 was primarily due to a full year of shipments to Teva in 2014.

Amortization of Deferred Revenues The amounts recognized in 2014 and 2013 represents the amortization of upfront payments received from our Collaboration, License and Supply Agreement with Ferrer, or the Ferrer Agreement. The amount recognized in 2012 includes the amortization of upfront payments from both our Ferrer Agreement and our Cypress Agreement, which terminated in December 2013. The decrease in the revenue recognized in 2014 as compared to 2013 was due to a change in the estimated period in which the obligations related to the upfront payments will be completed.

Milestone Revenue The amounts recognized in 2014 and 2013 resulted from a payments earned under the Ferrer agreement related to the first commercial sale in Spain and Germany, respectively.

Royalty Revenue Royalty revenue is earned under the Teva agreement for sales of ADASUVE in the U.S. Teva commercially launched ADASUVE in March 2014.

Licensing Revenue In 2013 we recognized licensing revenue of $42.8 million from an upfront payment and the fair value of the right-to-borrow asset upon signing of the Teva Agreement in May 2013.

In 2015, we expect royalty and product revenue to increase over 2014 levels as Teva and Ferrer continue the rollout of ADASUVE in their respective markets.

Cost of Goods Sold

Costs of goods sold include the direct costs incurred to manufacture products sold combined with allocated manufacturing overhead, which consists of indirect costs, including labor and facility overhead. We are in the early stages of commercialization and have incurred significantly higher than normal indirect costs in the production of our inventory due to manufacturing start-up costs and low production volumes and expect to continue to incur higher than normal indirect costs until we get closer to our normal manufacturing capacity.

Index to Financial Statements

The carrying cost of inventory is reduced so as to not be in excess of market value as determined by the contractual transfer prices to Ferrer and Teva. These amounts are expensed to cost of goods sold. All costs associated with the manufacturing process incurred prior to the first commercial product produced in the second quarter of 2013 were expensed as a component of research and development expense.

Cost of goods sold for 2014 and 2013 consist mainly of start-up and excess manufacturing costs during the period in addition to the cost of the units shipped. We expect our costs of goods sold to decrease as a percentage of product sales in 2015 because we anticipate an increase in the number of units shipped to Ferrer and Teva. However, we will continue to incur high unabsorbed production costs until we achieve higher consistent production levels.

Research and Development Expenses

Research and development expenses are identified as costs directly attributable to the development of our product and product candidates or as general research. Direct costs consist of personnel costs directly associated with a candidate, preclinical study costs, clinical trial costs, related clinical drug and device development and manufacturing costs, contract services and other research expenditures. Overhead, facility costs and other support service expenses are allocated to research and development efforts based on employee time.

Research and Development expenses were $13.7 million, $19.1 million and $21.8 million for the years ended December 31, 2014, 2013 and 2012, respectively. The decrease in both 2014 and 2013 was partially a result of expenses that related to quality and manufacturing being classified as cost of goods sold or inventory beginning in the second quarter of 2013 rather than research and development expenses. The decrease in research and development expenses in 2013 as compared to 2012 was also impacted by additional expenses associated with our post-approval commitments related to the Marketing Authorization Application, or MAA, approval.

In 2015, we expect our research and development expenses to increase as we begin to incur clinical trial expenses associated with our AZ-002 and AZ-007 product candidates, continued work related to the ADASUVE MAA post-approval commitments, and the continuation of the ADASUVE adolescent pharmacokinetic/dose-ranging study, which is being conducted in collaboration with Teva.

General and Administrative Expenses.

General and administrative expenses were $13.3 million, $15.8 million and $11.1 million for the years ended December 31, 2014, 2013 and 2012, respectively. General and administrative expenses consist principally of salaries and related personnel costs, including share-based compensation, in executive, finance, accounting, business development, legal and human resources functions. Other general and administrative expenses include facility and information technology costs not otherwise included in research and development expenses, patent related costs and professional fees for legal, consulting and accounting services.

The decrease in 2014 as compared to 2013 was primarily due to a reversal of share-based compensation related to equity awards that were rescinded in the fourth quarter of 2014 and pre-commercialization efforts such as market research, including pricing and market segmentation studies being incurred in 2013. Teva assumed these expenses after receiving commercialization rights to ADASUVE in the U.S. in May 2013.

The increase in 2013 as compared to 2012 was primarily due to pre-commercialization efforts such as market research, including pricing and market segmentation studies, during 2013, and an increase in headcount and external expenses to support the increased operational activity as a result of the approval of the ADASUVE NDA in December 2012. In 2012, we recognized a non-cash contra expense of $1.4 million related to the termination of our lease and associated subleases of one of our Mountain View facilities. The non-cash contra expense was a result of the reversal of deferred rent liability, net of the accelerated depreciation of the fixed assets, related to the facility.

We expect our general and administrative expenses in 2015 to remain relatively consistent with 2014 levels.

Index to Financial Statements

Change in the Fair Value of Contingent Consideration Liability.

In connection with our acquisition of all of the outstanding equity of Allegro in the third quarter of 2009, we are obligated to pay the former stockholders of Allegro certain percentages of cash receipts that may be generated from future collaboration transactions for ADASUVE, AZ-104 and/or AZ-002. We measure the fair value of this contingent consideration liability on a recurring basis. Any changes in the fair value of this contingent consideration liability are recognized in earnings in the period of the change. Certain events, including, but not limited to, the timing and terms of a collaboration, clinical trial results, regulatory approval or non-approval of our submissions, and the commercial success of ADASUVE, AZ-104, and/or AZ-002, could have a material impact on the fair value of the contingent consideration liability, and as a result, our results of operations.

In 2014, we modified the assumptions associated with the amount and timing of milestones and royalties projected for ADASUVE and AZ-002, the probability that AZ-002 would be licensed or sold by us, and the effects of the passage of one year on the present value computation. In addition, we increased the discount rate used to compute the fair value of the contingent consideration liability from 16.5% to 20% to reflect an increase in our estimated weighted average cost of capital. These changes resulted in a non-operating, non-cash gain of $8.1 million in 2014.

In 2013, we updated the contingent liability fair value model primarily to reflect the impact of the terms of the Teva Agreement, specifically the probability that ADASUVE would be commercialized by a third party. Had we commercialized ADASUVE internally, we would not have been required to pay the former stockholders of Allegro percentages of revenues earned. In addition, we reduced the discount rate used to compute the fair value of the contingent consideration liability from 18.0% to 16.5% to reflect the reduction in our estimated weighted average cost of capital. These changes resulted in non-operating, non-cash losses of $39.9 million in 2013.

In 2012, we increased the probability that we would internally commercialize ADASUVE in the United States rather than enter into a commercial collaboration that would result in upfront milestone and royalty payments. This change in assumption was partially offset by the approval of the ADASUVE NDA in December 2012 and the December 2012 positive opinion of the EMA Committee for Medicinal Products for Human recommending that ADASUVE be granted European Union centralized marketing authorization by the EC. Marketing authorization for ADASUVE was granted by the EC on February 20, 2013. These changes resulted in non-operating, non-cash gains of $1.9 million in 2012.

Interest and Other Income, Net.

Interest and other income, net, primarily represents income earned on our cash, cash equivalents, marketable securities balances, and restricted cash. Interest and other income, net was $13,000, $26,000 and $420,000 for the years ended December 31, 2014, 2013 and 2012, respectively. In 2012, the amount primarily consisted of gains on the retirement of fixed assets as we sold certain equipment no longer being utilized. We expect interest income to remain nominal through 2015 as we expect the low interest rate environment to continue and because we expect to focus on investing with a priority on liquidity and capital preservation.

Interest Expense.

Interest expense, which consists of interest on our financing obligations and in 2013 also included amortization of the right-to-borrow asset received in connection with the Teva Note, was $7.4 million, $1.5 million and $1.4 in the years ended December 31, 2014, 2013 and 2012, respectively. The increase in 2014 was due to higher debt balances as a result of the additional debt associated with the royalty securitization financing in March 2014, $10 million of draws against the Teva Note in 2014 and the $15 million of draws against the Teva Note in 2013 being outstanding all of 2014. The increase in 2013 as compared to 2012 was due to the drawdowns against the Teva Note, partially offset by the declining balances from the Hercules note. We expect interest expense to increase in 2015 due to the higher average debt balances as the royalty securitization financing and 2014 Teva Note draws will be outstanding the full year in 2015.

Index to Financial Statements

Liquidity and Capital Resources

Since inception, we have financed our operations primarily through private placements and public offerings of equity securities, debt financings, revenues primarily from licensing agreements and government grants, and payments from Allegro. We have received additional funding from interest earned on investments, as described below, and funds received upon exercises of stock options and exercises of purchase rights under our 2005 Employee Stock Purchase Plan. As of December 31, 2014, we had $37.5 million in cash, cash equivalents, marketable securities and restricted cash. Our cash and cash equivalents balances are held in money market accounts, investment grade commercial paper and government-backed securities. Cash in excess of immediate requirements is invested with regard to liquidity, capital preservation and yield.

Net cash used in operating activities was $(41.5) million, $(0.6) million and $(18.2) million in 2014, 2013 and 2012, respectively. The net cash used in each of these periods primarily reflects net loss for these periods, offset in part by depreciation, non-cash share-based compensation, the change in fair value of the contingent consideration liability, and non-cash changes in operating assets and liabilities. The other liabilities change in each year was related to the amortization of our deferred rent liability, which is a result of the straight line method of recognizing our facility rent expense and the recognition of tenant improvement reimbursements from the landlord as a deferred rent liability. In 2013, we received a payment of $40.0 million under the Teva Agreements. In 2012, we received a payment of $10.0 million under the Ferrer Agreement resulting in the decrease in accounts receivables. In 2012, the decrease in our deferred revenues was the result of the amortization of upfront payments on the Ferrer Agreement and the Cypress Agreement. In 2011, the Ferrer Agreement resulted in increases to other receivables and deferred revenues.

Net cash (used in) provided by investing activities was $(13.5) million, $(10.3) million and $2.0 million in 2014, 2013 and 2012, respectively. Investing activities consist primarily of purchases and maturities of marketable securities and capital purchases. In 2014 and 2013, we had purchases, net of maturities, of marketable securities of $11.2 million and $8.6 million, respectively. During 2012, we had maturities, net of purchases, of marketable securities of $2.0 million. Purchases of property and equipment were $2.3 million $1.8 million and $0.5 million in 2014, 2013 and 2012, respectively.

Net cash provided by financing activities was $52.9 million, $10.5 million and $19.1 million in 2014, 2013 and 2012, respectively. Financing activities consist primarily of proceeds from financing arrangements, the sale of our common stock and warrants to purchase common stock and financing obligations. In 2014, we raised net proceeds of approximately $40.8 million through a royalty securitization financing and drawdowns of $10.0 million against the Teva Note. In 2013, we received proceeds of $15.0 million from drawdown on the Teva Note. In 2014, 2013 and 2012, we received net proceeds from the issuance of common stock and warrants to purchase common stock of $5.6 million, $6.3 million and $35.2 million, respectively. In 2014, 2013 and 2012, payments on financing obligations were $0.8 million, $5.8 million and $6.1 million, respectively. In 2014, 2013 and 2012, we made payments of $0.3 million, $10.3 million and $5.0 million, respectively, to the former stockholders of Allegro for milestones and royalties received from Teva and Ferrer. In 2014, we established a reserve fund for interest payments related to the royalty securitization financing. Cash from financing activities in 2013 and 2012 was also impacted by the classifying of $5.1 million of cash as restricted cash in 2012 due to Hercules’ requirement that we establish a restricted access account equal to the principal balance of the Hercules debt and the reversal of that restricted cash in 2013 as Hercules removed the restricted access account requirement.

We believe that with current cash, cash equivalents, marketable securities and restricted cash balances, estimated product revenues and milestone payments associated with the sale of ADASUVE, and our current expected cash usage, we have sufficient capital resources to meet our anticipated cash needs, at our current cost levels into the fourth quarter of 2015. Changing circumstances may cause us to consume capital significantly faster or slower than we currently anticipate or to alter our operations. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available financial resources sooner than we currently expect. The key assumptions underlying these estimates include:

•

expenditures related to the ADASUVE post-approval commitments to both the FDA and EC during this period being within budgeted levels;

Index to Financial Statements

•

expenditures related to ADASUVE commercial manufacturing during this period being within budgeted levels;

•

no unbudgeted growth in the number of our employees during this period; and

•

no material shortfall in our budgeted revenues.

Our forecast of the period of time that our financial resources will be adequate to support operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed in “Risk Factors.” In light of the numerous risks and uncertainties associated with the commercialization of ADASUVE, the commercial manufacturing of ADASUVE, the development of our product candidates and the extent to which we enter into additional strategic collaborations with third parties to participate in development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials. Our future funding requirements will depend on many factors, including:

•

the cost and timing of the development of our commercialization abilities;

•

the commercial success of ADASUVE or any other product candidates that are approved for marketing;

•

the cost, timing and outcomes of regulatory approvals or non-approvals;

•

the scope, rate of progress, results and costs of our preclinical studies, clinical trials and other research and development activities;

•

the terms and timing of any additional distribution, strategic collaboration or licensing agreements that we may establish;

•

the number and characteristics of product candidates that we pursue;

•

the cost of manufacturing ADASUVE in commercial quantities;

•

the cost of establishing clinical supplies of our product candidates;

•

the cost of preparing, filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and

•

the extent to which we acquire or invest in businesses, products or technologies, although we currently have no commitments or agreements relating to any of these types of transactions.

We will need to raise additional funds to support our operations, and such funding may not be available to us on acceptable terms, or at all. If we are unable to raise additional funds when needed, we may not be able to successfully commercialize ADASUVE, perform our post-approval commitments to the FDA and EC, manufacture commercial quantities of ADASUVE or continue development of our product candidates or we could be required to delay, scale back or eliminate some or all of our development programs, or other operations. We may seek to raise additional funds through public or private financing, strategic collaborations or other arrangements. Any additional equity financing may be dilutive to stockholders and debt financing, if available, may involve restrictive covenants. Applicable listing standards may affect our ability to consummate certain types of offerings of our securities in the future. Our October 2014 private sale of unregistered shares to Ferrer involved the sale of 2,000,000 shares of our common stock. We paid $865,000 of the proceeds from Ferrer to the former stockholders of Symphony Allegro. Our March 2014 royalty securitization financing involved the issuance of warrants to purchase 345,661 shares of our common stock and requires interest payments by our wholly-owned subsidiary without recourse to us beginning in June 2014. Our February 2012 underwritten public offering involved the sale of 4,400,000 shares of our common stock and warrants to purchase an additional 4,400,000 shares of our common stock. If we raise funds through additional collaborative or licensing arrangements, we may be required to relinquish, on terms that are not favorable to us, rights to some of our technologies or product candidates that we would otherwise seek to develop or commercialize ourselves. Our failure to raise capital when needed may harm our business, financial condition, results of operations, and prospects.

Index to Financial Statements

Contractual Obligations

Facility Lease

We lease a 64,104 square foot manufacturing, office and laboratory facility in Mountain View, California, which we began to occupy in the fourth quarter of 2007. The lease expires on March 31, 2018, and we have two options to extend the lease for five years each. We believe that the Mountain View facility is sufficient for our office, manufacturing and laboratory needs for at least the next three years.

Autoliv

Currently, Autoliv manufactures, assembles and tests the chemical heat packages solely for us in conformance with our specifications. We pay Autoliv a specified purchase price, which varies based on annual quantities ordered by us, per chemical heat package delivered. The Manufacture Agreement provides that during the term of the Manufacture Agreement, Autoliv will be our exclusive supplier of chemical heat packages. In December 2014, we amended the Manufacture Agreement with Autoliv to provide that we have the right to engage a second source supplier and implement a manufacturing line transfer from Autoliv to manufacture and supply the chemical heat packages to us or our licensees. In addition, the Manufacture Agreement grants Autoliv the right to negotiate for the right to supply commercially any second generation chemical heat package, or a second generation product, and provides that we will pay Autoliv certain royalty payments if we manufacture second generation products ourselves or if we obtain second generation products from a third party manufacturer. Upon the expiration or termination of the Manufacture Agreement we will also be required, on an ongoing basis, to pay Autoliv certain royalty payments related to the manufacture of the chemical heat packages by us or third party manufacturers.

Our scheduled future minimum contractual payments, net of sublease income, including interest at December 31, 2014, are as follows (in thousands):


	Payments Due by Period
			Less Than
	Total		1 Year		1-3 Years		3-5 Years		Thereafter
Operating lease obligations	$	10,723	$	3,197	$	7,526	$	—	$	—
Term note obligations		29,635		—		29,635		—		—

	$	40,358	$	3,197	$	37,161	$	—	$	—

The above table excludes any payments pursuant to the $45,000,000 from the royalty securitization financing notes of our wholly-owned subsidiary, which have a legal maturity date in 2027. The principal payments by the subsidiary under the royalty securitization financing will be dependent upon the timing and amounts of royalties and milestone payments received under the Teva Agreement.

As part of our purchase of all of the outstanding equity of Allegro in August 2009, we agreed to pay to the former stockholders of Allegro certain percentages of cash payments that may be generated from future collaboration transactions pertaining to ADASUVE/AZ-104 (Staccato loxapine) or AZ-002 (Staccato alprazolam). These payments are excluded from the above table due to the uncertainty of the timing and amount of these payments. In 2013, we made payments to the former stockholders of Allegro of $10.0 million as a result of the $40.0 million upfront payment we received from Teva and $0.3 million as a result of a $1.25 million milestone payment received from Ferrer. In January 2012, we made a payment to the former stockholders of Allegro of $5.0 million as a result of the $10.0 million upfront payment we received from Ferrer.

Index to Financial Statements

Off-Balance Sheet Arrangements

None.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk is confined to our cash, cash equivalents, which have maturities of less than three months, and marketable securities. The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of cash equivalents and marketable securities in a variety of securities of high credit quality. As of December 31, 2014, we had cash, cash equivalents, marketable securities and restricted cash of $37.5 million. The securities in our investment portfolio are not leveraged, are classified as available for sale and are, due to their very short-term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that an increase in market rates would have a material negative impact on the realized value of our investment portfolio. We actively monitor changes in interest rates. We perform quarterly reviews of our investment portfolio and believe we have no exposure related to: mortgage and other asset backed securities, European sovereign debt, or auction rate securities.

Index to Financial Statements

Item 8.

Financial Statements and Supplementary Data

ALEXZA PHARMACEUTICALS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Report of Independent Registered Public Accounting Firm			84
Consolidated Balance Sheets as of December 31, 2014 and 2013			85
Consolidated Statements of Loss and Comprehensive Loss for the years ended December 31, 2014, 2013 and 2012			86
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2014, 2013 and 2012			87
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012			88
Notes to Consolidated Financial Statements			89

Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Alexza Pharmaceuticals, Inc.

We have audited the accompanying consolidated balance sheets of Alexza Pharmaceuticals, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of loss and comprehensive loss, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Alexza Pharmaceuticals, Inc. as of December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Alexza Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 13, 2015 expressed an adverse opinion thereon.

/s/ Ernst & Young LLP

Redwood City, California

March 13, 2015

Index to Financial Statements

ALEXZA PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)


	2014			2013
ASSETS
Current assets:
Cash and cash equivalents	$	15,200		$	17,306
Marketable securities		19,574			8,578
Receivables		173			129
Inventory		3,729			3,447
Prepaid expenses and other current assets		3,109			1,453

Total current assets		41,785			30,913
Property and equipment, net		13,953			14,991
Restricted cash		2,757			—
Other assets		3,065			1,168

Total assets	$	61,560		$	47,072

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	1,799		$	3,789
Accrued clinical trial liabilities		875			178
Other accrued liabilities		4,693			4,736
Current portion of contingent consideration liability		1,700			2,500
Financing obligations		—			780
Current portion of deferred revenues		2,450			2,915

Total current liabilities		11,517			14,898
Deferred rent		4,781			6,405
Noncurrent portion of contingent consideration liability		29,100			36,700
Noncurrent portion of deferred revenues		3,063			2,185
Noncurrent portion of financing obligations		63,767			10,744
Other noncurrent liabilities		985			115
Commitments and contingencies
Stockholders’ (deficit):
Preferred stock, $0.0001 par value, 5,000,000 shares authorized at December 31, 2014 and 2013; no shares issued and outstanding at December 31, 2014 or 2013		—			—
Common stock, $0.0001 par value; 200,000,000 shares authorized at December 31, 2014 and 2013, respectively; 19,404,697 and 17,279,804 shares issued and outstanding at December 31, 2014 and 2013, respectively		2			2
Additional paid-in capital		359,308			350,250
Accumulated other comprehensive (loss) income		(3	)		1
Accumulated deficit		(410,960	)		(374,228	)

Total stockholders’ deficit		(51,653	)		(23,975	)

Total liabilities and stockholders’ deficit	$	61,560		$	47,072

See accompanying notes.

Index to Financial Statements

ALEXZA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

(In thousands, except per share amounts)


	Year Ended December 31,
	2014			2013			2012
	(In thousands, except per share
Revenue
Collaboration revenue	$	2,997		$	46,965		$	4,070
Product sales		2,564			874			—

Total revenues		5,561			47,839			4,070
Operating expenses:
Cost of goods sold		15,925			11,209			—
Research and development		13,748			19,082			21,849
General and administrative		13,344			15,778			11,093

Total operating expenses		43,017			46,069			32,942

Loss from operations		(37,456	)		1,770			(28,872	)
Change in fair value of contingent consideration liability		8,149			(39,913	)		1,900
Interest and other income/expense, net		13			26			420
Interest expense		(7,438	)		(1,498	)		(1,426	)

Net loss	$	(36,732	)	$	(39,615	)	$	(27,978	)

Other Comprehensive Loss
Change in unrealized (loss) income on marketable securities		(4	)		1			—

Comprehensive loss	$	(36,736	)	$	(39,614	)	$	(27,978	)

Net loss per share - basic and diluted	$	(2.07	)	$	(2.38	)	$	(2.24	)

Shares used to compute net loss per share - basic and diluted		17,784			16,669			12,472

See accompanying notes.

Index to Financial Statements

ALEXZA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share data)


	Common Stock				Additional Paid in Capital		Accumulated Other Comprehensive (Loss) Income			Accumulated Deficit			Total Stockholders’ Equity (Deficit)
	Shares		Amount		Additional Paid in Capital		Accumulated Other Comprehensive (Loss) Income			Accumulated Deficit			Total Stockholders’ Equity (Deficit)
Balance at January 1, 2012		7,213,592	$	1	$	296,942	$	—		$	(306,635	)	$	(9,692	)
Issuance of common stock and common stock warrants for cash		4,400,000		1		20,230		—			—			20,231
Issuance of common stock for cash		3,812,225		—		14,929		—			—			14,929
Issuance of common stock for cash under the Company’s Employee Stock Purchase Plan		18,409		—		82		—			—			82
Issuance of common stock upon vesting of restricted stock units		323,299		—		—		—			—			—
Compensation expense related to fair value of employee share based awards		—		—		5,001		—			—			5,001
Net loss		—		—		—		—			(27,978	)		(27,978	)

Balance at December 31, 2012		15,767,525		2		337,184		—			(334,613	)		2,573
Issuance of common stock for cash		1,437,481		—		6,347		—			—			6,347
Issuance of common stock for cash under the Company’s Equity Incentive Plan		10,317		—		36		—			—			36
Issuance of common stock for cash under the Company’s Employee Stock Purchase Plan		54,494		—		200		—			—			200
Issuance of common stock upon vesting of restricted stock units		9,987		—		—		—			—			—
Compensation expense related to fair value of employee share based awards		—		—		3,371		—			—			3,371
Beneficial conversion feature of convertible debt		—		—		3,112		—			—			3,112
Change in unrealized gain/loss on marketable securities		—		—		—		1			—			1
Net loss		—		—		—		—			(39,615	)		(39,615	)

Balance at December 31, 2013		17,279,804		2		350,250		1			(374,228	)		(23,975	)
Issuance of common stock for cash		2,000,000		—		5,600		—			—			5,600
Issuance of common stock under our Equity Incentive Plan		22,842		—		79		—			—			79
Issuance of common stock for cash under our Employee Stock Purchase Plan		70,226		—		199		—			—			199
Issuance of common stock upon vesting of restricted stock units		31,825		—		—		—			—			—
Compensation expense related to fair value of employee share based awards		—		—		427		—			—			427
Benficial conversion feature of convertible debt		—		—		1,032		—			—			1,032
Issuance of common stock warrant		—		—		1,721		—			—			1,721
Change in unrealized gain/loss on marketable securities		—		—		—		(4	)		—			(4	)
Net loss		—		—		—		—			(36,732	)		(36,732	)

Balance at December 31, 2014		19,404,697	$	2	$	359,308	$	(3	)	$	(410,960	)	$	(51,653	)

See accompanying notes.

Index to Financial Statements

ALEXZA PHARMACEUTICALS, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	Year Ended December 31,
	2014			2013			2012
	(In thousands)
Cash flows from operating activities:
Net loss	$	(36,732	)	$	(39,615	)	$	(27,978	)
Adjustments to reconcile net loss to net cash used in operating activities:
Share-based compensation expense		427			3,371			5,001
Change in fair value of contingent consideration liability		(8,149	)		39,913			(1,900	)
Recognition of right to borrow asset		—			(2,800	)		—
Amortization of debt discount and deferred interest		2,216			1,079			447
Amortization of discount on available-for-sale securities		163			—			1
Depreciation		3,393			3,323			4,336
Loss/(gain) on disposal of property and equipment		8			(15	)		(415	)
Changes in operating assets and liabilities:
Receivables		(44	)		(129	)		10,000
Inventory		(282	)		(3,447	)		—
Prepaid expenses and other current assets		(822	)		(601	)		(203	)
Other assets		—			—			200
Accounts payable		(1,990	)		1,642			(1,456	)
Accrued clinical trial expense and other accrued liabilities		654			1,122			559
Deferred revenues		413			(2,916	)		(2,618	)
Other liabilities		(754	)		(1,539	)		(4,215	)

Net cash used in operating activities		(41,499	)		(612	)		(18,241	)

Cash flows from investing activities:
Purchase of available-for-sale securities		(42,003	)		(19,227	)		—
Maturities of available-for-sale securities		30,840			10,650			2,000
Purchases of property and equipment		(2,363	)		(1,784	)		(452	)
Proceeds from disposal of property and equipment		—			16			425

Net cash (used in) provided by investing activities		(13,526	)		(10,345	)		1,973

Cash flows from financing activities:
Proceeds from issuance of common stock, common stock warrants and exercise of stock options and stock purchase rights		5,878			6,583			35,242
Payment of contingent payment to Symphony Allegro Holdings, LLC		(251	)		(10,313	)		(5,000	)
Change in restricted cash		(2,757	)		5,051			(5,051	)
Proceeds from financing obligations		50,830			15,000			—
Payments of financing obligations		(781	)		(5,773	)		(6,110	)

Net cash provided by financing activities		52,919			10,548			19,081

Net (decrease) increase in cash and cash equivalents		(2,106	)		(409	)		2,813

Cash and cash equivalents at beginning of period		17,306			17,715			14,902
Cash and cash equivalents at end of period	$	15,200		$	17,306		$	17,715

Supplemental disclosures of cash flow information
Cash paid for interest	$	4,169		$	863		$	979

Non cash investing and financing activities:
Debt discount related to Teva Note	$	—		$	4,405		$	—

Value of warrants issued with royalty securitization financing	$	1,721		$	—		$	—

Value of the beneficial conversion feature related to borrowing against Teva Note	$	1,032		$	3,112		$	—

Value of right to borrow asset reclassified as debt discount	$	—		$	2,800		$	—

See accompanying notes

Index to Financial Statements

ALEXZA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The Company

Business

We were incorporated in the state of Delaware on December 19, 2000 as FaxMed, Inc., changed our name to Alexza Corporation in June 2001 and in December 2001 became Alexza Molecular Delivery Corporation. In July 2005, we changed our name to Alexza Pharmaceuticals, Inc.

We are a pharmaceutical company focused on the research, development, and commercialization of novel proprietary products for the acute treatment of central nervous system conditions. We operate in one business segment. Our facilities and employees are currently located in the United States. In 2012, we transitioned out of the development stage.

Underwritten Public Offering

On February 23, 2012, we issued an aggregate of 4,400,000 shares of our common stock and warrants to purchase up to an additional 4,400,000 shares of our common stock in an underwritten public offering. Net proceeds from the offering were $20,231,000, after deducting offering expenses. The warrants are exercisable beginning February 24, 2013, at an exercise price of $5.00 per share, and will expire on February 23, 2017. The shares of common stock and warrants were sold pursuant to a shelf registration statement declared effective by the Securities and Exchange Commission on May 20, 2010. We agreed to customary obligations, including indemnification.

Private Placement

On March 5, 2012, we entered into an amendment to the Collaboration, License and Supply Agreement, or the Ferrer Agreement, with Grupo Ferrer Internacional, S.A., or Ferrer (See Note 8). Ferrer and we agreed to eliminate a future potential milestone payment in exchange for Ferrer’s purchase of $3,000,000 of our common stock. On March 15, 2012 Ferrer purchased 241,936 shares of our common stock for $12.40 per share. We classified $1,452,000 of the proceeds as deferred revenue and are recognizing the amount into revenue over the estimated performance period of the Ferrer Agreement (see Note 8).

On October 27, 2014 we entered into an amendment to the Ferrer Agreement (See Note 8). Ferrer and we agreed to eliminate future potential milestone payments in exchange for Ferrer’s purchase of $8,000,000 of our common stock. Ferrer purchased 2,000,000 shares of our common stock for $4.00 per share. We classified $2,400,000 of the proceeds as deferred revenue and are recognizing the amount into revenue over the estimated performance period of the Ferrer Agreement (see Note 8).

Equity Financing Facility

In July 2012, we entered into a committed equity line of credit with Azimuth Opportunity, L.P., or Azimuth, pursuant to which we were granted the ability to sell up to $20,000,000 of our common stock over an approximately 24-month period pursuant to the terms of a Common Stock Purchase Agreement, or the Purchase Agreement. In addition to the foregoing amounts, in consideration for the performance of Azimuth’s obligations under the Purchase Agreement, we issued to Azimuth 80,429 shares of our common stock on July 23, 2012. In August and September 2012, we utilized a total of $13,600,000 under the facility by issuing 3,489,860 shares of our common stock to Azimuth at an average price of $3.88 per share, which resulted in $13,393,000 in net proceeds to us. In May 2013, we utilized the remaining $6,400,000 available under the facility by issuing 1,437,481 shares of our common stock to Azimuth at an average price of $4.48 per share, which resulted in $6,347,000 of net proceeds to us. Shares were issued to Azimuth at a discount of 5% to the volume-weighted average price of our common stock over a preceding period of trading days. Shares sold under this facility were sold pursuant to a shelf registration statement declared effective by the SEC on July 3, 2012.

Index to Financial Statements

2. Need to Raise Additional Capital

We have incurred significant losses from operations since inception and expect losses to continue for the foreseeable future. As of December 31, 2014, we had cash, cash equivalents, marketable securities and restricted cash (see Note 3) of $37.5 million and working capital of $30.3 million. Our operating and capital plans call for cash expenditures to exceed these amounts for the next twelve months. We plan to raise additional capital to fund our operations and to develop our product candidates. We plan to finance our operations through the sale of equity securities, debt arrangements or partnership or licensing collaborations. Such funding may not be available or may be on terms that are not favorable to us. Our inability to raise capital as and when needed could have a negative impact on our financial condition and our ability to continue as a going concern. If we become unable to continue as a going concern, we may have to liquidate our assets, and might realize significantly less than the values at which they are carried on our financial statements, and stockholders may lose all or part of their investment in our common stock. Based on our available cash resources and our expected cash usage, we estimate that we have sufficient capital resources to meet our anticipated cash needs into the fourth quarter of 2015.

The accompanying financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that may result from uncertainty related to our ability to continue as a going concern.

3. Summary of Significant Accounting Policies

Basis of Presentation

We have prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our fiscal year ends on December 31. The accompanying consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Three levels of inputs, of which the first two are considered observable and the last unobservable, may be used to measure fair value which are the following:

•

Level 1 — Quoted prices in active markets for identical assets or liabilities.

•

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Index to Financial Statements

The following table represents the fair value hierarchy for our financial assets (cash equivalents and marketable securities) by major security type and contingent consideration liability measured at fair value on a recurring basis as of December 31, 2014 and 2013 (in thousands):


December 31, 2014	Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	12,674	$	—	$	—	$	12,674
Corporate debt securities		—		24,617		—		24,617

Total assets	$	12,674	$	24,617	$	—	$	37,291

Liabilities
Contingent consideration liability	$	—	$	—	$	30,800	$	30,800

Total liabilities	$	—	$	—	$	30,800	$	30,800


December 31, 2013	Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	11,345	$	—	$	—	$	11,345
Corporate debt securities		—		12,003		—		12,003

Total assets	$	11,345	$	12,003	$	—	$	23,348

Liabilities
Contingent consideration liability	$	—	$	—	$	39,200	$	39,200

Total liabilities	$	—	$	—	$	39,200	$	39,200

Our available-for-sale debt securities are valued utilizing a multi-dimensional relational model. Inputs, listed in approximate order of priority for use when available, include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. There were no transfers between Level 1 and Level 2 measurements during the year ended December 31, 2014, and there were no changes in our valuation technique.

Contingent Consideration Liability

In connection with the exercise of our option to purchase all of the outstanding equity of Symphony Allegro, Inc., or Allegro, in 2009, we are obligated to make contingent cash payments to the former Allegro stockholders related to certain payments received by us from future collaboration agreements pertaining to ADASUVE/AZ-104 (Staccato loxapine) or AZ-002 (Staccato alprazolam). In order to estimate the fair value of the liability associated with the contingent cash payments, we prepared several cash flow scenarios for ADASUVE, AZ-104 and AZ-002, which are subject to the contingent payment obligation. Each potential cash flow scenario consisted of assumptions of the range of estimated milestone and license payments potentially receivable from such collaborations and assumed royalties received from future product sales. Based on these estimates, we computed the estimated payments to be made to the former Allegro stockholders. Payments were assumed to terminate in accordance with current agreement terms or, if no agreements exist, upon the expiration of the related patents.

The projected cash flow assumptions for ADASUVE in the United States are based on the License and Supply Agreement, or the Teva Agreement, between us and Teva Pharmaceuticals USA, Inc., or Teva, (see Note 8) and on internally and externally developed product sales forecasts. The timing and extent of the projected cash flows for ADASUVE for the territories licensed to Ferrer are based on the Ferrer Agreement (see Note 8). The timing and extent of the projected cash flows for the remaining territories for ADASUVE and worldwide territories for AZ-002 and AZ-104 were based on internal estimates for potential milestones and multiple product royalty scenarios and are also consistent in structure to the most recently negotiated collaboration agreements.

Index to Financial Statements

We then assigned a probability to each of the cash flow scenarios based on several factors, including: the product candidate’s stage of development, preclinical and clinical results, technological risk related to the successful development of the different drug candidates, estimated market size, market risk and potential collaboration interest to determine a risk adjusted weighted average cash flow based on all of these scenarios. These probability and risk adjusted weighted average cash flows were then discounted utilizing our estimated weighted average cost of capital, or WACC. Our WACC considered our cash position, competition, risk of substitute products, and risk associated with the financing of the development projects. In 2013, we reduced the discount rate from 18.0% to 16.5% to reflect our then current estimated WACC. The change in discount rate increased the net loss for 2013 by approximately $3,600,000 or $0.22 per share. In 2014, we increased the discount rate from 16.5% to 20% to reflect our current estimated WACC. The change in discount rate decreased the net loss for 2014 by approximately $6.4 million or $0.36 per share. The increase in our discount rate reflects the impact of our current financial condition, market capitalization and our estimated increase in borrowing costs.

The fair value measurement of the contingent consideration liability is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Level 3 measurements are valued based on unobservable inputs that are supported by little or no market activity and reflect our assumptions in measuring fair value.

We record any changes in the fair value of the contingent consideration liability in earnings in the period of the change. Certain events including, but not limited to, the timing and terms of any collaboration agreement, clinical trial results, approval or non-approval of any future regulatory submissions and the commercial success of ADASUVE, AZ-104 or AZ-002 could have a material impact on the fair value of the contingent consideration liability, and as a result, our results of operations and financial position for the impacted period.

During the year ended December 31, 2012, we modified the assumptions and the timing and extent of certain cash flows regarding the increased probability that we will commercialize ADASUVE in the United States internally without a collaborator and the timing of the commercial launch of ADASUVE in the United States. This change in assumptions resulted in a decrease to the contingent consideration liability as the former Allegro stockholders do not receive payments from us for product revenues generated by us. We also modified assumptions to reflect the approval of the ADASUVE NDA in December 2012 and the December 2012 positive opinion by the Committee for Medicinal Products for Human recommending that ADASUVE be granted European Union centralized marketing authorization by the European Commission, resulting in an increase in the contingent consideration liability. The changes in these assumptions resulted in a decrease to net loss per share of $0.15 for the year ended December 31, 2012.

During the year ended December 31, 2013, we modified the assumptions regarding the timing and amount of certain cash flows primarily to reflect (i) the increased probability in the first quarter of 2013 that we would license the U.S. commercialization rights to ADASUVE to a third party, (ii) the impact of the licensing and the terms of the Teva Agreement in the second quarter of 2013, (iii) the change in the projected ADASUVE launch date to the first quarter of 2014 and (iv) the projected timing of certain future revenues and the potential expansion of the ADASUVE label. These changes in assumptions, the change in the discount rate in 2013 described above, and the effects of the passage of a year on the present value computation resulted in an increase to the net loss of $39,913,000, or $2.39 per share, for the year ended December 31, 2013.

During the year ended December 31, 2014, we modified the assumptions associated with the amount and timing of milestones and royalties projected for ADASUVE and AZ-002 and the probability that AZ-002 would be licensed or sold by us. These changes in assumptions, the change in the discount rate and the effects of the passage of a year on the present value computation resulted in a decrease to the net loss of $8,149,000, or $0.46 per share, for the year ended December 31, 2014.

Index to Financial Statements

The following table represents a reconciliation of the change in the fair value measurement of the contingent consideration liability for the years ended December 31, 2014 and 2013 (in thousands).


	December 31,
	2014			2013
	(In thousands)
Beginning balance	$	39,200		$	9,600
Payments made		(251	)		(10,313	)
Adjustments to fair value measurement		(8,149	)		39,913

Ending balance	$	30,800		$	39,200

The $10,313,000 of aggregate payments in 2013 were the result of our receipt of the $40,000,000 upfront payment from Teva (see Note 8) and our receipt of the $1,250,000 milestone payment from Ferrer associated with the launch of ADASUVE in Germany. The $251,000 of aggregate payment in 2014 was primarily the results of our receipt the $1,000,000 milestone payment from Ferrer associated with the launch of ADASUVE in Spain.

Financing Obligations

We have estimated the fair value of our financing obligations (see Note 7) using the net present value of the payments discounted at an interest rate that is consistent with our estimated current borrowing rate for similar long-term debt. We believe the estimates used to measure the fair value of the financing obligations constitute Level 3 inputs.

At December 31, 2014 and 2013, the estimated fair value of our financing obligations was $52,075,000 and $9,342,000, respectively and had book values of $63,767,000 and $11,524,000, respectively. Our payment commitments associated with these debt instruments may vary with changes in interest rates and are comprised of interest payments and principal payments. The estimated fair value of our debt will fluctuate with movements of interest rates, increasing in periods of declining rates of interest and declining in periods of increasing rates of interest. In addition, the fair value of our royalty securitization financing will be affected by the timing and amount of royalties and milestones earned under the Teva Agreement.

Concentration of Credit Risk

Financial instruments that potentially subject us to credit risk consist of cash, cash equivalents, marketable securities and restricted cash to the extent of the amounts recorded on the balance sheets. Our cash, cash equivalents and marketable securities are placed with high credit-quality U.S. financial institutions and issuers.

Cash Equivalents and Marketable Securities

We determine the appropriate classification of our investments at the time of purchase. These securities are recorded as either cash equivalents or marketable securities.

We consider all highly liquid investments with original maturities of three months or less from date of purchase to be cash equivalents. Cash equivalents consist of interest-bearing instruments including obligations of U.S. government agencies, high credit rating corporate borrowers and money market funds, which are carried at market value.

All other investments are classified as available-for-sale marketable securities. We view our available-for-sale investments as available for use in current operations. Accordingly, we have classified all investments as short-term marketable securities, even though the stated maturity date may be one year or more beyond the current balance sheet date. Marketable securities are carried at estimated fair value with unrealized gains or losses included in accumulated other comprehensive income (loss) in stockholders’ (deficit) equity.

The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest and other income (expense), net. Realized

Index to Financial Statements

gains and losses, if any, are also included in interest and other income (expense), net. The cost of all securities sold is based on the specific-identification method. Interest and dividends are included in interest income.

We review our investments for other than temporary decreases in market value on a quarterly basis. To date, we have not recorded any charges related to other-than-temporary impairments.

Restricted Cash

In March 2014, from the proceeds from the Royalty Securitization Financing (see Note 7), we established a $6,890,000 interest reserve account, which is classified as a noncurrent asset, to cover any potential shortfall in royalties and milestones received from Teva and quarterly interest payments. At December 31, 2014, $2,757,000 remained in the interest reserve account.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Property and equipment are depreciated using the straight-line method over the estimated life of the asset, generally three years for computer equipment, five years for manufacturing equipment and laboratory equipment and seven years for furniture. Leasehold improvements are amortized over the estimated useful life or the remaining lease term, whichever is shorter.

Impairment of Long-Lived Assets

We review long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The impairment loss, if recognized, would be based on the excess of the carrying value of the impaired asset over its respective fair value. Through December 31, 2014, we have not recognized any long-lived asset impairment.

Revenue Recognition

Index to Financial Statements

Codification 605-28, Milestone Method. Under the milestone method, revenues for payments which meet the definition of a milestone will be recognized as the respective milestones are achieved.

We recognize product revenue as follows:

•

Delivery. Typically, ownership of the product passes to the collaborator upon shipment. Our current license and supply agreements also provide our collaborators with an acceptance period during which they may reject any product which does not conform to agreed-upon specifications. Because ADASUVE is a new product, a new technology and our first product to be commercialized, and because we do not have a history of producing product to collaborator specifications, we will not consider delivery to have occurred until after the collaborator acceptance period has ended or the collaborator has positively accepted the product. Once we have demonstrated over the course of time an ability to reliably produce the product to collaborator specifications, we will consider delivery to have occurred upon shipment in the absence of any other relevant shipment or acceptance terms.

•

Royalty revenue from our collaboration agreements is recognized as we receive information from our collaborators regarding product sales.

Significant management judgment is used in the determination of revenue to be recognized and the period in which it is recognized.

Inventory

Inventory is stated at standard cost, which approximates actual cost, determined on a first-in first-out basis, not in excess of market value. Inventory includes the direct costs incurred to manufacture products combined with allocated manufacturing overhead, which consists of indirect costs, including labor and facility overhead. We are in the early stages of commercialization and have incurred significantly higher than normal indirect costs in the production of our inventory due to start-up manufacturing costs and low production volumes. The carrying cost of inventory is reduced so as to not be in excess of the market value of the inventory as determined by the contractual transfer prices to Ferrer and Teva. The excess over the market value is expensed to cost of goods sold. All costs associated with the ADASUVE manufacturing process incurred prior to regulatory approval and the beginning of commercial manufacturing were expensed as a component of research and development expense. If information becomes available that suggests that all or certain of the inventory may not be realizable, we may be required to expense a portion, or all, of the capitalized inventory into cost of goods sold. Inventory, which is stated at the lower of cost or estimated market value, consists of the following (in thousands):


	December 31,
	2014		2013
Raw materials	$	3,677	$	3,044
Work in process		—		—
Finished goods		52		403

Total inventory	$	3,729	$	3,447

Index to Financial Statements

Research and Development

Research and development expenses include personnel and facility-related expenses, outside contracted services including clinical trial costs, manufacturing and process development costs, research costs and other consulting services. Research and development costs are expensed as incurred.

Clinical development costs are a significant component of research and development expenses. We have a history of contracting with third parties that perform various clinical trial activities on our behalf in the ongoing development of our product candidates. The financial terms of these contracts are subject to negotiations and may vary from contract to contract and may result in uneven payment flow. We accrue and expense costs for clinical trial activities performed by third parties based upon estimates of the percentage of work completed over the life of the individual study in accordance with agreements established with contract research organizations and clinical trial sites.

Income Taxes

We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.

The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

Share-Based Compensation

Compensation cost for employee share-based awards is based on the grant-date fair value and is recognized on a ratable basis over the requisite service periods of the awards, which are generally the vesting periods. We issue employee share-based awards in the form of stock options and restricted stock units under our equity incentive plans and stock purchase rights under our employee stock purchase plan.

Stock Options, Stock Purchase Rights and Restricted Stock Units

During the years ended December 31, 2014, 2013 and 2012, the weighted average fair value per share of the employee stock options, restricted stock units and stock purchase rights granted were:


	2014		2013		2012
Stock Options	$	2.83	$	3.46	$	2.60
Restricted Stock Units		—		4.67		4.96
Stock Purchase Rights		1.32		1.76		3.86

The estimated grant date fair values of the stock options and stock purchase rights were calculated using the Black-Scholes valuation model. The Black-Scholes model requires the use of a number of highly subjective and complex assumptions in determining the fair value of stock-based awards as follows:

Weighted-Average Expected Term We determine the expected term of stock options granted through a combination of our own historical exercise experience and expected future exercise activities and post-vesting termination behavior. Under the Employee Stock Purchase Plan, the expected term of employee stock purchase plan shares is equal to the offering period.

Volatility We utilize our historical volatility to determine future volatility for the purpose of determining share-based payments for all options granted.

Risk-Free Interest Rate We utilize U.S. Treasury zero-coupon issues with remaining terms similar to the expected term of the options or purchase rights on the respective grant dates to determine our risk-free interest rate.

Dividend Yield We have never declared or paid any cash dividends and do not plan to pay cash dividends in the foreseeable future, and, therefore, use an expected dividend yield of zero in the valuation model.

Index to Financial Statements

Forfeiture Rate We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

During the years ended December 31, 2014, 2013 and 2012, we calculated the estimated grant date fair value of stock options and stock purchase rights using the following assumptions:


	2014	2013	2012
Stock Option Plans
Weighted-average expected term	5.0 Years	5.0 Years	5.0 Years
Expected volatility	83%	99%	98%
Risk-free interest rate	1.66%	0.86%	0.62%
Dividend yield	0%	0%	0%
Employee Stock Purchase Plan
Weighted-average expected term	0.5 Years	0.5 Years	0.6 Years
Expected volatility	61%	80%	98%
Risk-free interest rate	0.86%	0.70%	0.14%
Dividend yield	0%	0%	0%

Restricted Stock Units The estimated fair value of restricted stock unit awards is calculated based on the market price of our common stock on the date of grant, reduced by the present value of dividends expected to be paid on our common stock prior to vesting of the restricted stock unit. Our estimate assumes no dividends will be paid prior to the vesting of the restricted stock unit.

In 2013, certain restricted stock unit awards were issued that vest based on market conditions. The estimated fair value of these awards was calculated using a binomial lattice model with a term of 10 years, an expected volatility of 99.4%, a risk-free interest rate of 1.94% and a dividend yield of 0%.

As of December 31, 2014, there was $3,020,000, $334,000 and $13,000 total unrecognized compensation costs related to non-vested stock option awards, restricted stock unit awards and stock purchase rights, respectively, which are expected to be recognized over a weighted average period of 2.7 years, 2.1 years and 0.3 years, respectively.

New Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In doing so, companies will have reduced diversity in the timing and content of footnote disclosures than under the current guidance. ASU 2014-15 is effective for us in the first quarter of 2016 with early adoption permitted. We do not believe the impact of adopting ASU 2014-15 on our results of operations or financial position.

In May 2014 the Financial Accounting Standards Board, or FASB, issued the Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers (Topic 606), that will supersede nearly all existing revenue recognition guidance under US GAAP. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard will be effective for public entities for annual and interim periods beginning after December 15, 2016.

Entities can choose to apply the standard using either the full retrospective approach or a modified retrospective approach. Entities electing the full retrospective adoption will apply the standard to each period presented in the financial statements. This means that entities will have to apply the new guidance as if it had been in effect since the inception of all its contracts with customers presented in the financial statements. Entities that elect the modified retrospective approach will apply the guidance retrospectively only to the most current

Index to Financial Statements

period presented in the financial statements. This means that entities will have to recognize the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings at the date of initial application. The new revenue standard will be applied to contracts that are in progress at the date of initial application.

We plan to adopt the new standard on January 1, 2017. We have not yet evaluated which adoption method we plan to use or the potential effect the new standard will have on our consolidated financial statements.

4. Net Loss per Share

Basic and diluted net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding for the period less weighted average shares subject to repurchase, of which there were none in 2014, 2013 or 2012. Outstanding stock options, warrants, and unvested restricted stock units are not included in the diluted net loss per share calculation for the years ended December 31, 2014, 2013 and 2012 as the inclusion of such shares would have had an anti-dilutive effect. Potentially anti-dilutive securities include the following (in thousands):


	Year Ended December 31,
	2014		2013		2012
Outstanding stock options		2,429		1,657		840
Unvested restricted stock units		371		315		120
Warrants to purchase common stock		6,561		6,462		5,582
Convertible debt		4,803		651		—

5. Cash Equivalents and Marketable Securities

The amortized cost, fair value and unrealized gain/(loss) for our financial assets by major security type as of December 31, 2014 and 2013 are as follows (in thousands):


December 31, 2014	Amortized Cost			Fair Value			Unrealized Gain/ (Loss)
Money market funds	$	12,674		$	12,674		$	—
Corporate debt securities		24,620			24,617			(3	)

Total		37,294			37,291			(3	)
Less amounts classified as cash equivalents		(17,717	)		(17,717	)		—

Total marketable securities	$	19,577		$	19,574		$	(3	)


December 31, 2013	Amortized Cost			Fair Value			Unrealized Gain/( Loss)
Money market funds	$	11,345		$	11,345		$	—
Corporate debt securities		12,002			12,003			1

Total		23,347			23,348			1
Less amounts classified as cash equivalents		(14,770	)		(14,770	)		—

Total marketable securities	$	8,577		$	8,578		$	1

Index to Financial Statements

6. Balance Sheet Components

Property and equipment consisted of the following (in thousands):


	December 31,
	2014			2013
	(In thousands)
Lab equipment	$	9,850		$	9,035
Manufacturing equipment		11,239			10,502
Computer equipment and software		5,136			4,706
Furniture		816			816
Leasehold improvements		18,950			18,899

Property and equipment, gross		45,991			43,958
Less: accumulated depreciation		(32,038	)		(28,967	)

Property and equipment, net	$	13,953		$	14,991

Other accrued liabilities consisted of the following (in thousands):


	December 31,
	2014		2013
	(In thousands)
Accrued compensation	$	2,781	$	3,435
Accrued professional fees		1,144		796
Other		768		505

	$	4,693	$	4,736

7. Commitments and Contingencies

Operating Leases

We lease one building, at 2091 Stierlin Court, or the 2091 Building, and we formerly leased an additional building at 2023 Stierlin Court, or the 2023 Building, both in Mountain View, California, and both of which we began to occupy in 2007. We recognize rental expense on the facilities on a straight line basis over the initial term of the lease. Differences between the straight line rent expense and actual rent payments are classified as deferred rent liability on the balance sheet. The lease for the 2091 Building expires on March 31, 2018, and we have two options to extend the lease for five years each.

In January 2010, we entered into an agreement to sublease a portion of the 2023 Building from March 1, 2010 through February 28, 2014. In August 2010, we entered into an agreement to sublease approximately 2,500 square feet of the 2091 Building to Cypress Bioscience, Inc., or Cypress, and to provide certain administrative, facility and information technology support for a period of 12 months and on a month-to-month basis thereafter. The Cypress sublease was terminated in October 2012.

On March 30, 2012, we terminated the lease for the 2023 Building, totaling 41,290 square feet, and concurrently cancelled the subleases associated with the 2023 Building. At the time of the termination, we recorded a non-cash contra-expense of $1,421,000 in general and administrative expenses, which is the net effect of reversing $2,073,000 of deferred rent liability associated with the 2023 Building lease and subleases and accelerating $652,000 of depreciation of fixed assets associated with the 2023 Building.

The 2091 Building lease, as amended, included tenant improvement reimbursements from the landlord. We have recorded all tenant improvements as additions to property and equipment and are amortizing the improvements over the shorter of the estimated useful life of the improvement or the remaining life of the lease. The reimbursements received from the landlord are included in deferred rent liability and amortized over the life of the lease as a contra-expense.

Index to Financial Statements

Future minimum lease payments under non-cancelable operating leases, at December 31, 2014 were as follows (in thousands):


	Lease Payments
2015	$	3,197
2016		3,287
2017		3,386
2018		853
2019		—
Thereafter		—

Total minimum payments	$	10,723

Rental expense for the years ended December 31, 2014 and 2013 was $1,953,000 and $2,286,000, respectively. Rental expense for the year ended December 31, 2012, net of sublease income and exclusive of the impact of reversing the deferred rent liability and acceleration of deprecation described above, was $1,972,000. We had no rental income from the sublease agreements during the years ended December 31, 2014 or 2013, and $340,000 for the year ended December 31, 2012.

Manufacturing and Supply Agreement

In October 2013, Autoliv notified us that they were terminating, effective October 2016, the Manufacture Agreement. Upon termination of the Manufacture Agreement, we were to retain full ownership of the production equipment for commercial manufacture of chemical heat packages developed for us by Autoliv, and Autoliv’s obligations under the Manufacture Agreement will terminate in full.

In December 2014, we amended the Manufacture Agreement with Autoliv, or the 2014 Amendment. The 2014 Amendment states that the letter of termination we received in October 2013 is null, and that we and

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Index to Financial Statements

Autoliv are extending the agreement through 2018. In addition, we have the right to engage a second source supplier and implement a manufacturing line transfer from Autoliv to manufacture and supply the chemical heat packages to us or our licensees.

Contingencies

From time to time, we are involved in lawsuits, arbitrations, claims, investigations and proceedings that arise in the ordinary course of business. We make provisions for liabilities when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. No such provisions have been made for the the periods presented herein. Litigation and related matters are inherently unpredictable. If any unfavorable ruling were to occur in any specific period, there exists the possibility of a material adverse impact on the results of operations of that period or on our cash flows and liquidity.

8. Financing Obligations

Hercules Technology Growth Capital

In May 2010, we entered into a Loan Agreement with Hercules. Under the terms of the Loan Agreement, we borrowed $15,000,000 at an interest rate of the higher of (i) 10.75% or (ii) 6.5% plus the prime rate as reported in the Wall Street Journal, with a maximum interest rate of 14% and issued to Hercules a secured term promissory note evidencing the loan. We made interest-only payments through January 2011 and beginning in February 2011 the loan was repaid in 33 equal monthly installments. The loan was paid in full in October 2013.

In conjunction with the loan, we issued to Hercules a five-year warrant to purchase 37,639 shares of our common stock at a price of $26.90 per share. The warrant was immediately exercisable and expires in May 2015. We estimated the fair value of this warrant as of the issuance date to be $921,000 which was recorded as a debt discount to the loan and consequently a reduction to the carrying value of the loan. The fair value of the warrant was calculated using the Black-Scholes option valuation model, and was based on the contractual term of the warrant of five years, a risk-free interest rate of 2.31%, expected volatility of 84% and a 0% expected dividend yield. We also recorded fees paid to Hercules as a debt discount, which further reduced the carrying value of the loan. The debt discount was amortized to interest expense over the life of the loan.

Autoliv ASP, Inc.

In June 2010, in return for transfer to us of all right, title and interest in a production line for the commercial manufacture of chemical heat packages completed or to be completed by Autoliv on our behalf, we paid Autoliv $4,000,000 in cash and issued Autoliv a $4,000,000 unsecured promissory note. In February 2011, we entered into an agreement to amend the terms of the unsecured promissory note. Under the terms of that amendment, the original $4,000,000 note was cancelled and the New Note was issued with a reduced principal amount of $2,800,000.

The New Note bore interest beginning on January 1, 2011 at 8% per annum and was being paid in 48 consecutive and equal monthly installments of approximately $68,000. The New Note was paid in full in 2014.

Teva Pharmaceuticals USA, Inc.

In May 2013, concurrent with the Teva Agreement (see Note 8), we entered into a Convertible Promissory Note and Agreement to Lend, dated as of May 7, 2013, between us and Teva, or the Teva Note. Under the terms of the Teva Note, we may, upon written notice to Teva, draw upon the Teva Note to fund agreed operating budgets related to ADASUVE. The aggregate drawdowns may total up to $25,000,000 and will be due and payable, together with all interest, on the fifth anniversary of the signing of the Teva Note. We may prepay, from time to time, up to one-half of the total amounts advanced plus the related interest outstanding at any time prior to the maturity date. At any time prior to five days before the maturity date, Teva will have the right to convert the then outstanding amounts into shares of our common stock at a conversion price of $4.4833 per share. The Teva Note bears simple interest of 4% per year. We have two years from the effective date of the Teva Note to receive advances.

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Index to Financial Statements

As of the December 2014, we had fully drawn the $25,000,000 available under the Teva Note. At the time of the drawdowns, the contractual conversion price was less than the value of our common stock. As a result, at each draw down date, we calculated the value of the beneficial conversion feature of the convertible note and recorded an increase to additional paid-in-capital and a discount on the Teva Note which is being amortized to interest expense over the life of the borrowing. Additionally, at each draw, we reclassified the relative portion of the unamortized right-to-borrow asset, classified as an Other Asset, (see Note 8) against the Teva Note, which will is also being amortized to interest expense over the life of the borrowing.

As we drew on the Teva Note, the relative portion of the unamortized right-to-borrow is accounted for as a discount on the borrowing and will be amortized to interest expense over the life of the borrowing. In 2013, we drew down $15,000,000 against the Teva Note and reclassified $1,293,000 of the unamortized right-to-borrow as a discount on the borrowing to be amortized to interest expense over the life of the borrowing. In 2014, we drew down the remaining $10,000,000. The following table shows the effective interest rate for each drawdown after taking into consideration the beneficial ownership features and the right-to-borrow asset discount.


	Draw Amount		Beneficial Conversion Feature		Reclassified Unamortized Right-to- Borrow		Effective Interest Rate
September 2013	$	10,000,000	$	2,455,000	$	900,000		14.2	%
December 2013		5,000,000		657,000		393,000		10.2	%
March 2014		5,000,000		883,000		318,000		11.6	%
June 2014		5,000,000		148,000		252,000		6.6	%

We recognized $216,000 and $752,000 of interest expense related to amortization of the right-to-borrow asset during the years ended December 31, 2014 and 2013, respectively.

Royalty Securitization Financing

In March 2014, we completed a royalty securitization financing, which consisted of a private placement to qualified institutional investors of $45,000,000 of non-recourse notes issued by our wholly-owned subsidiary, or the Notes, and warrants to purchase 345,661 shares of our common stock at a price of $0.01 per share exercisable for five years from the date of issuance. The Notes bear interest at 12.25% per annum payable quarterly beginning June 15, 2014. All royalty and milestone payments under the Teva Agreement, after paying interest, administrative fees, and any applicable taxes, will be applied to principal and interest payments on the Notes until the Notes have been paid in full.

From the proceeds of the transaction, we established a $6,890,000 interest reserve account, which is classified as a noncurrent asset, to cover any potential shortfall in interest payments. At December 31, 2014, $2,757,000 remained in the interest reserve account.

The Notes are secured by the right to receive royalty and milestone payments under the Teva Agreement and our equity ownership in the wholly-owned subsidiary. The Notes have no other recourse to us. The Notes may not be redeemed at our option until after March 18, 2016, and may be redeemed after that date subject to the achievement of certain milestones and the payment of a redemption premium for any redemption occurring prior to March 19, 2019. The Notes are not convertible into Alexza equity, nor have we guaranteed them.

We valued the warrants issued to the Note holders utilizing the Black-Scholes valuation model with an assumed volatility of 87%, an estimated life of 5 years, a 1.54% risk-free interest rate and a dividend rate of 0%. The total value of the warrants, $1,721,000, was recognized as an increase to additional paid in capital and as a discount to the Notes. The Note discount is being amortized into interest expense over five-years. We incurred total fees and expenses of $4,171,000, which we recorded as a noncurrent Other Asset, and are amortizing into interest expense over a five-year period.

102

Index to Financial Statements

Future scheduled principal payments under the debt obligations as of December 31, 2014 are as follows (in thousands):


	Total
2015		—
2016		—
2017		—
2018		25,000
Thereafter		—

Total	$	25,000

The above table excludes any payments pursuant to the $45,000,000 from the Royalty Securitization Financing notes of our wholly-owned subsidiary, which have a legal maturity date in 2027. The principal payments by the subsidiary under the royalty securitization financing will be dependent upon the timing and amounts of royalties and milestone payments received under the Teva Agreement.

9. License Agreements

Cypress Bioscience, Inc.

In August 2010, we entered into a license and development agreement with Cypress Bioscience, Inc., or Cypress, for Staccato nicotine, or the Cypress Agreement. According to the terms of the Cypress Agreement, Cypress paid us a non-refundable upfront payment of $5,000,000 to acquire the worldwide license for the Staccato nicotine technology. In January 2011, Cypress was acquired by Ramius Value and Opportunity Advisors LLC; Royalty Pharma, U.S. Partner, LP; Royalty Pharma U.S. Partners 2008, LP; and RP Investment Corporation, or collectively, Royalty Pharma, at which time Royalty Pharma became Cypress’ successor in interest to the Cypress Agreement. As Royalty Pharma did not sell or license the Staccato nicotine technology by December 31, 2013, the Cypress Agreement automatically terminated and all rights to the Staccato nicotine technology reverted back to us at that date.

For revenue recognition purposes, we viewed the Cypress Agreement as a multiple element arrangement. Multiple element arrangements are analyzed to determine whether the various performance obligations, or elements, can be separated or whether they must be accounted for as a single unit of accounting. We evaluated the Cypress Agreement to determine whether the delivered elements under the arrangement had value on a stand-alone basis and whether objective and reliable evidence of fair value of the undelivered items existed. We accounted for the deliverables as a single unit of accounting. We did not recognize revenues under the Cypress Agreement in 2014 or 2013 and recognized $1,259,000 of revenue under the Cypress Agreement in 2012. At December 31, 2014, we had no deferred revenues related to the Cypress Agreement.

Grupo Ferrer Internacional, S.A.

On October 5, 2011, we and Ferrer entered into the Ferrer Agreement to commercialize ADASUVE in Europe, Latin America, and the Commonwealth of Independent States countries, or the Ferrer Territories. Under the terms of the Ferrer Agreement, we received an upfront cash payment of $10,000,000, of which $5,000,000 was paid to the former stockholders of Allegro. The Ferrer Agreement provided for up to an additional $51,000,000 in additional milestone payments, contingent on approval of Marketing Authorization Applications, or MAAs, individual country commercial sales initiation and royalty payments based on cumulative net sales targets in the Ferrer Territories. We were responsible for the marketing authorization for ADASUVE. The application for marketing authorization was submitted to the European Medicines Agency, or EMA, for an opinion regarding the potential authorization of ADASUVE and subsequent decision by the European Commission, or EC. We are also responsible for all post-authorization clinical studies required by the EMA and EC. Ferrer will be responsible for satisfaction of all other regulatory and pricing requirements to market and sell ADASUVE in the Ferrer Territories. Ferrer will have the exclusive rights to commercialize the product in the Ferrer Territories. We will supply ADASUVE to Ferrer for all of its commercial sales, and will receive a

103

Index to Financial Statements

specified per-unit transfer price paid in Euros. Either party may terminate the Ferrer Agreement for the other party’s uncured material breach or bankruptcy. The Ferrer Agreement continues in effect on a country-by-country basis until the later of the last to expire patent covering ADASUVE in such country or 12 years after first commercial sale. The Ferrer Agreement is subject to earlier termination in the event the parties mutually agree, by a party in the event of an uncured material breach by the other party or upon the bankruptcy or insolvency of either party.

In March 2012, we entered into an amendment to the Ferrer Agreement. We and Ferrer agreed to eliminate the potential MAA approval milestone payment in exchange for Ferrer’s purchase of 241,936 shares of our common stock for $12.40 per share for a total of $3,000,000, which reflected a premium on the fair value of our common stock of approximately $1,452,000.

In October 2014, we entered into an amendment to the Ferrer Agreement. We and Ferrer agreed to eliminate certain individual country commercial sales initiation milestone payments in exchange for Ferrer’s purchase of 2,000,000 shares of our common stock for $4.00 per share for a total of $8,000,000, which reflected a premium on the fair value of our common stock of approximately $2,400,000. In January 2015, we paid the former shareholders of Symphony Allegro $865,000 related to this stock sale.

We evaluated whether the delivered elements under the Ferrer Agreement have value on a stand-alone basis and allocated revenue to the identified units of accounting based on relative fair value. We determined that the license and the development and regulatory services are a single unit of accounting as the licenses were determined not to have stand-alone value. We have begun to deliver all elements of the arrangement and are recognizing the $10,000,000 upfront payment as revenue ratably over the estimated performance period of the agreement of four years. The $1,452,000 and $2,400,000 premiums received from the sale of common stock to Ferrer were additional consideration received pursuant to the Ferrer Agreement and does not pertain to a separate deliverable or element of the arrangement, and thus are being deferred and recognized as revenue in a manner consistent with the $10,000,000 upfront payment. As of December 31, 2014, Ferrer was our largest shareholder owning 11.55% of the total outstanding shares of our common stock.

The Ferrer Agreement provides for us to receive up to $48,000,000 of additional payments related to first commercial sales in nine identified countries and to cumulative net sales targets in the Ferrer Territories. The cumulative net sales targets will be recognized as royalty revenue when each target is earned and payable to us. The first commercial sales payments will be recognized utilizing the milestone method of revenue recognition. We believe each of these milestones is substantive as there is uncertainty that the milestones will be met, the milestone can only be achieved as a result of our past performance and the achievement of the milestone will result in additional payment to us. We will recognize milestone revenue upon first commercial sales in each of these identified countries.

In 2013, we received and recognized revenue on the first milestone in the amount of $1,250,000, of which $312,500 was paid to the former stockholders of Allegro (see Note 3). In 2014, we received and recognized revenue on the second milestone in the amount of $1,000,000, of which $250,000 was paid to the former stockholders of Allegro (see Note 3)

We recognized $1,987,000, $2,915,000, and $2,811,000 of license revenue related to the Ferrer Agreement in the years ended December 31, 2014, 2013 and 2012, respectively. At December 31, 2014 we had deferred revenue of $5,513,000 related to the Ferrer Agreement.

Teva Pharmaceuticals USA, Inc.

In May 2013, we entered into the Teva Agreement to provide Teva with an exclusive license to develop and commercialize ADASUVE in the United States. Under the terms of the Teva Agreement, Teva is responsible for all U.S. development, regulatory and commercialization activities for ADASUVE, including the U.S. post-approval clinical studies and any additional clinical trials for new indications. Teva has the full right to sublicense its rights and obligations under the Teva Agreement. We are responsible for manufacturing and supplying ADASUVE to Teva for clinical trials and commercial sales. Teva has the exclusive rights to commercialize ADASUVE in the United States and the co-exclusive rights (with us and our affiliates) to manufacture the product.

104

Index to Financial Statements

We received an upfront cash payment of $40,000,000 from Teva, $10,000,000 of which was paid to the former stockholders of Allegro. We are eligible to receive up to $195,000,000 in additional payments contingent on Teva’s successful completion of the ADASUVE post-approval studies in the United States and Teva achieving specified net sales targets. In addition to these payments, we will supply ADASUVE to Teva for all of its clinical trials and commercial sales, and we will receive a specified per-unit transfer price in an amount of the greater of our costs of commercial production or a specified per-unit price. Teva will make tiered royalty payments based on net commercial sales of ADASUVE in the United States. In March 2014, Teva announced the U.S. launch of ADASUVE.

Unless earlier terminated, the Teva Agreement continues in effect until the later of the last to expire patent covering ADASUVE in the United States or a specified number of years after first commercial sale. The Agreement is subject to earlier termination in the event the parties mutually agree, by a party in the event of an uncured material breach by the other party or upon the bankruptcy or insolvency of either party. Teva may also terminate the Teva Agreement in the event the FDA requires withdrawal or suspension of ADASUVE from the market due to safety reasons or, subject to a specified period of notice, for Teva’s convenience at any time following the first anniversary of the Teva Agreement.

We evaluated whether the delivered elements under the Teva Agreement have value on a stand-alone basis and allocated revenue to the identified units of accounting based on relative fair value. We determined that the license fees are a single unit of accounting and valued the license based on its best estimate of selling price, as VSOE and TPE of the selling price could not be determined. The selling price was estimated using discounted projected cash flows related to the licensed territory. We have delivered the license to Teva and recognized the $40,000,000 non-refundable upfront payment as revenue during 2013.

As described in Note 7, in connection with the Teva Agreement, we received a right-to-borrow under the Teva Note. We have the ability to draw on the Teva Note in amounts not to exceed $25,000,000, over a two year period. As outlined in Note 7, the Teva Note has a fixed conversion price and interest rate. This right-to-borrow was considered additional consideration provided by Teva to us pursuant to the Teva Agreement. We performed an analysis using a Monte Carlo simulation model with a volatility rate of 70% and an estimated debt yield of 15%. Based on this analysis, we determined that the fair value of this right-to-borrow was $2,800,000. We recorded this amount as revenue and as another asset upon entering into the Teva Note.

As noted above, we are eligible to receive up to $195,000,000 of additional payments from Teva related to Teva’s successful completion of the ADASUVE post-approval studies in the United States and Teva achieving specified net sales targets. The payments related to net sales targets will be recognized as royalty revenue when each target is earned and payable to us. The payment related to the completion of the ADASUVE post-approval studies will be recognized upon completion of the studies when the payment is earned and payable to us.

10. Warrants

In May 2010, in conjunction with the Loan Agreement with Hercules, we issued to Hercules a five-year warrant to purchase 37,639 shares of our common stock at a price of $26.90 per share. The warrant expires in May 2015. At December 31, 2014, this warrant remained outstanding and exercisable.

In August 2010, we issued an aggregate of 668,518 shares of our common stock and warrants to purchase up to an additional 334,258 shares of our common stock in a registered direct offering. These securities were sold as units with each unit consisting of (i) one share of common stock and (ii) a warrant to purchase 0.5 of a share of common stock, at a purchase price of $27.00 per unit. The warrants are exercisable at $33.00 per share and expire in August 2015. At December 31, 2014, these warrants remained outstanding and exercisable.

In May 2011, we issued an aggregate of 1,192,703 shares of our common stock and warrants to purchase up to an additional 417,445 shares of our common stock in a registered direct offering. The warrants are exercisable at $17.55 per share and will expire in May 2016. At December 31, 2014, these warrants remained outstanding and exercisable.

105

Index to Financial Statements

In February 2012, we issued an aggregate of 4,400,000 shares of our common stock and warrants to purchase up to an additional 4,400,000 shares of our common stock in an underwritten public offering. The warrants are exercisable beginning February 24, 2013, at an exercise price of $5.00 per share, and will expire on February 23, 2017. At December 31, 2014, these warrants remained outstanding and exercisable.

In March 2014, in conjunction with the Royalty Securitization Financing, we issued to the debt holders a five-year warrant to purchase 345,661 shares of our common stock at a price of $0.01 per share. The warrant expires in March 2019. At December 31, 2014, these warrants remained outstanding and exercisable.

All outstanding warrants include a provision that allows the warrant holder to net share settle the warrant. In no circumstances will we issue shares in excess of the number of shares underlying the warrant. The outstanding warrants are classified as additional paid in capital and are indexed to our common stock.

11. Equity Incentive Plans

2005 Equity Incentive Plan

In December 2005, our Board of Directors adopted the 2005 Equity Incentive Plan, or the 2005 Plan, and authorized for issuance thereunder 108,879 shares of common stock. The 2005 Plan became effective upon the closing of our initial public offering on March 8, 2006. The 2005 Plan is an amendment and restatement of our previous stock option plans.

Stock options granted under the 2005 Plan generally vest over 4 years, vesting is generally based on service time, and have a maximum contractual term of 10 years. Restricted stock units granted to non-employee directors, which are granted in lieu of paying director fees in cash, generally vest one year after the date of grant. Prior to vesting, restricted stock units do not have dividend equivalent rights, do not have voting rights and the shares underlying the restricted units are not considered issued and outstanding. Shares are issued on the date the restricted stock units vest.

The 2005 Plan provides for annual reserve increases on the first day of each fiscal year commencing on January 1, 2007 and ending on January 1, 2015. The annual reserve increases will be equal to the lesser of (i) 2% of the total number of shares of our common stock outstanding on December 31^st of the preceding calendar year, or (ii) 100,000 shares of common stock. Our Board of Directors has the authority to designate a smaller number of shares by which the authorized number of shares of common stock will be increased prior to the last day of any calendar year.

2005 Non-Employee Directors’ Stock Option Plan

In December 2005, our Board of Directors adopted the 2005 Non-Employee Directors’ Stock Option Plan, or the Directors’ Plan, and authorized for issuance thereunder 25,000 shares of common stock. The Directors’ Plan provides for the automatic grant of nonstatutory stock options to purchase shares of common stock to our non-employee directors, which vest over four years and have a term of 10 years. The Directors’ Plan provides for an annual reserve increase to be added on the first day of each fiscal year, commencing on January 1, 2007 and ending on January 1, 2015. The annual reserve increases will be equal to the number of shares subject to options granted during the preceding fiscal year less the number of shares that revert back to the share reserve during the preceding fiscal year. Our Board of Directors has the authority to designate a smaller number of shares by which the authorized number of shares of common stock will be increased prior to the last day of any calendar year. In May 2013, our stockholders approved an amendment to the Directors’ Plan to increase the shares reserved by an additional 200,000 shares.

106

Index to Financial Statements

The following table sets forth the summary of option activity under our share-based compensation plans:


	Outstanding Options
	Number of Shares			Weighted Average Exercise Price

Balance as of January 1, 2014		2,121,504		$	7.53
Options granted		778,800			4.30
Options exercised		(22,842	)		3.49
Options forfeited		(790,242	)		4.76
Options cancelled		(108,947	)		13.26

Balance as of December 31, 2014		1,978,273			7.10

At December 31, 2014, options to exercise 861,443 shares of our common stock, at a weighted average exercise price of $10.71 were exercisable.

The intrinsic value of options exercised is calculated based on the difference between the exercise price and the quoted market price of our stock on the exercise date. The total intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 was $26,000, $13,000, and $0, respectively. Options to exercise 23,019 shares of our common stock expired in 2014.

Information regarding the stock options outstanding at December 31, 2014 is summarized as follows:


	Outstanding						Exercisable
Exercise Price	Number of Shares		Remaining Contractual Life (In Years)		Aggregate Intrinsic Value		Number of Shares		Remaining Contractual Life (In Years)		Aggregate Intrinsic Value
$1.34 — $3.32		99,200		9.77	$	3,044		906		7.58	$	—
$3.47 — $3.47		255,733		7.08		—		150,625		6.74		—
$3.50 — $4.38		247,363		8.66		—		57,302		7.52		—
$4.41 — $4.42		248,661		7.40		—		200,420		7.17		—
$4.43 — $4.56		84,700		8.94		—		15,110		8.04		—
$4.57 — $4.57		369,000		9.49		—		—		—		—
$4.58 — $5.11		219,567		8.62		—		62,788		8.40		—
$5.13 — $14.20		158,919		5.68		—		81,565		2.63		—
$15.30 — $117.00		295,130		5.20		—		292,727		5.19		—

		1,978,273		7.76	$	3,044		861,443		6.12	$	—

The intrinsic value noted in the table above is calculated as the difference between the market value per share as of December 31, 2014 and the exercise price of the shares. The market value per share as of December 31, 2014, the last trading date of 2014, was $1.49 as reported by The NASDAQ Stock Market.

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Index to Financial Statements

Information with respect to unvested share units (restricted stock units) as of December 31, 2014 is as follows:


	Number of Shares			Weighted Average Grant Date Fair Value
Outstanding at January 1, 2014		521,050		$	4.67
Granted		—			—
Released		(31,825	)		4.67
Forfeited		(408,175	)		4.67

Outstanding at December 31, 2014		81,050			4.67

The total value of restricted stock units released during the years ended December 31, 2014, 2013, and 2012 was $136,000, $75,000, and $1,443,000, respectively.

We authorized shares of common stock for issuance under the 2005 Plan and the Directors’ Plan as follows.


Year	Number of Shares
2012		120,000
2013		2,319,812
2014		158,751

The shares authorized for issuance in 2013 include the annual reserve increase of 119,812 shares and the stockholder approved increase of 2,200,000 shares. As of December 31, 2014, 1,667,850 and 136,110 shares remained available for issuance under the 2005 Plan and the Directors’ Plan, respectively.

On January 1, 2015 an additional 100,000 and 75,000 shares were authorized for issuance under the evergreen provisions of the 2005 Plan and the Directors’ Plan, respectively.

2005 Employee Stock Purchase Plan

In December 2005, our Board of Directors adopted the 2005 Employee Stock Purchase Plan (“ESPP”) and authorized for issuance thereunder 50,000 shares of common stock. The ESPP allows eligible employee participants to purchase shares of our common stock at a discount through payroll deductions. The ESPP consists of a fixed offering period, generally twenty-four months with four purchase periods within each offering period. Purchases are generally made on the last trading day of each October and April. Employees purchase shares at each purchase date at 85% of the market value of our common stock on their enrollment date or the end of the purchase period, whichever price is lower.

The ESPP provides for annual reserve increases on the first day of each fiscal year commencing on January 1, 2007 and ending on January 1, 2015. The annual reserve increases will be equal to the lesser of (i) 1% of the total number of shares of our common stock outstanding on December 31 of the preceding calendar year, or (ii) 75,000 shares of common stock. Our Board of Directors has the authority to designate a smaller number of shares by which the authorized number of shares of common stock will be increased prior to the last day of any calendar year. In May 2011, our Compensation Committee terminated the then current offering period under the ESPP and resolved to begin a new offering period in August 2011 and also amended the ESPP to reduce the time period of each offering period from twenty-four to six months.

In July 2011, following stockholder approval, the ESPP was amended to, among other changes, modify the annual automatic increase in shares reserved for the plan to an amount equal to the least of (i) one percent (1%) of the total number of shares of common stock outstanding on December 31st of the preceding calendar year, (ii) 75,000 shares of common stock and (iii) an amount determined by our Board of Directors. The new offering period under the ESPP began on August 15, 2011 and the related purchase occurred on April 30, 2012.

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Index to Financial Statements

Pursuant to the ESPP, on January 1, 2014, 2013 and 2012 an additional 75,000, 75,000, and 72,136 shares, respectively, were reserved for issuance. We issued 70,226, 54,494, and 18,409 shares at weighted average prices of $2.82, $3.67, and $4.44 during the years ended December 31, 2014, 2013 and 2012, respectively. At December 31, 2014, 79,406 shares were available for issuance under the ESPP.

On January 1, 2015 an additional 75,000 shares were reserved for issuance under the ESPP.

12. 401(k) Plan

We sponsor a 401(k) Plan that stipulates that eligible employees can elect to contribute to the 401(k) Plan, subject to certain limitations. During the years ended December 31, 2014 and 2013, we matched a total of $128,000 and $96,000 employee contributions, respectively.

13. Income Taxes

There is no provision for income taxes because we have incurred operating losses since inception and applied a full valuation allowance against all deferred tax assets.

The reported amount of income tax expense (benefit) attributable to operations for the year differs from the amount that would result from applying domestic federal statutory tax rates to loss before income taxes from operations as summarized below (in thousands):


	Year Ended December 31,
	2014			2013			2012
Federal tax benefit at statutory rate	$	(12,489	)	$	(13,469	)	$	(9,512	)
State tax benefit net of federal effect		(2,143	)		(2,311	)		(1,632	)
Research and development credits		(560	)		(532	)		(254	)
Other permanent differences		2			14			(30	)
Share-based compensation		414			650			1,040
Adjustment to basis in subsidiary		(3,246	)		15,899			(757	)
Change in valuation allowance		16,946			(357	)		11,016
Reduction of deferred tax asset attributed to expired net operating loss		1,076			106			—
carryforward
Other		—			—			129

Total	$	—		$	—		$	—

Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. The deferred tax assets were calculated using an effective tax rate of 40%. Significant components of our deferred tax assets are as follows (in thousands):


	December 31,
	2014			2013
Federal and state net operating loss carryforwards	$	130,011		$	114,643
Federal and state research and development credit carryforwards		15,536			14,977
Accrued liabilities		7,177			8,085
Capitalized research and development costs		16,027			13,845
Other		2,092			2,648

Total deferred tax assets		170,843			154,198
Valuation allowance		(170,843	)		(154,198	)

Net deferred tax assets	$	—		$	—

109

Index to Financial Statements

Our accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of our net deferred tax assets. We primarily considered such factors as our history of operating losses, the nature of our deferred tax assets and the timing, likelihood and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible. At present, we do not believe that it is more likely than not that the deferred tax assets will be realized; accordingly, a full valuation allowance has been established and no deferred tax asset is shown in the accompanying balance sheets. The valuation allowance (decreased) increased by approximately $16,645,000, $(272,000) and $10,552,000 during the years ended December 31, 2014, 2013 and 2012, respectively.

As of December 31, 2014 we had federal net operating loss carryforwards of approximately $331,586,000. We also had federal research and development tax credit carryforwards of approximately $10,441,000. The net operating loss and tax credit carryforwards will expire at various dates beginning in 2020, if not utilized.

As of December 31, 2014, we had state net operating loss carryforwards of approximately $305,544,000 which will begin to expire in 2014. We also had state research and development tax credit carryforwards of approximately $7,720,000, which have no expiration.

As of December 31, 2014, approximately $1,393,000 of deferred tax assets is attributable to certain employee stock option deductions and the federal and state net operating loss carryforward has been adjusted accordingly. When realized, the benefit of the tax deduction related to these options will be accounted for as a credit to stockholders’ equity rather than as a reduction of the income tax provision.

A limitation may apply to the use of the net operating loss and credit carryforwards, under provisions of the Internal Revenue Code that are applicable if we experience an “ownership change”. That may occur, for example, as a result of trading in our stock by institutional investors as well issuance of new equity. Should these limitations apply, the carryforwards would be subject to an annual limitation, resulting in a substantial reduction in the gross deferred tax assets before considering the valuation allowance. As of December 31, 2014, we have not performed an analysis to determine if our net operating loss and credit carryforwards would be subject to such limitations.

110

Index to Financial Statements

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



Balance at January 1, 2012		2,934
Additions based on tax positions taken during a prior period		—
Reductions based on tax positions taken during a prior period		(16	)
Additions based on tax positions taken during the current period		96
Reductions based on tax positions taken during the current period		—
Reductions related to settlement of tax matters		—
Reductions related to a lapse of applicable statute of limitations		—


Balance at December 31, 2012		3,014
Additions based on tax positions taken during a prior period		—
Reductions based on tax positions taken during a prior period		(231	)
Additions based on tax positions taken during the current period		36
Reductions based on tax positions taken during the current period		—
Reductions related to settlement of tax matters		—
Reductions related to a lapse of applicable statute of limitations		—


Balance at December 31, 2013	$	2,819
Additions based on tax positions taken during a prior period		—
Reductions based on tax positions taken during a prior period		—
Additions based on tax positions taken during the current period		113
Reductions based on tax positions taken during the current period		—
Reductions related to settlement of tax matters		—
Reductions related to a lapse of applicable statute of limitations		—


Balance at December 31, 2014	$	2,932

If we eventually are able to recognize these uncertain tax positions, the unrecognized tax benefits would not reduce the effective tax rate if we are applying a full valuation allowance against the deferred tax assets, as is our current policy.

We have not incurred any material tax interest or penalties as of December 31, 2014. We do not anticipate any significant change within 12 months of this reporting date of its uncertain tax positions. We are subject to taxation in the United States and various states jurisdictions. There are no other ongoing examinations by taxing authorities at this time. Our various tax years starting with 2000 to 2014 remain open in various taxing jurisdictions.

111

Index to Financial Statements

14. Quarterly Results (Unaudited)

The following table is in thousands, except per share amounts:


	Quarter Ended
	March 31			June 30			September 30			December 31
Fiscal 2014
Revenues	$	2,166		$	1,484		$	457		$	1,454
Loss from operations		(8,803	)		(11,349	)		(10,040	)		(7,264	)
Net loss		(10,735	)		(5,962	)		(13,328	)		(6,707	)
Basic and diluted net loss per share		(0.62	)		(0.34	)		(0.77	)		(0.35	)
Fiscal 2013
Revenues	$	729		$	43,635		$	2,166		$	1,309
Loss from operations		(9,603	)		31,069			(10,339	)		(9,357	)
Net loss		(20,712	)		(799	)		(12,412	)		(5,692	)
Basic and diluted net loss per share		(1.31	)		(0.05	)		(0.72	)		(0.33	)

During the quarter ended December 31, 2014, we reversed approximately $1,009,000 and $1,191,000 of share-based compensation that was recognized during the three quarters ended September 31, 2014 and the three years ended December 31, 2013, respectively, due to a reversal of share-based compensation related to the rescission of equity awards.

112

Index to Financial Statements

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Not Applicable.

Item 9A.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures:

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, we are required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of December 31, 2014, the end of the period covered by this report, we carried out an evaluation, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2014.

Management’s Annual Report on Internal Control Over Financial Reporting:

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2014 based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). Based on the above evaluation, our management concluded that our internal control over financial reporting was ineffective as of December 31, 2014 due to the identification of a material weakness.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

As of December 31, 2013, the Company identified a material weakness related to the ineffective review and verification of internally prepared reports and analyses utilized in the financial closing process. During 2014, certain adjustments were identified by our external auditors, including adjustments with respect to the calculation of the fair value of our contingent consideration liability, that indicated a material weakness existed at December 31, 2014. The material weakness relates to our lack of resources in financial reporting roles with the appropriate skills to identify and assess financial accounting and reporting risks and to perform effective review during our financial statement close process.

This material weakness did not result in the restatement of prior quarterly or annually filed financial statements.

Remediation Plan

To remediate the material weakness described above, we have begun and will continue to implement remedial measures to improve and develop internal controls, processes and procedures in the financial statement close process and plan to improve our review of key inputs in the calculation of the fair value of the contingent consideration liability.

113

Index to Financial Statements

Changes in Internal Control Over Financial Reporting:

Other than the changes discussed above, there has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.

Other Information

Effective at the opening of business on March 4, 2015, we transferred the listing of our common stock from The Nasdaq Global Market to The Nasdaq Capital Market, following the approval of our listing application by the Listing Qualifications Staff of The Nasdaq Stock Market LLC. Our common stock will continue to trade under the symbol “ALXA”.

114

Index to Financial Statements

The Board of Directors and Shareholders

Alexza Pharmaceuticals, Inc.

We have audited Alexza Pharmaceuticals, Inc. internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Alexza Pharmaceuticals, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s report on internal control over financial reporting. Management has identified a material weakness in the design and operation of the Company’s controls due to a lack of resources in financial reporting roles with the appropriate skills to identify and assess financial accounting and reporting risks and to perform effective review during the financial statement close process. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2014 and 2013 and the related consolidated statements of loss and comprehensive loss, stockholders’ equity (deficit), and cash flows of Alexza Pharmaceuticals, Inc. and our report dated March 13, 2015 expressed an unqualified opinion thereon. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of those financial statements, and this report does not affect our report dated March 13, 2015, which expressed an unqualified opinion on those financial statements.

In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Alexza Pharmaceuticals, Inc. has not maintained effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.

/s/ Ernst & Young LLP

Redwood City, California

March 13, 2015

115

Index to Financial Statements

PART III

Item 10.

Directors and Executive Officers of the Registrant

The information required by this Item concerning our directors is incorporated by reference to the information to be set forth in the sections entitled “Proposal No. 1 — Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement for the 2015 Annual Meeting of Stockholders to be filed within 120 days after the end of our fiscal year ended December 31, 2014, or the Proxy Statement. The information required by this Item concerning our executive officers is incorporated by reference to the information to be set forth in the section of the Proxy Statement entitled “Executive Officers.” The information required by this item concerning compliance with Section 16(a) of the Exchange Act, our code of business conduct and ethics, the procedures by which security holders may recommend nominees for our board of directors and certain information related to our Audit and Ethics Committee is incorporated by reference to the information to be set forth in the sections entitled “Information Regarding the Board of Directors and Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.

Item 11.

Executive Compensation

The information required by this Item 11 is incorporated by reference to the information to be set forth in the sections entitled “Executive Compensation” and “Information Regarding the Board of Directors and Corporate Governance” in the Proxy Statement.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item 12 with respect to stock ownership of certain beneficial owners and management is incorporated by reference to the information to be set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.

Securities Authorized For Issuance Under Equity Compensation Plans

We maintain our 2005 Equity Incentive Plan, or the 2005 Plan, 2005 Non-Employee Directors’ Stock Option Plan, or the Directors’ Plan, and 2005 Employee Stock Purchase Plan, or the ESPP, pursuant to which we may grant equity awards to eligible persons.

The following table gives information about equity awards under the 2005 Plan, the Directors’ Plan and the ESPP as of December 31, 2014:


Plan Category	(a) Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights		(b) Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights		(c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
Equity compensation plans approved by security holders		2,059,323	$	6.82		1,883,366	(1)(2)
Equity compensation plans not approved by security holders		—		—		—

Total		2,059,323	$	6.82		1,883,366

(1)

The 2005 Plan incorporates an evergreen formula pursuant to which on each January 1^st, the aggregate number of shares reserved for issuance under the 2005 Plan will increase by a number equal to the least of (i) 100,000 shares, (ii) 2% of the outstanding shares on December 31^st of the preceding calendar year, or (iii) an amount determined by our Board.

116

Index to Financial Statements

The Directors’ Plan incorporates an evergreen formula pursuant to which on each January 1^st, the aggregate number of shares reserved for issuance under the Directors’ Plan will increase by the number of shares subject to options granted during the preceding calendar year less the number of shares that revert back to the share reserve during the preceding calendar year.

The ESPP incorporates an evergreen formula pursuant to which on each January 1^st, the aggregate number of shares reserved for issuance under the ESPP will increase by a number equal to the least of (i) 75,000 shares, (ii) 1% of the outstanding shares on December 31^st of the preceding calendar year, or (iii) an amount determined by our Board.

(2)	Of these shares, 1,667,850 shares remained available as of December 31, 2014 under the 2005 Plan, 136,110 shares under the Directors’ Plan and 79,406 under the ESPP.

Item 13.

Certain Relationships and Related Transactions and Director Independence

The information required by this Item 13 is incorporated by reference to the information to be set forth in the sections entitled “Certain Relationships and Related Transactions and Director Independence” and “Information Regarding the Board of Directors and Corporate Governance” in the Proxy Statement.

Item 14.

Principal Accountant Fees and Services

The information required by this Item 14 is incorporated by reference to the information to be set forth in the sections entitled “Principal Accountant Fees and Services” and “Pre-Approval Policies and Procedures” in the Proxy Statement.

117

Index to Financial Statements

PART IV

Item 15.

Exhibits and Financial Statement Schedules

(a) 1. Financial Statements

See Index to Financial Statements under Item 8 on page 83

(a) 2. Financial Statement Schedules

All schedules are omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Financial Statements or notes thereto.

(a) 3. Exhibits

118

Index to Financial Statements

EXHIBIT INDEX


Exhibit Number		Description of Document
3.1		Restated Certificate of Incorporation(23)
3.2		Certificate of Amendment to Restated Certificate of Incorporation(23)
3.3		Certificate of Amendment to Restated Certificate of Incorporation(23)
3.4		Amended and Restated Bylaws(1)
3.5		Amendment to Amended and Restated Bylaws(5)
4.1		Specimen Common Stock Certificate(23)
4.2		Second Amended and Restated Investors’ Rights Agreement between Registrant and certain holders of Preferred Stock dated November 5, 2004(1)
4.3		Reference is made to exhibits 3.1, 3.2, 3.3, 3.4, and 3.5
10.1*		Form of Director/Officer Indemnification Agreement entered into between Registrant and each of its directors and officers(7)
10.2*		Form of Amended Change of Control Agreement between Registrant and each of its officers (30)
10.3.1*		2005 Equity Incentive Plan, as amended(27)
10.3.2*		Form of Option Grant Notice, Form of Option Agreement and Form of Notice of Exercise to 2005 Equity Incentive Plan(1)
10.3.3*		Form of Notice of Grant of Stock Options to 2005 Equity Incentive Plan(15)
10.3.4*		Form of Option Agreement to 2005 Equity Incentive Plan(15)
10.3.5*		Form of Option Agreement to 2005 Equity Incentive Plan(15)
10.3.6*		Form of Notice of Grant of Award and Stock Unit Award Agreement to 2005 Equity Incentive Plan(11)
10.4.1		2005 Non-Employee Directors’ Stock Option Plan(16)
10.4.2		Form of Option Grant Notice, Form of Option Agreement and Form of Notice of Exercise to 2005 Non-Employee Directors’ Stock Option Plan(1)
10.5.1*		2005 Employee Stock Purchase Plan, as amended(18)
10.6.1		Lease Agreement between the Brittania, LLC and Registrant dated August 25, 2006(2)
10.6.2		First Amendment to Lease between Britannia Hacienda VIII LLC and Registrant dated May 4, 2007(3)
10.6.3†		Second Amendment to Lease between Britannia Hacienda VIII LLC and Registrant dated August 28, 2007(4)
10.6.4		Partial Lease Termination Agreement between the Registrant and Britannia Hacienda VIII LLC dated February 7, 2012(21)
10.7.1†		Manufacturing and Supply Agreement between Registrant and Autoliv ASP, Inc., dated November 2, 2007(5)
10.7.2†		Amendment No. 1 to Manufacturing and Supply Agreement between Registrant and Autoliv ASP, Inc. dated June 30, 2010(12)
10.7.3†		Amendment No. 2 to Manufacturing and Supply Agreement between Registrant and Autoliv ASP, Inc. dated February 15, 2011(20)
10.7.4¿		Amendment No. 3 to Manufacturing and Supply Agreement between Registrant and Autoliv ASP, Inc. dated December 11, 2014
10.8		Promissory Note issued by Registrant to Autoliv ASP, Inc. dated June 30, 2010(12)
10.9		Promissory Note issued by Registrant to Autoliv ASP, Inc. dated February 15, 2011(20)
10.10		Stock and Warrant Purchase Agreement between Registrant and Biomedical Investment Fund Pte Ltd., dated March 26, 2008(6)

119

Index to Financial Statements


10.11		Warrant to Purchase shares of Common Stock issued to Biomedical Investment Fund Pte Ltd. dated March 27, 2008(6)
10.12		Amended and Restated Purchase Option Agreement by and among Registrant, Symphony Allegro Holdings LLC and Symphony Allegro, Inc. dated June 15, 2009(35)
10.13		Amended and Restated Registration Rights Agreement between Registrant and Symphony Allegro Holdings LLC dated June 15, 2009(8)
10.14		Letter Agreement among Registrant, Symphony Allegro Holdings LLC, Symphony Capital Partners, L.P. and Symphony Strategic Partners, LLC, dated August 26, 2009(9)
10.15		Securities Purchase Agreement by and among Registrant and the purchasers identified therein, dated September 29, 2009(10)
10.16		Form of Warrants to Purchase shares of Common Stock, dated October 5, 2009(10)
10.17		Warrant issued by Registrant to Hercules Technology Growth Capital, Inc. dated May 4, 2010(12)
10.18		Form of Warrant to Purchase Shares of Common Stock dated August 10, 2010(14)
10.19		Securities Purchase Agreement dated May 3, 2011(17)
10.20		Form of Warrant to Purchase Shares of Common Stock dated May 6, 2011(17)
10.21.1†		Collaboration, License and Supply Agreement between Registrant and Grupo Ferrer Internacional, S.A. dated October 5, 2011(21)
10.21.2		Amendment to Collaboration, License and Supply Agreement between Registrant and Grupo Ferrer, Internacional, S.A. dated March 5, 2012(21)
10.21.3¿		Second Amendment to Collaboration, License and Supply Agreement between Registrant and Grupo Ferrer, Internacional, S.A. dated November 26, 2013
10.21.4¿		Third Amendment to Collaboration, License and Supply Agreement between Registrant and Grupo Ferrer, Internacional, S.A. dated October 27, 2014
10.21.5¿		Stock Purchase Agreement between Registrant and Grupo Ferrer, Internacional, S.A. dated October 27, 2014
10.22		Form of Warrant to Purchase Shares of Common Stock dated February 23, 2012(19)
10.23*		Form of Retention Bonus letter agreement between Registrant and each of Thomas B. King, James V. Casella, and Mark K. Oki dated March 23, 2012(22)
10.24*		Form of Issuance of an Officer RSU Retention Grant letter agreement between Registrant and each of Thomas B. King, James V. Casella, and Mark K. Oki dated March 23, 2012(22)
10.25		Common Stock Purchase Agreement between Registrant and Azimuth Opportunity, L.P. dated July 20, 2012(24)
10.26		Summary of Compensation Arrangements with Non-Employee Directors(16)
10.27		Amendment to License & Development Agreement between Alexza Pharmaceuticals, Inc. and Royalty Pharma dated January 4, 2013(25)
10.28		License and Supply Agreement between Registrant and Teva Pharmaceuticals USA, Inc. dated May 7, 2013(29)
10.29		Convertible Promissory Note and Agreement to Lend between Registrant and Teva Pharmaceuticals USA, Inc. dated May 7, 2013(28)
10.30		2015 Cash Bonuse Plan. (31)
10.31		Form of Warrants dated March 18, 20114 (32)
10.32		Indenture dated March 18, 2014, by and between Atlas U.S. Royalty, LLC, a wholly-owned subsidiary of the registrant, and U.S. National Bank Association (33)
14.1		Alexza Pharmaceuticals, Inc. Code of Business Conduct for Employees, Executive Officers and Directors(2)

120

Index to Financial Statements


21.1¿		Subsidiaries of Registrant
23.1¿		Consent of Independent Registered Public Accounting Firm
24.1¿		Power of Attorney included on the signature pages hereto
31.1¿		Section 302 Certification of principal executive officer.
31.2¿		Section 302 Certification of principal financial officer.
32.1‡		Section 1350 Certifications of CEO and CFO.
101.INS		XBRL Instance Document (filed electronically herewith).
101.SCH		XBRL Taxonomy Extension Schema Document (filed electronically herewith).
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document (filed electronically herewith).
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document (filed electronically herewith).
101.LAB		XBRL Taxonomy Extension Label Linkbase Document (filed electronically herewith).
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document (filed electronically herewith).

*	Management contract or compensation plan or arrangement.

¿	Filed herewith

‡	Furnished herewith

†	Confidential treatment has been granted with respect to certain portions of this exhibit. This exhibit omits the information subject to this confidentiality request. Omitted portions have been filed separately with the SEC.

(1)	Incorporated by reference to exhibits to our Registration Statement on Form S-1 filed on December 22, 2005, as amended (File No. 333-130644).

(2)	Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 29, 2007.

(3)	Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on August 13, 2007.

(4)	Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on November 1, 2007.

(5)	Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 17, 2008.

(6)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on March 26, 2008.

(7)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on July 14, 2008.

(8)	Incorporated by reference to our Current Report on Form 8-K/A (File No. 000-51820) as filed with the SEC on June 26, 2009.

(9)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on August 26, 2009.

(10)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on September 30, 2009.

(11)	Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 10, 2009.

(12)	Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on July 26, 2010.

(13)

Reserved.

121

Index to Financial Statements

(14)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on August 5, 2010.

(15)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on February 22, 2011.

(16)	Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on November 6, 2013.

(17)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on May 3, 2011.

(18)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on August 2, 2011.

(19)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on February 17, 2012.

(20)	Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 15, 2011.

(21)	Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 12, 2012.

(22)	Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on May 10, 2012.

(23)	Incorporated by reference to exhibits to our Registration Statement on Form S-3 filed on June 26, 2012 (File No. 333-182341).

(24)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on July 23, 2012.

(25)	Incorporated by reference to our Annual Report on Form 10-K filed on March 26, 2013 (File No. 000-51820).

(26)

Reserved.

(27)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on May 22, 2013.

(28)	Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on August 14, 2013.

(29)	Incorporated by reference to our Quarterly Report on Form 10-Q/A (File No. 000-51820) as filed with the SEC on October 23, 2013.

(30)	Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 25, 2014.

(31)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on February , 2015.

(32)	Incorporated by reference to our Quarterly Report on Form 10-Q/A (File No. 000-51820) as filed with the SEC on December 10, 2014

(33)	Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on May 5, 2014.

122

Index to Financial Statements

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


ALEXZA PHARMACEUTICALS, INC.

By:		/S/ THOMAS B. KING
		Thomas B. King
		President and Chief Executive Officer

Dated: March 13, 2015

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Thomas B. King and Mark K. Oki, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 13, 2015.


Signature		Title
/s/ THOMAS B. KING Thomas B. King		President, Chief Executive Officer and Director (Principal Executive Officer)

/s/ MARK K. OKI Mark K. Oki		Senior Vice President, Finance, Chief Financial Officer and Secretary (Principal Accounting Officer, Principal Financial Officer)

/s/ J. KEVIN BUCHI J. Kevin Buchi		Director

/s/ DEEPIKA R. PAKIANATHAN Deepika R. Pakianathan		Director

/s/ J. LEIGHTON READ J. Leighton Read		Director

/s/ GORDON RINGOLD Gordon Ringold		Director

/s/ ISAAC STEIN Isaac Stein		Director

/s/ JOSEPH L. TURNER Joseph L. Turner		Director

123

Index to Financial Statements

EXHIBIT INDEX


Exhibit Number		Description of Document
3.1		Restated Certificate of Incorporation(23)
3.2		Certificate of Amendment to Restated Certificate of Incorporation(23)
3.3		Certificate of Amendment to Restated Certificate of Incorporation(23)
3.4		Amended and Restated Bylaws(1)
3.5		Amendment to Amended and Restated Bylaws(5)
4.1		Specimen Common Stock Certificate(23)
4.2		Second Amended and Restated Investors’ Rights Agreement between Registrant and certain holders of Preferred Stock dated November 5, 2004(1)
4.3		Reference is made to exhibits 3.1, 3.2, 3.3, 3.4, and 3.5
10.1*		Form of Director/Officer Indemnification Agreement entered into between Registrant and each of its directors and officers(7)
10.2*		Form of Amended Change of Control Agreement between Registrant and each of its officers (30)
10.3.1*		2005 Equity Incentive Plan, as amended(27)
10.3.2*		Form of Option Grant Notice, Form of Option Agreement and Form of Notice of Exercise to 2005 Equity Incentive Plan(1)
10.3.3*		Form of Notice of Grant of Stock Options to 2005 Equity Incentive Plan(15)
10.3.4*		Form of Option Agreement to 2005 Equity Incentive Plan(15)
10.3.5*		Form of Option Agreement to 2005 Equity Incentive Plan(15)
10.3.6*		Form of Notice of Grant of Award and Stock Unit Award Agreement to 2005 Equity Incentive Plan(11)
10.4.1		2005 Non-Employee Directors’ Stock Option Plan(16)
10.4.2		Form of Option Grant Notice, Form of Option Agreement and Form of Notice of Exercise to 2005 Non-Employee Directors’ Stock Option Plan(1)
10.5.1*		2005 Employee Stock Purchase Plan, as amended(18)
10.6.1		Lease Agreement between the Brittania, LLC and Registrant dated August 25, 2006(2)
10.6.2		First Amendment to Lease between Britannia Hacienda VIII LLC and Registrant dated May 4, 2007(3)
10.6.3†		Second Amendment to Lease between Britannia Hacienda VIII LLC and Registrant dated August 28, 2007(4)
10.6.4		Partial Lease Termination Agreement between the Registrant and Britannia Hacienda VIII LLC dated February 7, 2012(21)
10.7.1†		Manufacturing and Supply Agreement between Registrant and Autoliv ASP, Inc., dated November 2, 2007(5)
10.7.2†		Amendment No. 1 to Manufacturing and Supply Agreement between Registrant and Autoliv ASP, Inc. dated June 30, 2010(12)
10.7.3†		Amendment No. 2 to Manufacturing and Supply Agreement between Registrant and Autoliv ASP, Inc. dated February 15, 2011(20)
10.7.4¿†		Amendment No. 3 to Manufacturing and Supply Agreement between Registrant and Autoliv ASP, Inc. dated December 11, 2014
10.8		Promissory Note issued by Registrant to Autoliv ASP, Inc. dated June 30, 2010(12)
10.9		Promissory Note issued by Registrant to Autoliv ASP, Inc. dated February 15, 2011(20)

124

Index to Financial Statements


10.10		Stock and Warrant Purchase Agreement between Registrant and Biomedical Investment Fund Pte Ltd., dated March 26, 2008(6)
10.11		Warrant to Purchase shares of Common Stock issued to Biomedical Investment Fund Pte Ltd. dated March 27, 2008(6)
10.12		Amended and Restated Purchase Option Agreement by and among Registrant, Symphony Allegro Holdings LLC and Symphony Allegro, Inc. dated June 15, 2009(35)
10.13		Amended and Restated Registration Rights Agreement between Registrant and Symphony Allegro Holdings LLC dated June 15, 2009(8)
10.14		Letter Agreement among Registrant, Symphony Allegro Holdings LLC, Symphony Capital Partners, L.P. and Symphony Strategic Partners, LLC, dated August 26, 2009(9)
10.15		Securities Purchase Agreement by and among Registrant and the purchasers identified therein, dated September 29, 2009(10)
10.16		Form of Warrants to Purchase shares of Common Stock, dated October 5, 2009(10)
10.17		Warrant issued by Registrant to Hercules Technology Growth Capital, Inc. dated May 4, 2010(12)
10.18		Form of Warrant to Purchase Shares of Common Stock dated August 10, 2010(14)
10.19		Securities Purchase Agreement dated May 3, 2011(17)
10.20		Form of Warrant to Purchase Shares of Common Stock dated May 6, 2011(17)
10.21.1†		Collaboration, License and Supply Agreement between Registrant and Grupo Ferrer Internacional, S.A. dated October 5, 2011(21)
10.21.2		Amendment to Collaboration, License and Supply Agreement between Registrant and Grupo Ferrer Internacional, S.A. dated March 5, 2012(21)
10.21.3¿		Second Amendment to Collaboration, License and Supply Agreement between Registrant and Grupo Ferrer Internacional, S.A. dated November 26, 2013
10.21.4¿†		Third Amendment to Collaboration, License and Supply Agreement between Registrant and Grupo Ferrer Internacional, S.A. dated October 27, 2014
10.21.5¿		Stock Purchase Agreement between Registrant and Grupo Ferrer, Internacional, S.A. dated October 27, 2014
10.22		Form of Warrant to Purchase Shares of Common Stock dated February 23, 2012(19)
10.23*		Form of Retention Bonus letter agreement between Registrant and each of Thomas B. King, James V. Casella, and Mark K. Oki dated March 23, 2012(22)
10.24*		Form of Issuance of an Officer RSU Retention Grant letter agreement between Registrant and each of Thomas B. King, James V. Casella, and Mark K. Oki dated March 23, 2012(22)
10.25		Common Stock Purchase Agreement between Registrant and Azimuth Opportunity, L.P. dated July 20, 2012(24)
10.26		Summary of Compensation Arrangements with Non-Employee Directors(16)
10.27		Amendment to License & Development Agreement between Alexza Pharmaceuticals, Inc. and Royalty Pharma dated January 4, 2013(25)
10.28		License and Supply Agreement between Registrant and Teva Pharmaceuticals USA, Inc. dated May 7, 2013(29)
10.29		Convertible Promissory Note and Agreement to Lend between Registrant and Teva Pharmaceuticals USA, Inc. dated May 7, 2013(28)
10.30		2015 Cash Bonus Plan. (31)
10.31		Form of Warrants dated March 18, 20114 (32)
10.32		Indenture dated March 18, 2014, by and between Atlas U.S. Royalty, LLC, a wholly-owned subsidiary of the registrant, and U.S. National Bank Association (33)

125

Index to Financial Statements


14.1		Alexza Pharmaceuticals, Inc. Code of Business Conduct for Employees, Executive Officers and Directors(2)
21.1¿		Subsidiaries of Registrant
23.1¿		Consent of Independent Registered Public Accounting Firm
24.1¿		Power of Attorney included on the signature pages hereto
31.1¿		Section 302 Certification of principal executive officer.
31.2¿		Section 302 Certification of principal financial officer.
32.1‡		Section 1350 Certifications of CEO and CFO.
101.INS		XBRL Instance Document (filed electronically herewith).
101.SCH		XBRL Taxonomy Extension Schema Document (filed electronically herewith).
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document (filed electronically herewith).
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document (filed electronically herewith).
101.LAB		XBRL Taxonomy Extension Label Linkbase Document (filed electronically herewith).
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document (filed electronically herewith).

*	Management contract or compensation plan or arrangement.

¿	Filed herewith

‡	Furnished herewith

†	Confidential treatment has been granted with respect to certain portions of this exhibit. This exhibit omits the information subject to this confidentiality request. Omitted portions have been filed separately with the SEC.

(1)	Incorporated by reference to exhibits to our Registration Statement on Form S-1 filed on December 22, 2005, as amended (File No. 333-130644).

(2)	Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 29, 2007.

(3)	Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on August 13, 2007.

(4)	Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on November 1, 2007.

(5)	Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 17, 2008.

(6)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on March 26, 2008.

(7)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on July 14, 2008.

(8)	Incorporated by reference to our Current Report on Form 8-K/A (File No. 000-51820) as filed with the SEC on June 26, 2009.

(9)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on August 26, 2009.

(10)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on September 30, 2009.

(11)	Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 10, 2009.

(12)	Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on July 26, 2010.

126

Index to Financial Statements

(13)

Reserved.

(14)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on August 5, 2010.

(15)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on February 22, 2011.

(16)	Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on November 6, 2013.

(17)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on May 3, 2011.

(18)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on August 2, 2011.

(19)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on February 17, 2012.

(20)	Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 15, 2011.

(21)	Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 12, 2012.

(22)	Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on May 10, 2012.

(23)	Incorporated by reference to exhibits to our Registration Statement on Form S-3 filed on June 26, 2012 (File No. 333-182341).

(24)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on July 23, 2012.

(25)	Incorporated by reference to our Annual Report on Form 10-K filed on March 26, 2013 (File No. 000-51820).

(26)

Reserved.

(27)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on May 22, 2013.

(28)	Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on August 14, 2013.

(29)	Incorporated by reference to our Quarterly Report on Form 10-Q/A (File No. 000-51820) as filed with the SEC on October 23, 2013.

(30)	Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 25, 2014.

(31)	Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on February , 2015.

(32)	Incorporated by reference to our Quarterly Report on Form 10-Q/A (File No. 000-51820) as filed with the SEC on December 10, 2014

(33)	Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on May 5, 2014.

127

Alexza Pharmaceuticals Inc. - FORM 10-K - March 13, 2015

Attached files