ALBIREO PHARMA, INC. - Quarter Report: 2009 June (Form 10-Q)

Biodel Inc.
(A Development Stage Company)
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(unaudited)

Recently Adopted and Recently Issued Accounting Pronouncements

Adopted Accounting Pronouncements

Fair Value Measurement

     In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurement (“SFAS No. 157”). This statement defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. In February 2008, the FASB approved FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”), that permits companies to partially defer the effective date of SFAS No. 157 for one year for non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. FSP 157-2 does not permit companies to defer recognition and disclosure requirements for financial assets and financial liabilities or for non-financial assets and non-financial liabilities that are re-measured at least annually. SFAS No. 157 therefore is effective for financial assets and financial liabilities and for non-financial assets and non-financial liabilities that are re-measured at least annually for fiscal years beginning after November 15, 2007. It is effective for non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis for fiscal years beginning after November 15, 2008. The Company has assessed the impact of this statement to the Company’s financial position, results of operations and cash flows. The Company has adopted this statement for financial assets and liabilities (See Note 3). The Company does not expect the adoption of this statement for non-financial assets and liabilities recognized at fair value on a nonrecurring basis to have a material effect on its condensed financial statements.

     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). This statement permits entities to choose to measure at fair value many financial instruments and certain other items such as investments, debt and derivative instruments. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company has adopted SFAS No. 159 and there was no material effect on its financial position and results of operations.

     In April 2009, the FASB issued three Final Staff Positions (“FSPs”) intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities. These FSPs are effective for interim and annual periods ending after June 15, 2009.

     FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP 157-4”), provides guidelines for making fair value measurements more consistent with the principles presented in SFAS No. 157 and relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales.

     FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP 115-2 and 124-2”), provide additional guidance on presenting impairment losses on securities to bring consistency to the timing of impairment recognition, and provide clarity to investors about the credit and noncredit components of impaired debt securities that are not expected to be sold. FSP 115-2 and 124-2 also require increased and timely disclosures sought by investors regarding expected cash flows, credit losses, and an aging of securities with unrealized losses.

     FSP FAS 107-1 and Accounting Principles Board Opinion 28-1 (“APB 28-1”), Interim Disclosures about Fair Value of Financial Instruments (“FSP 107-1”), increases the frequency of fair value disclosures required by SFAS No. 107, Disclosures About Fair Value of Financial Instruments (“SFAS No. 107”). FSP 107-1 relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value. Prior to issuing FSP 107-1, fair values for these assets and liabilities were only required to be disclosed once a year. FSP 107-1 now requires these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value.

     Some of the Company’s financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that approximate fair value due to their liquid or short-term nature, such as cash and cash equivalents and payables.

     The Company has evaluated and adopted FSP 157-4, FSP 115-2 and 124-2, and FSP 107-1, and there was no material effect on its financial position or results of operations.

Biodel Inc.
(A Development Stage Company)
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(unaudited)

Derivatives

     In May 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS No. 161”). SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk related contingent features in derivative agreements. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company has adopted SFAS No. 161, and since this standard only requires additional disclosures concerning derivatives and hedging activities, it did not have an impact on the Company’s financial position and results of operations.

Business Combinations

     In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS No. 141(R)”), which replaces SFAS No. 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted SFAS No. 141(R) and this standard did not have an effect on its financial position and results of operations.

Subsequent Event

     In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS No. 165”). SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 sets forth: (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for interim or annual financial periods ending after June 15, 2009. The Company adopted SFAS No. 165 and this standard did not have an effect on its financial position and results of operations. The Company evaluated all events or transactions that occurred after June 30, 2009 through August 7, 2009, the date it issued these financial statements. During the period, the Company did not have any material recognizable or unrecognizable subsequent events.

Recent Accounting Pronouncements

     In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets (“SFAS No. 166”), an amendment of FASB Statement No. 140. SFAS No. 166 improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS No. 166 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The Company is evaluating the impact the adoption of SFAS No. 166 will have on its financial position and results of operations.

     In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“SFAS No. 168”), which is a replacement of FASB Statement No. 162. The FASB Accounting Standards Codification (“Codification”) will be the single source of authoritative nongovernmental U.S. generally accepted accounting principles. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS No. 168 is effective for interim and annual periods ending after September 15, 2009. All existing accounting standards are superseded as described in SFAS No. 168. All other accounting literature not included in the Codification is non-authoritative. The Codification is not expected to have a significant effect on the Company’s financial position and results of operations.

2. Marketable Securities

     The Company classifies marketable securities as available for sale and accounts for marketable securities in accordance with the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS No. 115”). SFAS No. 115 addresses the accounting and reporting for investments in fixed maturity securities and for equity securities with readily determinable fair values. The Company determines the appropriate classification of debt and equity securities at the time of purchase and re-evaluates such designation as of each balance sheet date.

Biodel Inc.
(A Development Stage Company)
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(unaudited)

     The Company invests in certain marketable securities, which consist primarily of short-to-intermediate-term debt securities issued by the U.S. government, U.S. government agencies and municipalities and investment grade corporate securities. The Company only invests in marketable securities with active secondary or resale markets to ensure portfolio liquidity and the ability to readily convert investments into cash to fund current operations, or satisfy other cash requirements as needed. Due to the nature of the Company as a development stage company and its funding needs at times being uncertain, the Company has classified all marketable securities as available-for-sale. The unrealized gains and losses on these securities, are included in accumulated other comprehensive income as a separate component of stockholders’ equity. The specific-identification method is used to determine the cost of a security sold or the amount reclassified from accumulated other comprehensive income into earnings.

     The Company conducts periodic reviews to identify and evaluate each investment that has an unrealized loss, in accordance with FASB Staff Position No. 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. Any unrealized loss identified as other-than-temporary is recorded directly in the Statement of Operations.

     Marketable securities classified as available for sale are measured at fair value based on quoted market prices. The amortized cost, gross unrealized gains and losses and fair value of investment securities at June 30, 2009 are summarized below. The security listed as of June 30, 2009 matures in August 2009.

		June 30, 2009
		Amortized				Gross Unrealized								Fair
		Cost				Gains				Losses				Value
Short term marketable securities
Corporate and agency bonds		$	1,000				—				—			$	1,000
Total		$	1,000			$	—			$	—			$	1,000

     The security listed as of June 30, 2009 matures in August 2009. Contractual maturities of available-for-sale debt securities at June 30, 2009 are as follows:

		Estimated
		Fair Value
Within one year		$	1,000
Total		$	1,000

     The Company classifies all its marketable securities as current.

3. Fair Value Measurement

     In September 2006, the FASB issued SFAS No. 157. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 became effective October 1, 2008 for the Company. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. The three levels of inputs used are as follows:

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

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

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. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

     As of June 30, 2009, the Company’s only assets that fell under the scope of SFAS No. 157 were its investments — marketable securities. The fair values of the marketable securities were based on quoted market prices. Accordingly, the Company’s fair value measurements of its marketable securities are classified as a Level 1 input.

Biodel Inc.
(A Development Stage Company)
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(unaudited)

     The fair value of the Company’s financial assets carried at fair value and measured on a recurring basis is as follows:

						Quoted Prices
						in Active				Significant
						Markets for				Other				Significant
		Fair Value at				Identical				Observable				Unobservable
		June 30,				Assets				Market Inputs				Inputs
Description		2009				(Level 1)				(Level 2)				(Level 3)
Assets:
Corporate and agency bonds		$	1,000			$	1,000				—				—
Total		$	1,000			$	1,000			$	—			$	—

4. Stock-Based Compensation

     The Company applies SFAS No. 123 (Revised 2004), Share-Based Payments, (“SFAS No. 123(R)”) on a retrospective basis, to account for awards granted under the Company’s 2004 Stock Incentive Plan. SFAS No. 123(R) requires the Company to recognize stock-based compensation arising from compensatory stock-based transactions using the fair value at the grant date of the award. Determining the fair value of stock-based awards at the grant date requires judgment. The Company uses an option-pricing model (Black-Scholes pricing model) to assist in the calculation of fair value. Due to its limited history, the Company uses the “calculated value method” which relies on comparable company historical volatility and uses the average of (i) the weighted average vesting period and (ii) the contractual life of the option, or eight years, as the estimated term of the option. The Company bases its estimates of expected volatility on the median historical volatility of a group of publicly traded companies that it believes are comparable to the Company based on the criteria set forth in SFAS No. 123(R), particularly in terms of line of business, stage of development, size and financial leverage.

     The risk free rate of interest for periods within the contractual life of the stock option award is based on the yield of U.S. Treasury strips on the date the award is granted with a maturity similar to the expected term of the award. The Company estimates forfeitures based on actual forfeitures during its limited history. Additionally, the Company has assumed that dividends will not be paid.

     For stock options granted to non-employees, the Company measures fair value of the equity instruments utilizing the Black-Scholes model, if that value is more reliably measurable than the fair value of the consideration or service received. The fair value of these instruments are periodically revalued as the options vest, and are recognized as expense over the related period of service or vesting period, whichever is longer. The total compensation charge or (credit) for options granted to non-employees for the three and nine months ended June 30, 2008 and 2009 was $347, ($10), $482 and $81, respectively.

     The Company expenses ratably over the vesting period the cost of the stock options granted to employees and directors. The total compensation charge for the three and nine months ended June 30, 2008 and 2009 was $1,541, $1,303, $5,484 and $3,827, respectively. At June 30, 2009, the total compensation charge related to non-vested options to employees and directors and non-employee consultants not yet recognized was $10,715, which will be recognized over the next four years assuming the employees complete their service period for vesting of the options.

     The following table summarizes the stock option activity during the nine months ended June 30, 2009:

										Weighted
						Weighted				Average
						Average				Remaining
						Exercise				Contractual				Aggregate
		Number				Price				Life in Years				Intrinsic Value
Outstanding options, September 30, 2008			3,135,390			$	13.92							$	815,000
Granted			611,500				2.69								1,575,000
Exercised			10,577				1.41								40,000
Forfeited, expired			(223,882	)			14.40
Outstanding options, June 30, 2009			3,512,431			$	11.92				6			$	2,390,000
Exercisable options, June 30, 2009			1,768,909			$	10.63				4			$	1,380,000

Biodel Inc.
(A Development Stage Company)
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(unaudited)

     The Black-Scholes pricing model assumptions for the three months ended June 30, 2008 and nine months ended June 30, 2008 and 2009 are determined as discussed below:

		Three Months ended				Nine Months Ended
		June 30,				June 30,
		2008				2008				2009
Expected life (in years)			5.25				5.25				5.25
Expected volatility			58%–66	%			58%–66	%			59%–68	%
Expected dividend yield			0	%			0	%			0	%
Risk-free interest rate			2.57%–3.73	%			2.46%–4.23	%			1%-3.19	%
Weighted average grant date fair value		$	15.07			$	16.88			$	2.69

2005 Employee Stock Purchase Plan

     The Company’s 2005 Employee Stock Purchase Plan (the “Purchase Plan”) was adopted by its Board of Directors and approved by its stockholders on March 20, 2007. The Purchase Plan became effective upon the closing of the Company’s initial public offering. The Purchase Plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Code.

     Under the Purchase Plan, eligible employees may contribute up to 15% of their eligible earnings for the period of that offering withheld for the purchase of common stock under the Purchase Plan. The employee’s purchase price is equal to the lower of: 85% of the fair market value per share on the start date of the offering period in which the employee is enrolled or 85% of the fair market value per share on the semi-annual purchase date. The Purchase Plan imposes a limitation upon a participant’s right to acquire common stock if immediately after the purchase the employee would own 5% or more of the total combined voting power or value of the Company’s common stock or of any of its affiliates not eligible to participate in the Purchase Plan. When the purchase price for a new offering period is lower than previously established purchase price(s) participants in the Purchase Plan are automatically rolled over into the lower-priced offering. Additionally, participants may elect to enroll in any new offering at the time the offering commences. However, participants may only be enrolled in a single offering at any given time. Offering periods are twenty-seven months in length. The compensation cost in connection with the Purchase Plan for the three months and nine months ended June 30, 2008 and 2009 was $17, $163, $39 and $206, respectively, in accordance with SFAS No. 123(R) and Financial Accounting Standards Board Technical Bulletin No. 97-1 (As Amended) Accounting under Statement 123 for Certain Employee Stock Purchase Plan with a Look-Back Option (“FTB No. 97-1”). The Purchase Plan is considered compensation under SFAS No. 123(R) and FTB No. 97-1.

     An aggregate of 1,500,000 shares of common stock are reserved for issuance pursuant to purchase rights to be granted to the Company’s eligible employees under the Purchase Plan. The Purchase Plan shares are replenished annually on the first day of each calendar year by virtue of an evergreen provision. The provision allows for share replenishment equal to the lesser of 1% of the total number of shares of common stock outstanding on that date or 100,000 shares. As of June 30, 2009, a total of 1,398,160 shares were reserved and available for issuance under the Purchase Plan. As of June 30, 2009, the Company issued 101,840 shares under the Purchase Plan.

5. Income Taxes

     Effective October 1, 2007, the Company adopted Financial Accounting Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (“FIN 48”) when accounting for its uncertain tax positions. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company’s income tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 utilizes a two-step approach for evaluating uncertain tax positions accounted for in accordance with SFAS No. 109. Step one, recognition, requires a company to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. Step two, measurement, is based on the largest amount of exposure, which is more likely than not to be realized on ultimate settlement.

     The Company did not have any liabilities for unrecognized tax positions as of October 1, 2007 (adoption date). During the three months ended June 30, 2009, the Company performed a partial study on the research and development activities that occurred in the state of Connecticut that supports our Connecticut research and development credits and refunds. The results of that study decreased income tax receivable and the corresponding FIN 48 reserve relating to an anticipated tax refund from the state of Connecticut for research and development activities. As of the nine months ended June 30, 2009, this resulted in a 1% increase to the Company’s effective tax rate. The FIN 48 liability does not include interest or penalties based on the nature of the liability. The Company plans to treat any future interest or penalties as operating expense.

     The Company files U.S. federal and state tax returns and has determined that its major tax jurisdictions are the United States and Connecticut. The tax years ended in 2004 through 2007 remain open and subject to examination by the appropriate governmental agencies in the United States and Connecticut.

Biodel Inc.
(A Development Stage Company)
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(unaudited)

     The Company’s effective tax rate for the nine months ended June 30, 2008 and 2009, was 2% and 1%, respectively, and differs from the federal statutory rate of 34% primarily due to the effects of state income taxes and valuation allowance.

6. Net Loss per Share

     Basic and diluted net loss per share has been calculated by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding during the period. All potentially dilutive common shares have been excluded from the calculation of weighted average common shares outstanding, as their inclusion would be antidilutive.

     The amount of options and warrants excluded are as follows:

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2008				2009				2008				2009
Common shares underlying warrants for Series A
Preferred Stock			118,815				118,815				118,815				118,815
Stock options			3,139,958				3,512,431				3,139,958				3,512,431

7. Commitments

Former General Counsel Severance Agreement

     Effective January 1, 2009, R. Timmis Ware, the Company’s former General Counsel and Secretary, resigned from all his positions with the Company. Pursuant to the Company’s severance agreement with Mr. Ware, Mr. Ware will receive a bonus, continuation of salary and certain benefits until June 30, 2010. Furthermore, the agreement permits for the acceleration of the vesting of options to purchase 170,445 shares of common stock at exercise prices between $1.41 through $18.16 that remain exercisable through the original expiration date. The charge of approximately $277 for the lump sum payment, salary and benefit continuation for eighteen months and option acceleration modification charge of approximately $100 have been recorded in the fiscal quarter ended March 31, 2009. As of June 30, 2009 the Company has paid $92 of the $277 obligation, which leaves of $185 as a short term obligation.

Former Chief Financial Officer Severance Agreement

     On November 13, 2007, F. Scott Reding, the Company’s former Chief Financial Officer, Chief Accounting Officer and Treasurer, resigned from all his positions with the Company. In connection with Mr. Reding’s resignation, the Company and Mr. Reding entered into a severance agreement that established the terms of Mr. Reding’s separation of employment. The charge of $482 for the lump sum payment, salary and benefit continuation for two years and were recorded in the year ended September 30, 2008. The charge of $482 includes lump sum payment and payment for the continuation of salary and certain benefits for two years. As of June 30, 2009, the Company has adjusted the obligation by $12 and paid $396 of the $482 obligation, which leaves $74 as a short term obligation.

Leases

     On December 1, 2008, the Company entered into a lease agreement (the “Lease”) with Mulvaney Properties LLC to lease a facility located in Danbury, Connecticut (the “Leased Premises”) for fourteen months beginning December 1, 2008 and ending January 30, 2010, at a total lease and operating cost of $50 for the fourteen months. The Company has agreed to use the Leased Premises only for offices, laboratories, research, development and light manufacturing. Upon 180 days written notice prior to the expiration of the Lease, the Company may renew the Lease for one additional year under the same terms and conditions.

FORWARD-LOOKING STATEMENTS

     This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

     Our forward-looking statements in this Quarterly Report on Form 10-Q are subject to a number of known and unknown risks and uncertainties that could cause actual results, performance or achievements to differ materially from those described or implied in the forward-looking statements, including:

	•		our ability to secure approval by the U.S. Food and Drug Administration, or FDA, for our product candidates under Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act, or FFDCA;
	•		our ability to file our New Drug Application, or NDA, for VIAject® by the end of the calendar year 2009 as planned and, once filed, the length of time that will elapse before our NDA is fully reviewed by the FDA;
	•		our ability to secure approval by the FDA for VIAject® without conducting additional pivotal clinical trials;
	•		the FDA’s findings regarding data anomalies observed in India in our Phase 3 clinical trial of VIAject® for patients with Type 1 diabetes;
	•		our ability to market, commercialize and achieve market acceptance for product candidates, particularly VIAject®, developed using our VIAdel™ technology;
	•		the progress, timing or success of our product candidates, particularly VIAject®, and that of our research, development and clinical programs, including any resulting data analyses;
	•		our ability to enter into collaboration arrangements for the commercialization of our product candidates and the success or failure of any such collaborations that we enter, or our ability to commercialize our product candidates ourselves;
	•		our ability to enforce our patent for VIAject® and secure patents for our other product candidates;
	•		our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;
	•		the rate and degree of market acceptance and clinical utility of our products;
	•		the ability of our major suppliers, including our supplier of insulin, to produce our product or products in our final dosage form;
	•		our commercialization, marketing and manufacturing capabilities and strategy; and
	•		our ability to accurately estimate anticipated operating losses, future revenues, capital requirements and our needs for additional financing.

     We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in “Part II Item 1A — Risk Factors,” that could cause actual results or events to differ materially from the forward-looking statements that we make.

     You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits hereto with the understanding that our actual future results may be materially different from what we expect. It is routine for internal projections and expectations to change as the year or each quarter in the year progresses, and therefore it should be clearly understood that the internal projections and beliefs upon which we base our expectations are made as of the date of this Quarterly Report on Form 10-Q and may change prior to the end of each quarter or the year. While we may elect to update forward-looking statements at some point in the future, we do not undertake any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q . Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-Q , including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this Form 10-Q (see Part II-Item 1A below) for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

     We are a specialty biopharmaceutical company focused on the development and commercialization of innovative treatments for endocrine disorders such as diabetes and osteoporosis, which may be safer, more effective and convenient. We develop our product candidates by applying our proprietary formulation technologies to existing drugs in order to improve their therapeutic results. Our initial development efforts are focused on peptide hormones.

     Our most advanced product candidate is VIAject^®, a proprietary injectable formulation of recombinant human insulin designed to be absorbed into the blood faster than the currently marketed rapid-acting insulin analogs. We completed two pivotal Phase 3 clinical trials of VIAject^®, one in patients with Type 1 diabetes and the other in patients with Type 2 diabetes. In addition to VIAject^®, we are developing VIAtab™, a sublingual, or below the tongue, tablet formulation of insulin. We have tested one formulation of VIAtab™ in Phase 1 trials in patients with Type 1 diabetes and plan to develop additional formulations for further clinical testing. We are developing VIAtab™ as a potential treatment for patients with Type 2 diabetes who are in the early stages of their disease. In addition to our insulin programs, we have two preclinical product candidates for the treatment of osteoporosis — VIAmass™ and VIAcal™. VIAmass™ is a sublingual rapid-acting formulation of parathyroid hormone 1-34. VIAcal™ is a sublingual rapid-acting formulation of salmon calcitonin. Pending further development of our regulatory plans for VIAject^®, we have suspended significant expenditures for these earlier stage product candidates, as we believe that focusing our resources on the later-stage VIAject^® program provides our best opportunity to maximize stockholder value.

     We have developed all of our product candidates utilizing our proprietary VIAdel™ technology, which allows us to study the interaction between peptide hormones and small molecules. We use our technology to reformulate existing peptide drugs with small molecule ingredients that are generally regarded as safe by the U.S. Food and Drug Administration, or the FDA, to improve their therapeutic effect by entering the blood more rapidly and in greater quantities.

Recent Developments

     In March 2009, we announced our plan to submit an NDA to the FDA by the end of this calendar year to market VIAject^® for the treatment of diabetes. After reviewing all of the data from the two pivotal Phase 3 clinical trials with regulatory consultants and meeting with the FDA staff, we decided to proceed with the submission of our NDA under section 505(b)(2) of the FFDCA. The NDA will be based upon results from multiple pharmacokinetic and pharmacodynamic studies as well as two completed Phase 3 studies of VIAject^® in patients with Type 1 and Type 2 diabetes. We intend to seek approval for a 100 IU/cc liquid formulation of VIAject^®, that is bioequivalent to the two-part 25 IU/cc lyophilized powder formulation of VIAject^® that was used in our pivotal Phase 3 clinical trials.

     In September 2008, we reported that preliminary efficacy results from patients with Type 1 diabetes in India in our Phase 3 clinical trial of VIAject^® were not comparable to results from patients in the United States and Germany. While non-inferiority of VIAject^® to Humulin^® R was achieved without the data from India, it was not achieved when the data from India was included. We identified probable causes for the variance in the data from India with assistance of regulatory consultants and presented the results to the FDA in January 2009 in our pre-NDA briefing package. Among the causes noted in the briefing package, an identifiable subset of blood samples from patients in India was found to be compromised due to excessive heat exposure in transit to a central laboratory. When the compromised samples are removed from the efficacy analysis, non-inferiority in both the Type 1 and Type 2 trials is achieved.

     We completed a 40 patient bioequivalence clinical trial of VIAject^® in January 2009. The VIAject^® formulation used in the pivotal Phase 3 clinical trials was a two vial presentation, with one vial containing lyophilized insulin and the second vial containing 10cc of the proprietary VIAject^® diluent, which upon reconstitution yields a concentration of 25 IU/cc. We have developed a pre-mixed, liquid formulation of VIAject^® at a concentration of 100 IU/cc. This formulation is being developed in two presentations: vials for use with syringes and insulin pumps and cartridges for both disposable and reusable pen injectors. The bioequivalence trial successfully demonstrated that the liquid 100 IU/cc formulation is bioequivalent to the 25 IU/cc two-part lyophilized formulation.

     The trial studying the bioequivalence of the 25 IU/cc and 100 IU/cc formulations also compared the relative levels of injection site discomfort associated with the two formulations. Each of the 40 patients in the trial received both the 25 IU/cc and 100 IU/cc formulations and were asked to compare the pain intensity upon injection of each formulation with the pain associated with the prandial insulin they normally utilized. While 20% of the study subjects reported that the pain upon injection was “moderately” or “greatly” increased when injected with the 25 IU/cc, only 5% of the subjects reported “moderately” more pain and no patients reported greatly more pain when injected with the 100 IU/cc formulation. Thirty percent of subjects who received the 25 IU/cc formulation and 45% of subjects upon receiving the 100 IU/cc formulation reported no pain with injection. For the balance of the 25 IU/cc and 100 IU/cc injections, subjects reported little to no difference in pain compared to the prandial insulin they normally used.

     We plan to conduct additional clinical trials designed to generate additional data to enhance the potential marketing of VIAject^®.

     We are a development stage company. We were incorporated in December 2003 and commenced active operations in January 2004. To date, we have generated no revenues and have incurred significant losses. We have financed our operations and internal growth through our initial public offering in May 2007 and follow-on offering in February 2008 and prior to that, private placements of convertible preferred stock and other securities. We have devoted substantially all of our efforts to research and development activities, including clinical trials. Our net loss applicable to common stockholders was $32.8 million for the nine months ended June 30, 2009. As of June 30, 2009, we had a deficit accumulated during the development stage of $116 million. The deficit accumulated during the development stage is attributable primarily to our research and development activities. Research and development and general and administrative expenses represent approximately 71% and 29%, respectively, of the net loss that we have incurred since our inception. We expect to continue to generate significant losses as we continue to develop our product candidates.

Financial Operations Overview

Revenues

     To date, we have generated no revenues. We do not expect to begin generating any revenues unless any of our product candidates receive marketing approval or if we receive payments in connection with strategic collaborations that we may enter into for the commercialization of our product candidates.

Research and Development Expenses

     Research and development expenses consist of the cost associated with our basic research activities, as well as the costs associated with our drug development efforts, conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings. Our research and development expenses consist of:

	•		external research and development expenses incurred under agreements with third-party contract research organizations and investigative sites, third-party manufacturing organizations and consultants;
	•		employee-related expenses, which include salaries and benefits for the personnel involved in our preclinical and clinical drug development and manufacturing activities; and
	•		facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment and laboratory and other supplies.

     While we have suspended significant expenditures on VIAtab™, VIAmass™, VIAcal™ and any enlargement of our laboratory facilities pending further development of our regulatory plans for VIAject^®, we expect to continue to incur significant operating losses for the next several years as we:

	•		continue our clinical trial extension program for the pivotal Phase 3 clinical trials of VIAject®, which is designed to run through the eighteenth month of patient treatment, subject to compassionate use exceptions, if any;
	•		conduct additional clinical trials of VIAject® to support our commercialization efforts and, potentially, FDA approval; and
	•		purchase recombinant human insulin and other materials to build commercial supply inventory for VIAject®.

     If we obtain regulatory approval for VIAject^®, research and development expenses may increase significantly as we prepare for the commercial launch of VIAject^® and reinvigorate development work on our early stage product candidates.

     We have used our employee and infrastructure resources across multiple research projects, including our drug development programs. To date, we have not tracked expenses related to our product development activities on a program-by-program basis. Accordingly, we cannot reasonably estimate the amount of research and development expenses that we incurred with respect to each of our clinical and preclinical product candidates. However, substantially all of our research and development expenses incurred to date are attributable to our VIAject^® program.

     The following table illustrates, for each period presented, our research and development costs by nature of the cost.

																		December 3, 2003
																		(Inception) to
		Three Months Ended June 30,								Nine Months Ended June 30,								June 30,
		2008				2009				2008				2009				2009
		(in thousands)
Research and development expenses:
Preclinical expenses		$	1,410			$	542			$	3,150			$	2,122			$	11,666
Manufacturing expenses			1,789				3,454				3,557				8,736				19,123
Clinical/regulatory expenses			3,685				3,995				14,818				13,529				51,324
Total		$	6,884			$	7,991			$	21,525			$	24,387			$	82,113

     The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, specific timing and estimated costs of the efforts that will be necessary to complete the remainder of the development of, or the period, if any, in which material net cash inflows may commence from our product candidates. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

	•		our ability to secure approval by the FDA for our product candidates under Section 505(b)(2) of the FFDCA;
	•		our ability to file our NDA for VIAject® by the end of the calendar year 2009 as planned and, once filed, the length of time that will elapse before our NDA is fully reviewed by the FDA;
	•		our ability to secure approval by the FDA for VIAject® without conducting additional pivotal clinical trials;
	•		the FDA’s findings regarding data anomalies observed in India in our Phase 3 clinical trial of VIAject® for patients with Type 1 diabetes;
	•		the size, endpoints and duration of additional clinical trials of VIAject® to support our commercialization efforts and, potentially, FDA approval;
	•		the cost to fully develop the 100 IU/cc liquid formulation of VIAject®;
	•		the cost to develop an insulin pen program for use with VIAject®;
	•		the costs of pre-commercialization activities, including increased insulin purchases;
	•		the costs associated with qualifying and obtaining regulatory approval of suppliers of insulin and manufacturers of our product candidates;
	•		the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims;
	•		the emergence of competing technologies and products and other adverse market developments; and
	•		our ability to establish and maintain collaborations and the terms and success of the collaborations, including the timing and amount of payments that we might receive from potential strategic collaborators.

     A change in the outcome of any of these variables with respect to the development of VIAject^® or our other product candidates could mean a significant change in the costs and timing associated with product development. For example, if the FDA or other regulatory authority were to require us to conduct an additional pivotal Phase 3 clinical trial of VIAject^®, we could be required to expend significant additional financial resources and time on the completion of that clinical development program.

General and Administrative Expenses