ALBIREO PHARMA, INC. - Quarter Report: 2010 March (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-33451

BIODEL INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		90-0136863 (IRS Employer Identification No.)
100 Saw Mill Road Danbury, Connecticut (Address of principal executive offices)		06810 (Zip code)

(203) 796-5000
(Registrant’s telephone number, including area code)

Not Applicable
(Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report)

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. þ Yes o 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 (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

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 o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(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 Exchange Act). o Yes þ No

Indicate the number of shares outstanding of the issuer’s common stock as of the latest practicable date: As of April 30, 2010 there were 23,890,662 shares of the registrant’s common stock outstanding.

 

 

BIODEL INC.

		Page
PART I — FINANCIAL INFORMATION
Item 1. Condensed Financial Statements			1
Condensed Balance Sheets at September 30, 2009 and March 31, 2010 (unaudited)			1
Condensed Statements of Operations (unaudited) for the Three and Six Months Ended March 31, 2009 and 2010 and for the period from December 3, 2003 (inception) to March 31, 2010			2
Condensed Statements of Stockholders’ Equity (unaudited) for the period from December 3, 2003 (inception) to March 31, 2010			3
Condensed Statements of Cash Flows (unaudited) for the Six Months Ended March 31, 2009 and 2010 and for the period from December 3, 2003 (inception) to March 31, 2010			6
Notes to Condensed Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Quantitative and Qualitative Disclosure About Market Risk			24
Item 4. Controls and Procedures			24
PART II — OTHER INFORMATION
Item 1A. Risk Factors			26
Item 6. Exhibits			40
Signatures			41
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-31.01
EX-31.02
EX-32.01

PART I — FINANCIAL INFORMATION

Item 1.   Condensed Financial Statements.

Balance Sheets
(in thousands, except share and per share amounts)

		September 30,				March 31,
		2009				2010
						(unaudited)
ASSETS
Current:
Cash and cash equivalents		$	54,640			$	32,716
Taxes receivable			752				766
Other receivables			—				1,406
Prepaid and other assets			482				828
Total current assets			55,874				35,716
Property and equipment, net			3,695				3,255
Intellectual property, net			56				54
Total assets		$	59,625			$	39,025
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current:
Accounts payable		$	1,007			$	2,913
Accrued expenses:
Clinical trial expenses			5,647				1,777
Regulatory			359				450
Payroll and related			1,117				972
Accounting and legal fees			325				444
Severance			183				46
Other			284				515
Income taxes payable			165				153
Total current liabilities			9,087				7,270
Commitments
Stockholders’ equity:
Preferred stock, $.01 par value; 50,000,000 shares authorized, none outstanding			—				—
Common stock, $.01 par value; 100,000,000 shares authorized; 23,803,672 and 23,889,612 issued and outstanding			238				239
Additional paid-in capital			176,764				179,537
Deficit accumulated during the development stage			(126,464	)			(148,021	)
Total stockholders’ equity			50,538				31,755
Total liabilities and stockholders’ equity		$	59,625			$	39,025

See accompanying notes to financial statements.

Condensed Statements of Operations
(in thousands, except share and per share amounts)
(unaudited)

																		December 3,
																		2003
		Three Months Ended								Six Months Ended								(inception) to
		March 31,								March 31,								March 31,
		2009				2010				2009				2010				2010
Revenue		$	—			$	—			$	—			$	—			$	—
Operating expenses:
Research and development			8,361				7,014				16,396				15,768				105,819
General and administrative			3,435				3,377				5,716				5,793				42,438
Total operating expenses			11,796				10,391				22,112				21,561				148,257
Other (income) and expense:
Interest and other income			(78	)			(2	)			(320	)			(7	)			(5,496	)
Interest expense			—				—				—				—				78
Loss on settlement of debt			—				—				—				—				627
Operating loss before tax provision (benefit)			(11,718	)			(10,389	)			(21,792	)			(21,554	)			(143,466	)
Tax provision (benefit)			(89	)			20				(139	)			3				(505	)
Net loss			(11,629	)			(10,409	)			(21,653	)			(21,557	)			(142,961	)
Charge for accretion of beneficial conversion rights			—				—				—				—				(603	)
Deemed dividend — warrants			—				—				—				—				(4,457	)
Net loss applicable to common stockholders		$	(11,629	)		$	(10,409	)		$	(21,653	)		$	(21,557	)		$	(148,201	)
Net loss per share — basic and diluted		$	(0.49	)		$	(0.44	)		$	(0.91	)		$	(0.90	)
Weighted average shares outstanding — basic and diluted			23,717,800				23,885,856				23,698,558				23,867,152

See accompanying notes to financial statements.

Condensed Statements of Stockholders’ Equity
(in thousands, except share and per share amounts)

																																		Deficit
																														Accumulated				Accumulated
		Common Stock								Series A Preferred stock								Series B Preferred stock								Additional				Other				During the				Total
		$01 Par Value								$.01 Par Value								$.01 Par Value								Paid in				Comprehensive				Development				Stockholders’
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Income (loss)				Stage				Equity
Shares issued to employees			732,504			$	7				—			$	—				—			$	—			$	(7	)		$	—			$	—			$	—
January 2004 Proceeds from sale of common stock			4,581,240				46				—				—				—				—				1,308				—				—				1,354
Net loss			—				—				—				—				—				—				—								(774	)			(774	)
Balance, September 30, 2004			5,313,744				53				—				—				—				—				1,301				—				(774	)			580
Additional stockholder contributions			—				—				—				—				—				—				514				—				—				514
Share-based compensation			—				—				—				—				—				—				353				—				—				353
Shares issued to employees and directors for services			42,656				1				—				—				—				—				60				—				—				61
July 2005 Private placement — Sale of Series A preferred stock, net of issuance costs of $379			—				—				569,000				6				—				—				2,460				—				—				2,466
Founder’s compensation contributed to capital			—				—				—				—				—				—				63				—				—				63
Net loss			—				—				—				—				—				—				—				—				(3,383	)			(3,383	)
Balance, September 30, 2005			5,356,400				54				569,000				6				—				—				4,751				—				(4,157	)			654
Share-based compensation			—				—				—				—				—				—				1,132				—				—				1,132
July 2006 Private placement — Sale of Series B preferred stock, net of issuance costs of $1,795			—				—				—				—				5,380,711				54				19,351				—				—				19,405
July 2006 — Series B preferred stock units issued July 2006 to settle debt			—				—				—				—				817,468				8				3,194				—				—				3,202
Shares issued to employees and directors for services			4,030				—				—				—				—				—				23				—				—				23
Accretion of fair value of beneficial conversion charge			—				—				—				—				—				—				603				—				(603	)			—
Net loss			—				—				—				—				—				—				—				—				(8,068	)			(8,068	)
Balance, September 30, 2006			5,360,430				54				569,000				6				6,198,179				62				29,054				—				(12,828	)			16,348

																																		Deficit
										Series A Preferred																				Accumulated				Accumulated
		Common Stock								stock								Series B Preferred stock								Additional				Other				During the				Total
		$01 Par Value								$.01 Par Value								$.01 Par Value								Paid in				Comprehensive				Development				Stockholders’
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Income (loss)				Stage				Equity
May 2007 Proceeds from sale of common stock			5,750,000				58				—				—				—				—				78,697				—				—				78,755
Conversion of preferred stock on May 16, 2007			6,407,008				64				(569,000	)			(6	)			(6,198,179	)			(62	)			4				—				—				—
Share-based compensation			—				—				—				—				—				—				4,224				—				—				4,224
Shares issued to employees, non-employees and directors for services			2,949				—				—				—				—				—				16				—				—				16
Stock options exercised			3,542				—				—				—				—				—				5				—				—				5
March 2007 Warrants exercised			2,636,907				26				—				—				—				—				397				—				—				423
Deemed dividend — warrants			—				—				—				—				—				—				4,457				—				(4,457	)			—
Net loss			—				—				—				—				—				—				—				—				(22,548	)			(22,548	)
Balance, September 30, 2007			20,160,836				202				—				—				—				—				116,854				—				(39,833	)			77,223
Proceeds from sale of common stock			3,260,000				32				—				—				—				—				46,785				—				—				46,817
Issuance of restricted stock			9,714				—				—				—				—				—				172				—				—				172
Share-based compensation			—				—				—				—				—				—				6,503				—				—				6,503
Stock options exercised			174,410				1				—				—				—				—				901				—				—				902
Warrants exercised			79,210				1				—				—				—				—				111				—				—				112
Net unrealized (loss) on Marketable Securities			—				—				—				—				—				—				—				(62	)			—				(62	)
Proceeds from sale of stock — ESPP			14,388				1				—				—				—				—				180				—				—				181
Net loss			—				—				—				—				—				—				—				—				(43,361	)			(43,361	)
Balance, September 30, 2008			23,698,558				237				—				—				—				—				171,506				(62	)			(83,194	)			88,487

Biodel Inc.
(A Development Stage Company)
Condensed Statements of Stockholders’ Equity
(in thousands, except share and per share amounts)

																																		Deficit
										Series A Preferred																				Accumulated				Accumulated
		Common Stock								stock								Series B Preferred stock								Additional				Other				During the				Total
		$01 Par Value								$.01 Par Value								$.01 Par Value								Paid in				Comprehensive				Development				Stockholders'
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Income (loss)				Stage				Equity
Share-based compensation			—				—				—				—				—				—				5,064				—				—				5,064
Stock options exercised			17,661				—				—				—				—				—				25				—				—				25
Net unrealized gain on Marketable Securities			—				—				—				—				—				—				—				62				—				62
Proceeds from sale of stock — ESPP			87,453				1				—				—				—				—				169				—				—				170
Net loss																																			(43,270	)			(43,270	)
Balance, September 30, 2009			23,803,672				238				—				—				—				—				176,764				—				(126,464	)			50,538
Share-based compensation			—				—				—				—				—				—				2,609				—				—				2,609
Stock options exercised			6,000				—				—				—				—				—				10				—				—				10
Proceeds from sale of stock — ESPP			79,940				1				—				—				—				—				154				—				—				155
Net loss			—				—				—				—				—				—				—				—				(21,557	)			(21,557	)
Balance, March 31, 2010 (unaudited)			23,889,612			$	239				—			$	—				—			$	—			$	179,537			$	—			$	(148,021	)		$	31,755

See accompanying notes to financial statements.

Condensed Statements of Cash Flows
(in thousands, except share and per share amounts)
(unaudited)

										December 3,
										2003
		Six months ended								(inception) to
		March 31,								March 31,
		2009				2010				2010
Cash flows from operating activities:
Net loss		$	(21,653	)		$	(21,557	)		$	(142,961	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			420				487				2,636
Founder’s compensation contributed to capital			—				—				271
Share-based compensation for employees and directors			2,525				2,633				17,837
Share-based compensation for non-employees			90				(24	)			2,301
Loss on settlement of debt			—				—				627
Write-off of loan to related party			—				—				41
Write-off of capitalized patent expense			—				—				208
(Increase) decrease in:
Income tax receivable			(157	)			(14	)			(766	)
Other receivables			—				(1,406	)			(1,406	)
Prepaid expenses			375				(346	)			(828	)
Increase (decrease) in:
Accounts payable			(202	)			1,906				2,913
Income taxes payable			104				(12	)			153
Accrued expenses			235				(3,710	)			4,423
Total adjustments			3,390				(486	)			28,410
Net cash used in operating activities			(18,263	)			(22,043	)			(114,551	)
Cash flows from investing activities:
Purchase of property and equipment			(77	)			(46	)			(5,855	)
Purchase of marketable securities			—				—				(25,614	)
Sale of marketable securities			13,595				—				25,614
Acquisition of intellectual property			—				—				(298	)
Loan to related party			—				—				(41	)
Net cash provided by (used in) investing activities			13,518				(46	)			(6,194	)
Cash flows from financing activities:
Options exercised			12				10				942
Warrants exercised			—				—				535
Employee stock purchase plan			27				155				506
Deferred public offering costs			—				—				(1,458	)
Stockholder contribution			—				—				1,660
Net proceeds from sale of Series A preferred stock			—				—				2,466
Net proceeds from sale of common stock			—				—				127,030
Proceeds from bridge financing			—				—				2,575
Net proceeds from sale of Series B preferred stock			—				—				19,205
Net cash provided by financing activities			39				165				153,461
Net (decrease) increase in cash and cash equivalents			(4,706	)			(21,924	)			32,716
Cash and cash equivalents, beginning of period			64,731				54,640				—
Cash and cash equivalents, end of period		$	60,025			$	32,716			$	32,716

Biodel Inc.
(A Development Stage Company)
Condensed Statements of Cash Flows
(in thousands, except share and per share amounts)
(unaudited)

										December 3,
										2003
		Six months ended								(inception) to
		March 31,								March 31,
		2009				2010				2010
Supplemental disclosures of cash flow information:
Cash paid for interest and income taxes was:
Interest		$	—			$	—			$	9
Income taxes			85				30				276
Non-cash financing and investing activities:
Settlement of debt with Series B preferred stock		$	—			$	—			$	3,202
Accrued expenses settled with Series B preferred stock			—				—				150
Deemed dividend — warrants			—				—				4,457
Accretion of fair value of beneficial charge on preferred stock			—				—				603
Conversion of convertible preferred stock to common stock			—				—				68

See accompanying notes to financial statements.

Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(unaudited)

1. Business and Basis of Presentation

  Business

     Biodel Inc. (“Biodel” or the “Company”, and formerly Global Positioning Group Ltd.) is a development stage specialty pharmaceutical company located in Danbury, Connecticut. The Company was incorporated in the State of Delaware on December 3, 2003 and commenced operations in January 2004. The Company is focused on the development and commercialization of innovative treatments for diabetes. The Company develops product candidates by applying its proprietary formulation technologies to existing drugs in order to improve their therapeutic results. The Company’s initial development efforts are focused on peptide hormones. The Company’s most advanced product candidate, VIAject^®, has been studied in two pivotal Phase 3 clinical trials for the treatment of patients with Type 1 and Type 2 diabetes. Earlier stage product candidates include VIAtab™, a sublingual tablet formulation of insulin, a line of adjustable basal insulins, a “smart” basal insulin and a stabilized formula of glucagon. The Company has developed all of its product candidates utilizing its proprietary VIAdel™ technology that allows the Company to study the interaction between peptide hormones and small molecules.

  Basis of Presentation

     The financial statements have been prepared by the Company and are unaudited. In the opinion of management, the Company has made all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position and results of operations for the interim periods presented. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted. These condensed financial statements should be read in conjunction with the September 30, 2009 audited financial statements and accompanying notes included in the 2009 Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 14, 2009. The results of operations for the six months ended March 31, 2010 are not necessarily indicative of the operating results for the full year or any other interim period.

     The Company is in the development stage, as defined by Financial Accounting Standards Board (“FASB”) ASC 915 (prior authoritative literature: Statement of Financial Accounting Standards No. 7), “Development Stage Entities”, as its primary activities since incorporation have been establishing its facilities, recruiting personnel, conducting research and development, business development, business and financial planning and raising capital.

Recently Adopted and Recently Issued Accounting Pronouncements

Adopted Accounting Pronouncements

  Fair Value Measurement

     Effective October 1, 2009, the Company adopted the provisions of ASU 2009-5 Fair Value and Disclosures (Topic 820) Measuring Liabilities at Fair Value (“ASU 2009-5”). ASU 2009-5 provides amendments to Subtopic 820-10, Fair Value Measurements and Disclosures-Overall, for the fair value measurement of liabilities. ASU 2009-5 clarifies that in circumstances in which a quoted price in an active market for the identical liability is not available; a reporting entity is required to measure fair value. The adoption of this accounting pronouncement did not have a material effect on the Company’s financial statements.

 Share-based Compensation

     In June 2008, the FASB issued ASC 260-10-55 Earnings Per Share — Overall (formerly Financial Statement Position Emerging Issues Task Force 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities) (“ASC 260-10-55”). ASC 260-10-55 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. ASC 260-10-55 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform to the provisions of ASC 260-10-55. Given that the holder of Restricted Stock Unit awards (“RSUs”) will only receive dividends or dividend equivalents on RSUs that have vested prior to the Company declaring dividends as well as forfeiting their rights to receive dividends or dividend equivalents on any unvested portion, the Company determined that the RSUs are non-participating securities and therefore are not subject to ASC 260-10-55.

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

2. Pre-Launch Inventory

     Inventory costs associated with products that have not yet received regulatory approval are capitalized if the Company believes there is probable future commercial use and future economic benefit. If the probability of future commercial use and future economic benefit cannot be reasonably determined, then costs associated with pre-launch inventory that has not yet received regulatory approval are expensed as research and development expense during the period the costs are incurred. For the three and six months ended March 31, 2010, the Company expensed $972 and $2,694, respectively, of costs associated with the purchase of recombinant human insulin, as research and development expense after it passed quality control inspection by the Company and transfer of title occurred. The Company submitted a new drug application to the U.S. Food and Drug Administration for VIAject^® in December 2009. Until the Company can determine the probability of VIAject^® receiving regulatory approval, costs associated with the purchase of recombinant human insulin will continue to be expensed as research and development.

3. Share-Based Compensation

     In March 2010, the shareholders of the Company approved a new 2010 Stock Incentive Plan (2010 Plan). Up to 5,400,000 shares of the Company’s common stock may be issued pursuant to awards granted under the 2010 Plan, plus shares of common stock underlying already outstanding awards under the Company’s prior plans. The contractual life of options granted under the 2010 Plan may not exceed seven years. The 2010 Plan uses a “fungible share” concept under which any awards that are not a full-value award shall be counted against the share limit as one (1) share for each share of common stock and any award that is not a full-value award shall be counted against the share limit as 1.6 shares for each one share of common stock. The Company will not make any new awards under any prior equity plans after March 2, 2010 - the effective date the plan was approved by the Company’s stockholders. The Company will continue to use the Black-Scholes pricing model to assist in the calculation of fair value. For options granted in the quarter ended March 31, 2010 and under the 2010 Plan, the expected life for options granted was calculated in accordance with the simplified method described in the Securities and Exchange Commission Staff Accounting Bulletin (SAB) Topic 14.D.2 in accordance with SAB No. 110. The simplified method was chosen due to limited Company history. Until the Company has adequate history, it will continue to utilize the simplified method.

     The Company recognizes 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. For options that were granted under the 2004 Stock Incentive plan, the Company used 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 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.

     Based on historical experience of option cancellations, the Company has estimated an annualized forfeiture rate of 9% for employee and director options. Forfeiture rates will be adjusted over the requisite service period when actual forfeitures differ, or are expected to differ, from the estimate.

     For determining the fair value of restricted stock units and total stock-based compensation expenses, the Company uses the fair market value of the Company’s stock on the award date of grant.

     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 six months ended March 31, 2009 and 2010 were $12, $2, $90 and $(24), 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 six months ended March 31, 2009 and 2010 were $1,377, $1,332, $2,525 and $2,633, respectively. At March 31, 2010, the total compensation charge related to non-vested options to employees and directors not yet recognized was $10,378 which will be recognized over the remaining vesting periods, up to the next four years, assuming the employees complete their service period for vesting of the options.

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

     The following table summarizes the stock option activity during the six months ended March 31, 2010:

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
		Number				Price				Life in Years				Value
Outstanding options, September 30, 2009			3,407,633			$	11.81							$	1,590
Granted			1,252,500				4.09							$	231
Exercised			6,000				1.70							$	15
Forfeited, expired			34,896				14.40								—
Outstanding options, March 31, 2010			4,619,237			$	9.71				6			$	1,821
Exercisable options, March 31, 2010			2,463,243			$	10.65				5			$	1,288

     The Black-Scholes pricing model assumptions for the three and six months ended March 31, 2009 and 2010 are determined as discussed below:

		Three Months Ended								Six Months Ended
		March 31,								March 31,
		2009				2010				2009				2010
Expected life (in years)			5.25				3.77-5.25				5.25				3.77-5.25
Expected volatility			61%-62	%			65	%			59-62	%			64-76%	%
Expected dividend yield			0	%			0	%			0	%			0	%
Risk-free interest rate			1.51 – 1.99	%			2.30 – 2.55	%			1.00-1.99	%			1.38-2.69	%
Weighted average grant date fair value		$	3.75			$	2.30			$	2.69			$	2.30

Restricted Stock Units

     In the quarter ended December 31, 2009, the Company granted restricted stock units to executive officers and employees pursuant to the 2004 Stock Incentive Plan. There is no direct cost to the recipients of the restricted stock units, except for any applicable taxes. Each restricted stock unit represents one share of common stock and vests in equal installments over four years on the anniversary of the grant date. Each year following the annual vesting date, between January 1st and March 15th, the Company will issue common stock for each vested restricted stock unit. During the vesting period, the restricted stock units cannot be transferred and the grantee has no voting rights. If the Company declares a dividend, restricted stock unit recipients will receive payment based upon the percentage of RSUs that have vested prior to the date of declaration. The costs of the awards, determined as the fair value of the shares on the grant date, is expensed ratably over the vesting period.

     Based on historical experience of option cancellations, the Company has estimated an annualized forfeiture rate of 9% for employee RSUs. Rates will be adjusted over the requisite service period when actual forfeitures differ, or are expected to differ, from the estimate.

     The stock-based compensation expense associated with the restricted stock units have been recorded in the statement of operations and in additional paid-in-capital on the balance sheets as follows:

		Three Months Ended								Six Months Ended
		March 31,								March 31,
		2009				2010				2009				2010
Stock compensation expense — RSUs		$	—			$	61			$	—			$	82

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

     At March 31, 2010, there was $905 of total unrecognized stock-based compensation expense related to restricted stock unit awards granted under the 2004 Stock Incentive Plan. This expense is expected to be recognized over the remaining vesting periods up to four years.

     The following table summarizes restricted stock unit activity from October 1, 2009 through March 31, 2010:

						Weighted
						Average
						Grant-Date
						Fair Value
		Shares				Per Share
Nonvested balance at October 1, 2009			—			$	—
Changes during the period
Shares granted			250,000				3.95
Shares vested			—				—
Shares forfeited or expired			(90	)			3.95
Nonvested balance at March 31, 2010			249,910			$	3.95

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. The Purchase Plan provides for an automatic rollover when the purchase price for a new offering period is lower than previously established purchase price(s). The Purchase Plan also provides for a one-time election that allows an employee the opportunity to enroll into a new offering period when the new offering is higher than their current offering price. This election must be made within 30 days from the start of a new offering period. Offering periods are twenty-seven months in length. The compensation cost in connection with the Purchase Plan for the three and six months ended March 31, 2009 and 2010 were $7, $28, $43, and $200, respectively.

     An aggregate of 1,600,000 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 March 31, 2010, a total of 1,418,220 shares were reserved and available for issuance under the Purchase Plan. As of March 31, 2010, the Company issued 181,780 shares under the Purchase Plan.

4. Income Taxes

     The Company accounts for income taxes under FASB Codification Topic 740 (“ASC 740”), “Income Taxes”. Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

     As of the three and six months ended March 31, 2010, a liability adjustment of $2 was recorded. The adjustment relates to the uncertainty of available tax credits. The Company did not have any amounts of unrecognized tax benefits that, if recognized, would affect its effective tax rate. The 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.

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

     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 2008 remain open and subject to examination by the appropriate governmental agencies in the United States and Connecticut.

     The Company’s effective tax rate for the six months ended March 31, 2009 and 2010, was 0% for both periods and differs from the federal statutory rate of 34% primarily due to the effects of state income taxes and valuation allowance.

5. 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								Six Months Ended
		March 31,								March 31,
		2009				2010				2009				2010
Common shares underlying warrants for Series A Preferred Stock			118,815				118,815				118,815				118,815
Stock options			3,595,129				4,619,237				3,595,129				4,619,237
Restricted stock units			—				249,910				—				249,910

6. Commitments

Chief Executive Officer Employment Agreement

     On March 30, 2010,the Company announced the appointment of Errol B. De Souza, Ph.D., as the Company’s President, Chief Executive Officer and a Director. In connection with his appointment, Dr. De Souza signed an employment agreement, dated March 26, 2010, setting forth the terms of his employment. The agreement provides for an initial term of employment for the period from March 29, 2010 to March 28, 2014 and it continues for successive one-year terms unless the agreement is terminated by either party on 120 days prior written notice in accordance with the terms of the agreement. The agreement provides for an annual salary of $450 and eligibility for a target bonus of 50% of the annual salary. In addition, Dr. De Souza was granted options to purchase 700,000 shares of the Company’s common stock pursuant to the Company’s 2010 Plan. These options will vest over a four-year period, with 25% vesting on the first anniversary of the grant date and the rest vesting in equal monthly amounts over the next three years. The Company will pay Dr. De Souza reasonable and documented temporary housing and related expenses of up to $5 per month for a period of up to 18 months following the date of the agreement.

     The Company may terminate the agreement with or without cause. Dr. De Souza will not be entitled to severance benefits if the Company terminates his employment for cause, or if he terminates his employment without good reason, as defined in the agreement. If the Company terminates Dr. De Souza’s employment without cause, or he terminates his employment with the Company for good reason, he is entitled to:

	•		two times his then current salary, plus two times his target annual bonus for the fiscal year in which he is terminated, plus the pro rata amount of his target annual bonus for the fiscal year in which he is terminated;
	•		COBRA benefits until the earlier of the end of the 24th month after the date his employment with the Company ends or the date his COBRA coverage expires;
	•		24 months of acceleration of his outstanding equity compensation awards; and
	•		full vesting of his outstanding equity compensation awards, if the Company terminates his employment without cause, or he terminates his employment with the Company for good reason within 12 months following a change in control, as defined in the agreement.

Chief Scientific Officer Employment Agreement

     On March 30, 2010, the Company announced the appointment of Dr. Solomon S. Steiner, our former Chairman, President and Chief Executive Officer, as the Company’s Chief Scientific Officer and a Director. In connection with his appointment, Dr. Steiner signed an employment agreement, dated March 26, 2010, setting forth the terms of his employment. The agreement provides for at-will employment, meaning that the Company or Dr. Steiner can terminate his employment at any time, for any or no reason, subject to the terms of the agreement. The agreement provides for an annual salary of $400 and eligibility for a target bonus of 50% of the annual salary.

     The Company may terminate the agreement with or without cause. Dr. Steiner will not be entitled to severance benefits if the Company terminates his employment for cause, as defined in the agreement. If the Company terminates Dr. Steiner’s employment without cause or he resigns for any reason, he is entitled to:

	•		two times his then current salary, plus two times his target annual bonus for the fiscal year in which he is terminated, plus the pro rata amount of his target annual bonus for the fiscal year in which he is terminated;
	•		COBRA benefits until the earlier of the end of the 24th month after the date his employment with the Company ends or the date his COBRA coverage expires;
	•		24 months of acceleration of his outstanding equity compensation awards; and
	•		full vesting of his outstanding equity compensation awards, if the Company terminates his employment without cause, or he resigns within 12 months following a change in control, as defined in the agreement.

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 were recorded in January 2009. As of March 31, 2010 the Company has paid $231 of the $277 obligation, which leaves $46 as a short term obligation.

Leases

     As of March 31, 2010, the Company leased three facilities in Danbury, Connecticut with Mulvaney Properties, LLC, which is controlled by a non-affiliated stockholder of the Company.

     The Company entered into its first lease for laboratory space in February 2004, which was subsequently renewed in January 2010 for an additional three years. The lease will expire in January 2013. This lease provides for annual basic lease payments of $64, plus operating expenses.

     In July 2007, the Company entered into a second lease for its corporate office, which was subsequently amended in October 2007. The October 2007 amendment increased the term from five years to seven years beginning on August 1, 2007 and ending on July 31, 2014. The renewal option was also amended from a five year to a seven year term. This lease provides for annual basic lease payments of $357, plus operating expenses.

     In December 2008, the Company entered into a third lease agreement for additional office space adjacent to its laboratory space, which was subsequently renewed in January 2010 for an additional three years. The Company has agreed to use the leased premises only for offices, laboratories, research, development and light manufacturing. This lease provides for annual basic lease payments of $29, plus operating expenses.

     Lease expense for the three and six months ended March 2009 and 2010 were $148, $146, $292, and $296, respectively.

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;

·

the length of time that will elapse before our NDA for VIAject® is fully reviewed by the FDA;

·

our ability to secure approval by the FDA for VIAject® without conducting additional pivotal clinical trials;

·

our ability to market, commercialize and achieve market acceptance for VIAject® ;

·

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 into which we enter, or our ability to commercialize our product candidates ourselves;

·

our ability to enforce our patent for VIAject® and our ability to secure additional patents for VIAject® and 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 degree of clinical utility of our products;

·

the ability of our major suppliers, including suppliers of insulin, to produce our product or products in our final dosage form;

·

our commercialization, marketing and manufacturing capabilities and strategies; 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, particularly in Part II - Item 1A “Risk Factors” of this Quarterly Report 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, which may be safer, more effective and more convenient for patients. We develop our product candidates by applying our proprietary formulation technologies to existing drugs in order to improve their therapeutic profiles. Our initial development efforts are focused on peptide hormones. Our most advanced product candidate, VIAject^®, has been studied in two pivotal Phase 3 clinical trials for the treatment of patients with Type 1 and Type 2 diabetes. Earlier stage product candidates include VIAtab™, a sublingual tablet formulation of insulin, a line of adjustable basal insulins, a “smart” insulin and a stabilized formulation of glucagon.

     VIAject^® is our proprietary injectable formulation of recombinant human insulin designed to be absorbed into the blood faster than the currently marketed rapid-acting insulin analogs. We have 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 both clinical trials we compared VIAject^® to Humulin ^® R, a form of recombinant human insulin. We believe VIAject^® can improve the management of blood glucose levels in patients with diabetes by more closely mimicking the natural first-phase insulin release that healthy individuals experience at mealtime. Patients in both clinical trials were treated for a period of six months.

     In October 2009, we executed a letter of intent to purchase a disposable insulin pen designed by Wockhardt Ltd. for use with VIAject^® . We intend to submit this pen to the FDA for review at a later date after completing certain modifications that we believe will improve its commercial performance.

     In December 2009, we submitted an NDA to the FDA under section 505(b)(2) of the FFDCA for clearance to market VIAject^® as a treatment for diabetes. The NDA includes results from pharmacokinetic and standardized meal studies, two pivotal 6 month Phase 3 clinical trials of VIAject^® in patients with Type 1 and Type 2 diabetes, as well as interim results from the long-term 18 month safety extension trials for patients who completed the pivotal Phase 3 clinical trials. The data from these studies consistently document the safety and efficacy of VIAject^®. We are seeking 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. On March 2, 2010, we announced that the FDA accepted the NDA for review and that we expected the Prescription Drug User Fee Act action date for the NDA to be October 30, 2010.

     In March 2010, we appointed Dr. Errol B. De Souza as our President and Chief Executive Officer and Dr. Charles Sanders as our board chairman. Dr. Solomon S. Steiner, our former Chairman, President and Chief Executive Officer, became our Chief Scientific Officer and remains a member of the board.

     In fiscal year 2010, we plan to conduct additional clinical trials designed to generate data to enhance VIAject’s^® potential commercial success. We believe that the following product candidates have recently shown promise in early-stage laboratory and clinical work, and we therefore intend to generate proof of concept data for these programs in animal models and small human clinical trials:

·

A line of adjustable basal insulins with durations that can be tailored to individual patients: Current basal insulins have a duration of activity that varies patient by patient; what may be an adequate duration for one patient may be too short or too long in another. We are developing a technology that may shorten or lengthen the duration of a basal insulin to best suit the individual needs of patients.

·

A “smart” basal insulin: We are developing a basal insulin formulation that may sufficiently react to a patient’s blood glucose levels to meaningfully lessen the risk of hyper or hypoglycemia compared to currently available basal insulin products, although we anticipate that prandial insulin injections would still be necessary in many instances.

·

Stabilized glucagon: Glucagon is a protein released by the pancreas that signals the liver to release glucose. Glucagon is currently approved and marketed for use as a rescue therapy in cases where patients become severely hypoglycemic. It is an unstable protein and therefore must be stored lyophilized and reconstituted prior to use. We are developing a more stable formulation of glucagon that may allow it to be stored as a refrigerated liquid. Such a formulation may offer certain advantages in the rescue market and may also enable the development of a bi-hormonal pump, which might better mimic the normal function of the human pancreas.

     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 $21.6 million for the six months ended March 31, 2010. As of March 31, 2010, we had a deficit