MANNKIND CORP - Annual Report: 2009 (Form 10-K)
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
| or | ||
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-50865.
MannKind Corporation
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
13-3607736 (I.R.S. Employer Identification No.) |
|
| 28903 North Avenue Paine Valencia, California (Address of principal executive offices) |
91355 (Zip Code) |
Registrant’s telephone number, including area code
(661) 775-5300
(661) 775-5300
Securities registered pursuant to Section 12(b) of the Act:
| Title of Class | Name of Each Exchange on Which Registered | |
| Common Stock, par value $0.01 per share | The Nasdaq Global Market |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
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). Yes o No o
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 o | |||
| (Do not check if a smaller reporting | company | |||||
| company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act).
Yes o No þ
Yes o No þ
As of June 30, 2009, the aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the last sale price of such stock as of such date on the
Nasdaq Global Market, was approximately $473,888,088.
As of February 19, 2010, there were 113,355,204 shares of the registrant’s Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement, or the Proxy Statement, for the 2010
Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K,
are incorporated by reference in Part III, Items 9-13 of this Annual Report on Form 10-K.
MANNKIND CORPORATION
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2009
For the Fiscal Year Ended December 31, 2009
TABLE OF CONTENTS
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Forward-Looking Statements
Statements in this report that are not strictly historical in nature are forward-looking
statements. These statements include, but are not limited to, statements about: the progress or
success of our research, development and clinical programs, including the submission of application
for and receipt of regulatory clearances and approvals, and the timing or success of the
commercialization of AFREZZA™, our ultra rapid-acting insulin product that was formerly
known as AFRESA®, or any other products or therapies that we may develop; our ability to
market, commercialize and achieve market acceptance for AFREZZA, or any other products or therapies
that we may develop; our ability to protect our intellectual property and operate our business
without infringing upon the intellectual property rights of others; our estimates for future
performance; our estimates regarding anticipated operating losses, future revenues, capital
requirements and our needs for additional financing; and scientific studies and the conclusions we
draw from them. In some cases, you can identify forward-looking statements by terms such as
“anticipates,” “believes,” “could,” “estimates,” “expects,” “goal,” “intends,” “may,” “plans,”
“potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions intended to
identify forward-looking statements. These statements are only predictions or conclusions based on
current information and expectations and involve a number of risks and uncertainties. The
underlying information and expectations are likely to change over time. Actual events or results
may differ materially from those projected in the forward-looking statements due to various
factors, including, but not limited to, those set forth under the caption “Risks and Uncertainties
That May Affect Results” and elsewhere in this report. Except as required by law, we undertake no
obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
AFREZZA™, MedTone® and Technosphere® are our trademarks in the United States. We
have also applied for or have registered company trademarks in other jurisdictions, including
Europe and Japan. This document also contains trademarks and service marks of other companies that
are the property of their respective owners.
PART I
Item 1. Business
Unless the context requires otherwise, the words “MannKind,” “we,” “company,” “us” and “our”
refer to MannKind Corporation. Unless explicitly stated otherwise, AFREZZA refers to the
combination of AFREZZA inhalation powder and the AFREZZA inhaler.
OVERVIEW
MannKind Corporation is a biopharmaceutical company focused on the discovery, development and
commercialization of therapeutic products for diseases such as diabetes and cancer. Our lead
product candidate, AFREZZA (insulin human [rDNA origin]) Inhalation Powder, is an ultra
rapid-acting insulin that has completed Phase 3 clinical trials that evaluated its safety and
efficacy in the treatment of diabetes. We submitted a new drug application, or NDA, to the United
Stated Food and Drug Administration, or FDA, for AFREZZA in March 2009.
On March 12, 2010, we received a Complete Response letter from the
FDA regarding this NDA, seeking additional information about AFREZZA.
As of the date of this
Annual Report, AFREZZA remains under review by the FDA.
AFREZZA utilizes our proprietary Technosphere formulation technology, which is based on a
class of organic molecules that are designed to self-assemble into small particles onto which drug
molecules can be loaded. With AFREZZA, we load recombinant human insulin onto the Technosphere
particles; however, this technology is not limited to insulin delivery. We believe it represents a
versatile drug delivery platform that may allow pulmonary administration of certain drugs that
currently require administration by injection, such as glucagon-like peptide-1, or GLP-1. Beyond
convenience, we believe the key advantage of drugs inhaled as Technosphere formulations is that
they have been shown to be absorbed very rapidly into the arterial circulation, essentially
mimicking intra-arterial administration.
In addition to our Technosphere platform, we are developing therapies for the treatment of
different types of cancer. We have conducted Phase 1 clinical studies of two immunotherapy product
candidates, MKC1106-PP and MKC1106-MT, and are preparing to initiate a Phase 2 study of MKC1106-MT
in patients with advanced melanoma. We are also conducting preclinical studies of a drug candidate,
MKC204, that may have the potential to treat certain malignancies and inflammatory diseases.
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The following chart indicates the most advanced stage of development for each of our product
candidates.
| Preclinical | Clinical Studies | Regulatory | ||||||||||||||||||||||
| Development | Phase 1 | Phase 2 | Phase 3 | Review | Commercial | |||||||||||||||||||
Technosphere Platform |
||||||||||||||||||||||||
AFREZZA (insulin) |
X | |||||||||||||||||||||||
MKC253 (GLP-1) |
X | |||||||||||||||||||||||
MKC180 (obesity compound) |
X | |||||||||||||||||||||||
Cancer Immunotherapy |
||||||||||||||||||||||||
MKC1106-MT |
X | |||||||||||||||||||||||
MKC1106-PP |
X | |||||||||||||||||||||||
MKC1106-NS |
X | |||||||||||||||||||||||
Cancer Drugs |
||||||||||||||||||||||||
MKC204 (IRE-1 inhibitor) |
X | |||||||||||||||||||||||
We were incorporated in the State of Delaware in 1991. Our principal executive offices are
located at 28903 North Avenue Paine, Valencia, California 91355, and our telephone number at that
address is (661) 775-5300. Our website address is http://www.mannkindcorp.com. Our filings with the
Securities and Exchange Commission, or SEC, including our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports are available
free of charge through our website as soon as reasonably practicable after being electronically
filed with or furnished to the SEC. We regularly post copies of our press releases as well as
additional information on our website. Interested persons can subscribe on the website to e-mail
alerts that are sent automatically when we issue press releases, file reports with the SEC or post
certain other information to the website.
RECENT DEVELOPMENTS
On March 12, 2010, we received a Complete Response letter from the FDA regarding the NDA for
AFREZZA. A Complete Response letter is issued by the FDA’s Center for Drug Evaluation and Research
when the review of a submitted file is completed and questions remain that preclude the approval of
the NDA in its current form.
The Complete Response letter related to the AFREZZA application requested several items, including:
| • | information and currently available clinical data that support the clinical utility of AFREZZA; | ||
| • | information about the comparability of the MedTone inhaler to an earlier version of this device that was used in pivotal clinical trials; | ||
| • | changes to the proposed labeling of the cartridges, foil pouches and cartons; and | ||
| • | updated safety data related to AFREZZA, including whether there were any significant changes or findings in the safety profile. |
The letter did not require any additional pre-marketing clinical studies in order for the FDA to
complete its review of the NDA.
The letter stated that the FDA had not yet completed its inspection of one of the manufacturing or
testing facilities listed in the NDA and that satisfactory inspection reports for all facilities
must be received before the application could be approved. We had previously been informed by the
FDA that it had not yet completed this inspection. We are aware from our supplier that the
inspection of its facility has now been scheduled by the FDA and is expected to take place during
the week of March 22, 2010.
In the Complete Response letter, the FDA also stated that a Risk Evaluation and Mitigation
Strategy, or REMS, will be necessary for AFREZZA, if it is approved, to ensure that the benefits of
the drug outweigh:
| • | the risk of respiratory difficulty immediately post-inhalation, especially in patients with undiagnosed chronic lung disease; | ||
| • | the risk of pulmonary function decline over time; and | ||
| • | the potential risk of harm due to use by inappropriate patient populations, such as smokers and patients with chronic lung disease. |
The FDA acknowledged receipt of our proposed REMS materials that were included in the original NDA
submission and stated that it would continue its discussion with us regarding the REMS after we had
submitted our response to the Complete Response letter.
As recommended by the FDA, we will request an End-of-Review meeting with the agency to discuss our
approach for resolving the remaining issues. Prior to this regulatory action, our plan had been to
follow the original NDA for AFREZZA with another regulatory submission for our next-generation
inhaler rather than launch AFREZZA with the MedTone device. We intend to discuss with the FDA
whether it is appropriate to address the agency’s requests using what would otherwise have been a
supplemental NDA submission. If this approach is acceptable, we believe that this regulatory
action may not have a significant impact on the timing of the commercial launch of AFREZZA, which
would not have occurred until at least 2011 in any event.
We plan to work closely with the FDA to answer the agency’s questions and to provide the requested
information and data as quickly as possible. There can be no assurance that we will be able to
satisfy all of the FDA’s requirements with currently available data or that the FDA will find our
proposed approach with respect to the inhaler acceptable. The FDA could also request that we
conduct additional clinical trials to provide sufficient data for approval of the NDA. There can be no
assurance that we will obtain approval of the NDA in time for a commercial launch of
AFREZZA in 2011 or at any time.
DIABETES
Diabetes is a major disease characterized by the body’s inability to properly regulate levels
of blood glucose, or blood sugar. The cells of the body use glucose as fuel, which is consumed 24
hours a day. Between meals, when glucose is not being supplied from food, the liver releases
glucose into the blood to sustain adequate levels. Insulin is a hormone produced by the pancreas
that regulates the body’s blood glucose levels. Patients with diabetes develop abnormally high
levels of glucose, a state known as hyperglycemia, either because they produce insufficient levels
of insulin or because they fail to respond adequately to insulin produced by the body. Over time,
poorly controlled levels of blood glucose can lead to major complications, including high blood
pressure, blindness, amputations, kidney failure, heart attack, stroke and death.
According to the United States Centers for Disease Control, or CDC, approximately 23.6 million
people in the United States, or 7.8% of the population, suffered from diabetes as of 2007. The CDC
estimated that 17.9 million cases of diabetes were diagnosed and under treatment, with about 1.6
million new cases being diagnosed each year in people aged 20 or older. Diabetes extracts a heavy
toll from those who suffer from it. The CDC reported that diabetes was the seventh leading cause of
death listed on death certificates in 2006, but that diabetes was likely to be underreported as a
cause of death. Overall, the CDC found that the risk of death among people with diabetes is about
twice that of people without diabetes of similar age. The economic costs of diabetes are high as
well. The American
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Diabetes Association estimated that, in 2007, the total cost of diabetes in the United States
was $174 billion, an increase of 32% since 2002. This amount includes $27 billion of direct costs
for drug treatment for glucose control, of which approximately $5.4 billion were for insulin and
delivery supplies and approximately $8.5 billion were for non-insulin oral medications.
There are two major forms of diabetes, type 1 and type 2. Type 1 diabetes is an autoimmune
disease characterized by a complete lack of insulin secretion by the pancreas, so insulin must be
supplied from outside the body in order to sustain life. In type 2 diabetes, the pancreas continues
to produce insulin; however, insulin-dependent cells become resistant to the insulin effect. Over
time, the pancreas becomes increasingly unable to secrete adequate amounts of insulin to support
metabolism. According to the CDC, type 2 diabetes is the more prevalent form of the disease,
affecting approximately 90% to 95% of people diagnosed with diabetes.
Challenges of Treating Diabetes
Since patients with type 1 diabetes produce no insulin of their own, the primary treatment for
type 1 diabetes is daily intensive insulin therapy. Such patients usually require a daily injection
of long-acting, or basal, insulin along with an injection of rapid- or fast-acting insulin at
mealtimes.
When patients with type 2 diabetes are first diagnosed, the initial therapy is typically
lifestyle intervention (diet and exercise) in order to try to normalize their blood glucose levels.
As the disease progresses, treatment moves to various non-insulin oral medications. Often, the
first drug introduced is metformin, which acts to reduce the glucose output of the liver. When this
drug fails to reduce blood glucose levels, other drugs are added. Some of these additional
medications act to increase the amount of insulin produced by the pancreas; others increase the
sensitivity of muscle, fat and liver cells to the effects of insulin. Generally, these oral
medications are limited in their ability to manage the disease effectively and tend to have
significant side effects, such as weight gain and hypertension. Ultimately, many patients with type
2 diabetes will require insulin therapy in order to maintain appropriate levels of blood glucose.
Although insulin therapy is accepted as an effective means to control glucose levels, the
available insulin products have limitations, including:
| • | the risk of severe hypoglycemia, which is abnormally low levels of blood glucose that result from excessive insulin administration. Hypoglycemia can result in loss of mental acuity, confusion, increased heart rate, hunger, sweating and faintness and, at very low glucose levels, loss of consciousness, seizures, coma and death; | ||
| • | the likelihood of weight gain; | ||
| • | inadequate post-meal glucose control; | ||
| • | the need for complex titration of insulin doses in connection with meals; and | ||
| • | the need for injections. |
Because of these limitations, patients tend not to comply with the prescribed treatment regimens
and are often under-treated. Moreover, even when properly administered, subcutaneous injections of
insulin do not replicate the natural time-action profile of insulin for a healthy person. In a
person without diabetes, blood insulin levels rise within several minutes of the entry into the
bloodstream of glucose from a meal. By contrast, injected insulin enters the bloodstream slowly,
resulting in peak insulin levels in about 120 to 180 minutes for regular human insulin or 30-90
minutes for so-called “rapid-acting” insulin analogs. The consequence of these slower acting
insulins is that patients do not have adequate levels of insulin present at the initiation of a
meal and tend to be over-insulinized between meals. This lag in insulin delivery results in
hyperglycemia early after meal onset, followed by a tendency for hypoglycemia to develop during the
period between meals. Physicians who treat patients with diabetes are concerned about the risks of
hypoglycemia and, as a result, tend to undertreat the chronic hyperglycemia that is associated with
the disease. However, the resultant extensive hyperglycemia significantly contributes to many of
the long-term cardiovascular and other serious complications of diabetes.
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Our Solution
Our lead product, AFREZZA (insulin human [rDNA origin]) Inhalation Powder, has a time-action
profile unlike other insulin products. In our clinical trials to date, we have consistently
observed that AFREZZA is rapidly absorbed into the bloodstream following inhalation, reaching peak
levels within 12 to 14 minutes. In this manner, AFREZZA produces a profile of insulin levels in the
bloodstream that closely approximates the early insulin secretion normally seen in healthy
individuals immediately following the beginning of a meal, but which is absent in patients with
diabetes.
We believe the rapid action of AFREZZA may be related to the unique aspects of both the
carrier molecule as well as the way insulin is stabilized in our formulation. Our formulation
technology is centered on a class of pH-sensitive organic molecules that self-assemble into small
particles under acidic conditions. We refer to these particles as Technosphere particles.
Certain drugs, such as insulin, can be loaded onto these particles by combining an acidic
solution of the drug with a suspension of Technosphere material, which is then dried to a powder.
This powder is then filled into plastic cartridges and packaged. To administer AFREZZA, a patient
loads a cartridge into our inhaler. By inhaling through this device, air is pulled through the
cartridge, which aerosolizes the powder and pulls the particles into the air current and out
through the mouthpiece. The individual particles within this aerosol are small and have aerodynamic
properties that enable them to fly deep into the lungs. When the particles contact the moist lung
surface with its neutral pH, the Technosphere particles dissolve immediately, releasing the insulin
molecules to diffuse across a thin layer of cells into the bloodstream. We believe that the insulin
absorption step is a passive process that occurs without any active assistance or enhancement and
without disruption of either cell membranes or the tight junctions between cells.
Significantly, when the Technosphere particles dissociate, we believe that the insulin that is
released is in a form that can be readily used by the body. In most pharmaceutical dosage forms,
regular human insulin exists as a hexamer, a complex of six associated insulin molecules. In order
to exert a pharmacological effect, the hexamer must first dissociate into three dimers — complexes
of two insulin molecules — which then further dissociate into individual insulin molecules, or
monomers. Only monomeric insulin can attach to the insulin receptor and exert a physiological
effect. Rapid-acting insulin analogs are designed to be fragile hexamers that dissociate more
quickly, thereby reducing the time required to achieve an effect but this is still far slower than
insulin that is released from a healthy pancreas. However, the insulin released from Technosphere
particles is already largely in monomeric form. During the manufacture of AFREZZA, we cause
hexameric insulin to dissociate into monomeric insulin before being loaded onto Technosphere
particles. When AFREZZA particles dissolve in the deep lung, the insulin that is released diffuses
across a thin layer of cells to reach the bloodstream. Little change is required before the insulin
can start exerting its glucose-lowering effect in the body.
The AFREZZA clinical program involved 49 different studies of AFREZZA and over 5,000 adult
patients. In our clinical studies, we observed that AFREZZA produces the following clinical
benefits:
| • | Consistent decreases in A1C levels, comparable to current insulin therapies. In a number of clinical studies involving patients with type 1 and type 2 diabetes, we have evaluated levels of glycosylated hemoglobin, or A1C, which is a measure of average blood glucose. A consistent finding was that AFREZZA produced decreases in A1C levels that were essentially comparable to the decreases observed in the control arm of these studies, including studies that compared AFREZZA to rapid-acting insulin analogs, to pre-mixed insulin analogs and to metformin in combination with a sulfonylurea. | ||
| • | Superior post-meal glucose control. AFREZZA has a shorter duration of action than other insulin therapies, so its glucose-lowering effect better meets a patient’s needs following a meal. Specifically, AFREZZA treatment produces lower blood glucose levels than comparators in the first hour following meal ingestion with comparable levels after two hours. Importantly, AFREZZA does not remain active for an extended period of time, thereby reducing the risk of hypoglycemia between meals. | ||
| • | Improved fasting glucose control. In clinical trials of both type 1 and type 2 diabetes, AFREZZA has consistently provided lower fasting blood glucose control than comparator insulin therapies. | ||
| • | Less hypoglycemia due to better synchronization with glucose absorption from meals. In clinical trials involving patients with type 2 diabetes, we observed that the incidence and frequency of hypoglycemia was significantly reduced. Similar results were observed in patients with type 1 diabetes. The overall |
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| hypoglycemic event rate was lower for AFREZZA at all times of the day, but in particular, there were fewer nocturnal hypoglycemic events, a condition much feared by patients with diabetes. |
| • | Little or no weight gain. In our clinical trials, patients receiving AFREZZA experienced weight reduction or significantly less weight gain compared to other insulin therapies. |
There are no assurances, however, that these or any other advantages of AFREZZA will be agreed
to by the FDA or otherwise included in final product labeling or advertising.
To date, our clinical trials have indicated that AFREZZA has a favorable safety profile. The
most common adverse event associated with AFREZZA therapy was a transient, mild and non-productive
cough, which occurred early in about 25-30% of subjects and diminished within the first few weeks
after initiation of AFREZZA therapy. The occurrence of mild cough is well recognized with inhaled
medications. In our studies, the incidence of cough leading to the discontinuation of AFREZZA was
low.
After a two-year Phase 3 clinical trial of AFREZZA, we determined that the use of AFREZZA in
patients with diabetes was non-inferior to usual diabetes care with respect to a decline in FEV1, a
measure of lung function that assesses the volume of air that can be forcibly expired within one
second. Similar results were obtained for other measures of lung function.
Our clinical trials for AFREZZA have not demonstrated an increased risk of pulmonary cancer.
In addition, we conducted comprehensive nonclinical studies of AFREZZA and unloaded Technosphere
particles, including a two-year rat carcinogenicity study and a six-month transgenic mouse study.
These studies indicated that there was no increased risk of cancer, or any other
pathological effects.
As part of our NDA submission, we voluntarily proposed a REMS for ensuring that the benefits of AFREZZA outweighed its risks. Our proposed
REMS included communication tools, such as the prescribing information, medication guide,
educational materials and training materials, as well as evaluation tools, such as prescriber and
patient surveys, a pharmacovigilance program and oversight by an independent safety monitoring
committee. We have been informed by the FDA that a REMS will be necessary for AFREZZA, if it is approved, to
ensure that the benefits of the drug outweigh:
| • | the risk of respiratory difficulty immediately post-inhalation, especially in patients with undiagnosed chronic lung disease; | ||
| • | the risk of pulmonary function decline over time; and | ||
| • | the potential risk of harm due to use by inappropriate patient populations, such as smokers and patients with chronic lung disease. |
We expect to continue our discussions with the FDA regarding the REMS after we submit our response
to the Complete Response letter.
To facilitate the delivery of Technosphere-formulated drugs to the deep lung, we developed an
inhaler that utilizes single-use, disposable, plastic cartridges containing drug-loaded powder. The
MedTone inhaler is light and easy to use, and fits in the palm of the patient’s
hand. However, while this inhaler was under regulatory review as part of the AFREZZA NDA, we have
been conducting bioequivalency and other studies to the safety and efficacy of our next-generation
inhaler, which is even smaller (thumb-sized), easier to use, cheaper to manufacture and allows for
more efficient emptying of the cartridge.
Prior to receiving the Complete Response letter, our plan had been to follow the original NDA for
AFREZZA with another regulatory submission for our next-generation inhaler rather than launch
AFREZZA with the MedTone device. We intend to discuss with the FDA whether it is
appropriate to address the agency’s requests using what would otherwise have been a supplemental
NDA submission to amend the original NDA. If this approach is acceptable, we believe that this
regulatory action may not have a significant impact on the timing of the commercial launch of
AFREZZA, which would not have occurred until at least 2011 in any event.
Another Potential MannKind Solution
In a healthy person, the consumption of a meal triggers the release of insulin by the
pancreas. However, the insulin response is much less robust if the same amount of glucose is
administered by intravenous injection, effectively by-passing the intestinal tract. This effect is
due to the fact that when glucose is administered intravenously, the intestinal tract is not
stimulated to release incretins, which are hormones that stimulate the release of insulin by the
pancreas. One such incretin is GLP-1. In addition to its effect on the pancreas, GLP-1 slows
stomach emptying and reduces food intake. The incretin effect — the robust release of insulin in
response to meal consumption — is much less pronounced in patients with type 2 diabetes. This
observation has suggested that augmenting the GLP-1 signal may be a useful strategy to help treat
type 2 diabetes.
Under normal circumstances, GLP-1 is short-lived in the bloodstream; half the amount that is
released by the intestinal tract is inactivated in about two minutes. Much of the circulating
GLP-1 is degraded by an enzyme known
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as dipeptidyl peptidase-4, or DPP-4. The rapid degradation of GLP-1 by DPP-4 represents a
challenge for the use of exogenous GLP-1 in the treatment of type 2 diabetes. Some drug
manufacturers have responded to this challenge by developing analog variations of GLP-1 that are
resistant to DPP-4 degradation. Exenatide was the first so-called incretin mimetic to be marketed.
Exenatide is a peptide derived from lizard venom that is sufficiently similar to human GLP-1 to
have comparable effects but is much more resistant to DPP-4 degradation than human GLP-1. The
formulation of exenatide currently being marketed requires twice-daily injection; however, a
once-weekly injection is under development. Other drug manufacturers have developed drugs that
inhibit DPP-4 activity. Sitagliptin was the first drug of this class to be approved. This drug is
available as a once-daily pill.
With both incretin mimetic and DPP-4 inhibitor therapies, the objective is to augment the
GLP-1 signal to the pancreas and other target organs. However, this approach does not truly
reestablish the incretin effect that is lost in type 2 diabetes. These types of drugs act to
increase the duration of elevated GLP-1 levels in the bloodstream, but they do not restore or
simulate the short burst of GLP-1 that is released by the gut in response to meal ingestion.
Unlike incretin mimetics and DPP-4 inhibitors, our GLP-1 product candidate — MKC253, a
proprietary formulation of human GLP-1 loaded onto Technosphere particles — is intended to mimic
gut physiology more closely. In a Phase 1 clinical trial involving 26 healthy subjects, inhalation
of MKC253 produced a sharp pulse of GLP-1 in the bloodstream that peaked within five minutes after
inhalation. Administering human GLP-1 in this manner was found to produce the desired response.
We observed a GLP-1-induced release of insulin from the pancreas that peaked within six minutes of
inhalation. The insulin response increased in proportion to the dose of MKC253 that was inhaled.
In subjects that received the highest dose of MKC253 (1.5 mg of GLP-1), blood glucose levels were
observed to decrease for a period of approximately 20 minutes after administration. All of the
subjects that participated in this trial had fasted prior to administration of MKC253; thus, these
results support the hypothesis that inhalation of MKC253 may be able to simulate the incretin
effect that is lost in patients with type 2 diabetes.
The primary objective of this Phase 1a trial was to evaluate the tolerability of ascending
doses of MKC253 as determined by the incidence and severity of reported adverse events. At all dose
levels, MKC253 was well tolerated. Even in subjects that achieved plasma GLP-1 concentrations in
excess of 100 pmol/L, we observed none of the nausea and vomiting characteristically associated
with such levels of the GLP-1 products currently marketed or in late development. This lack of
side effects may be another benefit of administering MKC253 in this pulsatile manner rather than
administering a longer acting formulation of a GLP-1 analogue that lingers in the bloodstream for
hours or days.
We conducted a second Phase 1 trial to assess the effect of MKC253 on post-meal glucose excursions
in patients with type 2 diabetes. A total of 15 subjects were each given MKC253, placebo or exenatide
on different days and followed for a four-hour period after each administration. In both fasted
and fed subjects, inhalation of MKC253 produced a rise in insulin levels that peaked within 10 — 15
minutes. In fasted subjects, this increase in insulin led to a rapid decrease in blood glucose
concentrations within 30 minutes, with a slower decline over the next 3.5 hours. Subjects who were
fed and given MKC253 displayed a blunting of the initial post-meal glucose excursion for
approximately 30-50 minutes, depending on the dose. In the same subjects, exenatide stimulated
insulin release but produced much lower peak levels than those produced by MKC253 in either the fed
or fasted state. Nonetheless, over the four-hour study period, exenatide also produced mean
decreases in blood glucose concentrations. This observation may be due to the fact that exenatide
had a profound effect on gastric emptying, with approximately 90% of the meal retained in the
stomach at four hours after meal ingestion. In contrast, MKC253 did not have any overall effect on
gastric emptying. Until we have conducted a full program of clinical trials, we will not be able to
reach definitive conclusions about the potential safety or efficacy of MKC253.
CANCER
Cancer is the unregulated proliferation of cells that have the capacity to spread to other
sites in the body. A neoplasm is an uncontrolled growth of abnormal cells. A neoplasm is considered
benign if it does not spread; if it invades other tissues, however, it is considered malignant. The
term cancer refers to a malignant neoplasm.
The first goal of cancer treatment is to eradicate the cancer. Typically, this goal is pursued
using treatment methods — surgery, radiation and chemotherapy — that can be highly toxic and may
offer little clinical benefit. In the past decade or so, newer treatment methods have begun to
emerge, including:
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| • | immunotherapy approaches that attempt to induce the immune system to kill tumor cells instead of tolerating them; and | ||
| • | drugs and antibodies that specifically target the abnormal mechanisms of proliferation, differentiation and invasion of malignant cells. |
Our Cancer Immunotherapy Program
Our cancer immunotherapy program utilizes the body’s immune system to help eradicate tumor
cells. The immune system is a network of cells and organs that defends the body against infection
and abnormal cells, such as tumor cells. A key element of the immune system is its ability to
distinguish between healthy cells and foreign or diseased cells that do not belong in the body. The
immune system accomplishes this task by recognizing distinctive molecules called epitopes on the
surface of each cell as either normal or abnormal, and responding to them appropriately. Any
substance capable of being recognized by the immune system is known as an antigen. An antigen can
be all or part of a pathogenic organism or it can be a by-product of diseased cells. Certain
specialized cells of the immune system (antigen-presenting cells or APC) sample antigens found in
the body and present the epitopes associated with foreign antigens to other cells of the immune
system, known as Tcells, whose function is to destroy any cell that expresses the same epitope;
this process is known as cell-mediated immunity. In this way, the immune system can launch a very
specific response to infection or disease.
Our approach uses DNA- and peptide-based compounds that correspond to tumor-associated
antigens that are expressed in a range of tumors. We select as target antigens molecules that
either play a role in disease progression or that are very selectively expressed by tumor cells. A
patient’s immune system is first “primed” by DNA-based compounds, or plasmids, that are injected
directly into the patient’s lymph nodes. This is designed to sensitize the immune system to the
tumor-associated antigens encoded by the plasmids. After a period of time, the patient’s lymph
nodes are then injected with synthetic peptides that are designed to “boost” or greatly amplify the
immune response to the target antigens. The immune response is maintained by repeated immunization
cycles. This prime-boost regimen is designed to provoke a potent cell-mediated immune response that
destroys cancer cells along with the underlying blood supply to tumors.
The key features of our cancer immunotherapy program include the following:
| • | It is a targeted therapeutic approach that aims to redirect patients’ immune response to the tumor targets expressed by their cancer. The patients with a highest likelihood to benefit from this treatment can be identified by histological analysis of their tumors. | ||
| • | It involves an innovative and potent vaccination approach comprising direct intra-lymphatic administration of the immunizing components using a prime-boost sequence that is designed to achieve optimal response. | ||
| • | The selected target antigens are molecules that play a key role in tumor progression and migration and that display increased expression, or selective expression, in tumor cells. Moreover, they are expressed in a range of tumors. | ||
| • | The immunizing components are “off-the-shelf” formulations of DNA and peptides containing excipients that are well recognized and generally regarded as safe. There is no need to harvest any material from patients’ tumors or cells in order to manufacture our immunotherapy products. |
To date, we have evaluated two product candidates in clinical trials: MKC1106-PP and
MKC1106-MT. MKC1106-PP consists of three components: a plasmid that encodes pharmacologically active
elements from two tumor-associated antigens, known as PRAME and PSMA, and two synthetic peptides,
one an analog of a PRAME epitope and the other an analog of a PSMA epitope. In addition to
melanoma, PRAME is expressed in carcinomas such as prostate, lung, breast, ovarian, renal, pancreatic and
colorectal. PSMA was originally isolated from prostate carcinoma cells and later shown to be
expressed in the blood vessels that supply several types of carcinoma, including breast, lung,
ovarian, pancreatic, renal and colorectal carcinoma and melanoma. MKC1106-MT consists of a plasmid
that encodes portions of two antigens known as Melan-A and tyrosinase, and two synthetic peptides,
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one an analog of a Melan-A epitope and the other an analog of a tyrosinase epitope. Melan-A
and tyrosinase are antigens commonly expressed by melanoma tumor cells.
In one study, MKC1106-PP was used to treat 26 advanced cancer patients with diverse tumor
types, metastatic disease and/or progressive, refractory disease. Patients were evaluated after
two therapeutic cycles of six weeks each and again after four therapeutic cycles, as applicable.
Patients demonstrating a clinical response or no evidence of disease progression remained in the
clinical trial and received up to six cycles of treatment over nine months. In all patients, the
treatment was well tolerated with few and mild adverse events. In this study, an immune response
was found in approximately 58% of patients. Overall, ten patients had stable disease. Patients
attaining an immune response against both antigens, persisting throughout the first two cycles of
therapy, were more likely to show clinical benefit.
In a separate study, 18 patients with advanced melanoma were treated with MKC1106-MT. Patients
were evaluated after each therapeutic cycle of six weeks and those who demonstrated a clinical
response or no evidence of disease progression remained in the clinical trial and received up to
eight cycles of treatment over one year. Treatment with MKC1106-MT was well tolerated by all
patients. In this study, the immune response rate was greater than 40%, defined as the percentage
of patients who showed elevated numbers of antigen-specific Tcells in the blood upon immunization.
There was also preliminary evidence of clinical benefit. Fourteen patients had visceral
metastases; in the remaining four, metastases were confined to the lymphatic system. All four
patients with metastatic disease confined to the lymph system achieved a durable objective response, as measured by
tumor imaging. A subset analysis of these patients identified the
presence of melanoma-specific Tcells at baseline.
These latter results have suggested which patients could benefit most from treatment with our
immunotherapy regimen. Accordingly, we plan to initiate a Phase 2 study of MKC1106-MT involving up
to 44 patients with advanced melanoma that is confined to the skin, subcutaneous tissue or lymph
nodes; patients with visceral metastases will be excluded. The primary end-point of this
open-label, non-randomized study is objective tumor response. Clinical efficacy will also be
assessed using measures of time-to-progression, progression-free survival and overall survival. We
expect to initiate this study in the second quarter of 2010.
Our Cancer Small Molecule Drug Program
Our drug discovery efforts, though focused primarily on cancer targets, are directed at
several biochemical signaling pathways that may play a role in a number of diseases, including
inflammatory diseases and cancer. One of these pathways is known as the unfolded protein response,
or UPR, a response to stress or changes in cellular conditions during which proteins cease to
function correctly. The UPR is intended to restore the normal function of the cell and preserve its viability, by halting
protein production while molecular “chaperones” remove the improperly folded proteins. When
cellular stress continues for an extended period of time, the role of the UPR changes from
restoring normal function to initiating programmed cell death or apoptosis. In this manner, the
improperly functioning cell is removed from the body.
However, in myeloma cells and possibly other malignancies, the UPR is not properly regulated.
In these cells, an enzyme known as inositol-requiring enzyme-1, or IRE-1α, activates the X-box
binding protein-1 , or XBP-1, gene thus enhancing molecular chaperone activity and protein
degradation. The result is that tumor cells escape apoptosis, proliferate and invade vital organs
in cancer patients, and/or confer resistance to other therapeutic means that induce cellular
stress, including chemotherapy, radiotherapy and antiangiogenic drugs.
Multiple myeloma, the second most prevalent blood cancer after non-Hodgkin’s lymphoma, is a
key focus of our IRE-1α program. According to the American Cancer Society, in 2009 there were
approximately 20,500 new cases diagnosed and about 10,500 deaths from multiple myeloma. This
disease results in excessive abnormal cells as a result of transformation of normal B-cells
(B-lymphocytes) into malignant plasma cells, which may lead to hypercalcemia, anemia, renal damage,
increased susceptibility to bacterial infection, impaired production of immunoglobulin and diffuse
osteoporosis.
Using our proprietary IRE-1α assay, we have identified a novel compound that selectively antagonizes
IRE-1α in vitro and consequently down-regulates XBP-1 activity in tumor cells and animal models. We are currently
undertaking preclinical studies in order
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to position the compound for clinical trials in 2011. Our efforts are partially supported by
a research award from the Multiple Myeloma Research Foundation.
OUR STRATEGY
Our objective is to develop products primarily in the major therapeutic areas of diabetes and
cancer. Our strategy is to achieve this objective by doing the following:
| • | Commercialize AFREZZA with a partner that shares our commitment to improving the lives of patients with diabetes. We are evaluating potential collaboration opportunities with large pharmaceutical companies in the United States, Europe and Japan to provide marketing, sales and financial resources to commercialize, market and sell AFREZZA. We have not licensed or transferred any of our rights to this product or to our platform technology. | ||
| • | Expand our proprietary Technosphere formulation technology for the delivery of other peptide hormones. On the basis of some initial clinical studies, we believe that additional Technosphere formulations of peptide hormones have the potential to demonstrate clinical advantages over existing therapeutic options in diabetes, endocrine disorders and obesity. | ||
| • | Develop novel approaches to treating cancer using our immunotherapy and drug discovery platforms. We are currently conducting a Phase 2 clinical trial of one of our investigational cancer immunotherapy product candidates. Our goal is to evaluate the safety and efficacy of this approach while also continuing to conduct research aimed at identifying novel drug therapies for cancer indications. |
SALES AND MARKETING
Our efforts to date have primarily been directed at developing products for a number of
different markets. We currently have no sales or distribution capabilities and have no experience
as a company in marketing or selling pharmaceutical products. However, we have built a small
marketing team and are actively engaged in the activities that would normally be
undertaken in preparation for commercial launch of a pharmaceutical product.
In order to commercially market any of our products, we need either to develop an internal
sales team, continue to expand our marketing infrastructure or collaborate with third parties who
have greater sales and marketing capabilities and have access to potentially large markets.
Although we believe that establishing our own sales and marketing organizations in North America
would have substantial advantages, we recognize that this may not be practical for some of our
products and that collaborating with companies with established sales and marketing capabilities in
a particular market or markets may be a more effective alternative for some products. To date, we
have retained worldwide commercialization rights for all of our products, including AFREZZA. We
believe that this will give us flexibility if we enter into collaborations to provide the necessary
sales and marketing support.
We are evaluating potential collaboration opportunities to assist us in the commercialization
of AFREZZA in the United States and other major markets, and we may also create parallel in-house
sales and marketing operations in certain key markets, particularly in the United States.
MANUFACTURING AND SUPPLY
We formulate and fill the AFREZZA inhalation powder into plastic cartridges and blister
package the cartridges in our Danbury facility. We believe that our Danbury facility has enough
capacity to satisfy the initial commercial demand for AFREZZA, although the facility includes
expansion space that will allow production capacity to be increased based on anticipated needs
during the initial years of commercialization. The quality management systems of our facility were
certified to be in conformance with the ISO 13485 and ISO 9001 standards. In addition, our facility
underwent a successful pre-approval inspection by the FDA during the fall of 2009.
We currently have two sources of insulin. In November 2007, we entered into a long-term
supply agreement with N. V. Organon, or Organon, (now owned by Merck & Co., Inc.) pursuant to which
Organon will manufacture and supply specified quantities of recombinant human insulin to us. The
initial term of this supply agreement will end on
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December 31, 2012 and will be automatically extended for consecutive two-year periods unless
(i) we fail to provide a forecast of our insulin requirements for the two-year extension period to
Organon at least 24 months before any automatic extension or (ii) either party provides 23-months’
advance written notice to the other party of its desire to terminate the agreement. We and Organon
each have normal and customary termination rights, including (a) for material breach of the
agreement by the other party, (b) due to the liquidation or bankruptcy of the other party or (c)
upon 90-days advance written notice if the parties are unable to agree after mediation on the
consequences of any changes to the product specifications required by any controlling regulatory
authority. We may terminate the supply agreement upon 30-days advance written notice to Organon if
certain regulatory authorities fail to approve or withdraw approval of AFREZZA. If we terminate the
supply agreement following failure to obtain or maintain regulatory approval of AFREZZA or either
party terminates the agreement following the parties’ inability to agree after any regulatory
authority-mandated changes to product specifications that relate specifically to the use of insulin
in AFREZZA, we will be required to pay Organon a specified termination fee if Organon is unable to
sell certain quantities of insulin to other parties. We must rely on our insulin supplier to
maintain compliance with relevant regulatory requirements including current Good Manufacturing
Practices, or cGMP.
In June 2009, we acquired a quantity of bulk insulin from Pfizer Manufacturing Frankfurt GmbH,
a subsidiary of Pfizer Inc., or Pfizer, as well as Pfizer’s rights under a license to manufacture
insulin for pulmonary delivery. In addition, we agreed to maintain and store the remainder of
Pfizer’s bulk insulin inventory and acquired an option to purchase this inventory, in whole or in
part, at a specified price, to the extent that Pfizer has not otherwise disposed of or used the
retained insulin.
We have a long-term supply agreement with Vaupell, Inc. for the manufacture and supply of our
first-generation inhaler and the cartridges that are inserted into it. We are in the process of
qualifying a manufacturer to supply us with our next-generation inhaler and the corresponding
cartridges. We rely on our manufacturers to comply with relevant regulatory requirements, including
compliance with Quality System Regulations, or QSRs.
Currently, we purchase the raw material from which we produce Technosphere particles from a
major chemical manufacturer with facilities in Europe and North America. We also have the
capability of manufacturing this chemical ourselves in our Danbury facility, which is treated as a
back-up facility. Like us, our third-party manufacturers are subject to extensive governmental
regulation.
INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY
Our success will depend in large measure on our ability to obtain and enforce our intellectual
property rights, effectively maintain our trade secrets and avoid infringing the proprietary rights
of third parties. Our policy is to file patent applications on what we deem to be important
technological developments that might relate to our product candidates or methods of using our
product candidates and to seek intellectual property protection in the United States, Europe, Japan
and selected other jurisdictions for all significant inventions. We have obtained, are seeking, and
will continue to seek patent protection on the compositions of matter, methods and devices flowing
from our research and development efforts. We have also in-licensed certain technology.
Our Technosphere drug delivery platform, including AFREZZA, enjoys patent protection relating
to the particles, their manufacture, and their use for pulmonary delivery of drugs. We have
additional patent coverage relating to the treatment of diabetes using AFREZZA. We have been
granted patent coverage for our inhaler cartridges in the form in which our insulin product will be
sold to the consumer. We have additional pending patent applications, and expect to file further
applications, relating to the drug delivery platform, methods of manufacture, the AFREZZA product
and its use, and other Technosphere-based products, inhalers and inhaler cartridges. Overall, we
own 55 issued utility patents, 48 issued design patents and over 240 pending applications in the United
States and selected jurisdictions around the world related to our Technosphere platform. These
include composition and method of treatment patents providing protection for AFREZZA that will
remain in force into 2020, and patents on our inhaler and inhaler cartridges that will remain
in force into 2023.
In addition, we own or have in-licensed intellectual property relating to several drug targets
of interest in the treatment of cancer and other fields. Patents and patent applications in this
area are drawn to drug screening methods, methods of treatment, and chemical structures of
inhibitors of these targets. Our cancer immunotherapy program is built on proprietary methods for
the selection, design and administration of epitopes, as well as the plasmids and peptides that are
the active ingredients of our product candidates. Overall we own 21 issued patents
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and over 200 pending applications in the United States and selected jurisdictions around the
world related to our immunotherapy program.
The fields of pulmonary drug delivery and cancer therapies are crowded and a substantial
number of patents have been issued in these fields. In addition, because patent positions can be
highly uncertain and frequently involve complex legal and factual questions, the breadth of claims
obtained in any application or the enforceability of issued patents cannot be confidently
predicted. Further, there can be substantial delays in commercializing pharmaceutical products,
which can partially consume the statutory period of exclusivity through patents.
In addition, the coverage claimed in a patent application can be significantly reduced before
a patent is issued, either in the United States or abroad. Statutory differences in patentable
subject matter may limit the protection we can obtain on some of our inventions outside of the
United States. For example, methods of treating humans are not patentable in many countries outside
of the United States. These and other issues may limit the patent protection we will be able to
secure internationally. Consequently, we do not know whether any of our pending or future patent
applications will result in the issuance of patents or, to the extent patents have been issued or
will be issued, whether these patents will be subjected to further proceedings limiting their
scope, will provide significant proprietary protection or competitive advantage, or will be
circumvented or invalidated. Furthermore, patents already issued to us or our pending applications
may become subject to disputes that could be resolved against us. In addition, patent applications
in the United States filed before November 29, 2000 are currently maintained in secrecy until the
patent issues, although in certain countries, including the United States, for applications filed
on or after November 29, 2000, applications are generally published 18 months after the
application’s priority date. In any event, because publication of discoveries in scientific or
patent literature often trails behind actual discoveries, we cannot be certain that we were the
first inventor of the subject matter covered by our pending patent applications or that we were the
first to file patent applications on such inventions.
Although we own a number of domestic and foreign patents and patent applications relating to
our Technosphere-based investigational products and our cancer products under development, we have
identified certain third-party patents having claims relating to pulmonary insulin delivery that
may trigger an allegation of infringement upon the commercial manufacture and sale of AFREZZA. We
have also identified third-party patents disclosing methods and compositions of matter related to
cancer vaccines that also may trigger an allegation of infringement upon the commercial manufacture
and sale of our cancer immunotherapy. We believe that we are not infringing any valid claims of any
patent owned by a third party. However, if a court were to determine that our inhaled insulin
product or cancer immunotherapies were infringing any of these patent rights, we would have to
establish with the court that these patents were invalid in order to avoid legal liability for
infringement of these patents. Proving patent invalidity can be difficult because issued patents
are presumed valid. Therefore, in the event that we are unable to prevail in an infringement or
invalidity action we will either have to acquire the third-party patents outright or seek a
royalty-bearing license. Royalty-bearing licenses effectively increase costs and therefore may
materially affect product profitability. Furthermore, if the patent holder refuses to either assign
or license us the infringed patents, it may be necessary to cease manufacturing the product
entirely and/or design around the patents. In either event, our business would be harmed and our
profitability could be materially adversely impacted. If third parties file patent applications, or
are issued patents claiming technology also claimed by us in pending applications, we may be
required to participate in interference proceedings in the United States Patent and Trademark
Office, or USPTO, to determine priority of invention. We may be required to participate in
interference proceedings involving our issued patents and pending applications.
We also rely on trade secrets and know-how, which are not protected by patents, to maintain
our competitive position. We require our officers, employees, consultants and advisors to execute
proprietary information and invention and assignment agreements upon commencement of their
relationships with us. These agreements provide that all confidential information developed or made
known to the individual during the course of our relationship must be kept confidential, except in
specified circumstances. These agreements also provide that all inventions developed by the
individual on behalf of us must be assigned to us and that the individual will cooperate with us in
connection with securing patent protection on the invention if we wish to pursue such protection.
There can be no assurance, however, that these agreements will provide meaningful protection for
our inventions, trade secrets or other proprietary information in the event of unauthorized use or
disclosure of such information.
We also execute confidentiality agreements with outside collaborators. However, disputes may
arise as to the ownership of proprietary rights to the extent that outside collaborators apply
technological information to our projects that are developed independently by them or others, or
apply our technology to outside projects, and there
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can be no assurance that any such disputes would be resolved in our favor. In addition, any of
these parties may breach the agreements and disclose our confidential information or our
competitors might learn of the information in some other way. If any trade secret, know-how or
other technology not protected by a patent were to be disclosed to or independently developed by a
competitor, our business, results of operations and financial condition could be adversely
affected.
COMPETITION
The pharmaceutical and biotechnology industries are highly competitive and characterized by
rapidly evolving technology and intense research and development efforts. We expect to compete with
companies, including the major international pharmaceutical companies, and other institutions that
have substantially greater financial, research and development, marketing and sales capabilities
and have substantially greater experience in undertaking preclinical and clinical testing of
products, obtaining regulatory approvals and marketing and selling biopharmaceutical products. We
will face competition based on, among other things, product efficacy and safety, the timing and
scope of regulatory approvals, product ease of use and price.
Diabetes Treatments
We believe that AFREZZA has important competitive advantages in the delivery of insulin when
compared with currently known alternatives. However, new drugs or further developments in
alternative drug delivery methods may provide greater therapeutic benefits, or comparable benefits
at lower cost, than AFREZZA. There can be no assurance that existing or new competitors will not
introduce products or processes competitive with or superior to our product candidates.
We have set forth below more detailed information about certain of our competitors. The
following is based on information currently available to us.
Inhaled and Oral Insulin Delivery Systems
Currently, we are not aware of any other inhaled insulin products on the market or in
development.
In January 2006, Exubera®, developed by Pfizer, Inc. in collaboration with Nektar
Therapeutics, was approved for the treatment of adults with type 1 and type 2 diabetes.
Exubera® was slow to gain market acceptance and, in October 2007, Pfizer announced that
it was discontinuing the product. In September 2008, we announced a collaboration agreement with
Pfizer pursuant to which certain patients with a continuing medical need for inhaled insulin were
transitioned to AFREZZA on a compassionate use basis. Pfizer subsequently withdrew the NDA for
Exubera from the FDA.
In January 2008, Novo Nordisk A/S announced that it was halting development of its inhaled
insulin product, having reached the conclusion that the product did not have adequate commercial
potential. Notwithstanding the termination of this program, Novo Nordisk stated that it intended to
increase research and development activities targeted at inhalation systems for long-acting
formulations of insulin and GLP-1.
In March 2008, Eli Lilly and Company, or Lilly, announced that it too was terminating the
development of its AIR® inhaled insulin system. Lilly stated that this decision resulted
from increasing uncertainties in the regulatory environment and after a thorough evaluation of the
evolving commercial and clinical potential of its product compared to existing medical therapies.
There are several companies that are pursuing development of products involving the oral
delivery of insulin. Biocon Limited is currently in Phase 2 clinical trials of IN-105, a tablet for
the oral delivery of insulin. Emisphere Technologies, Inc., or Emisphere, has also developed an
oral formulation of insulin. A Phase 2 clinical trial of the Emisphere investigational product was
completed in the fall of 2006. Other companies are evaluating alternative means of delivering
insulin orally. Generex Biotechnology Corporation is currently conducting Phase 3 clinical trials
in North America of its liquid formulation of insulin that is sprayed onto the buccal mucosa. This
product, Oral-lyn, is currently available for sale in certain countries, including Ecuador and
India. Biodel Inc. is currently conducting Phase 1 clinical trials of an oral formulation of
insulin (VIAtab) designed to be administered
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sublingually. We are not aware that the timelines to commercialization for any of these
investigational products have been made available publicly.
Non-insulin Medications
We expect that AFREZZA will compete with currently available non-insulin medications for type
2 diabetes. These products include the following:
| • | Sulfonylureas, also called oral hypoglycemic agents, prompt the pancreas to secrete insulin. This class of drugs is most effective in individuals whose pancreas still have some working pancreas cells. | ||
| • | Meglitinides are taken with meals and reduce the elevation in blood glucose that generally follows eating. If these drugs are not taken with meals, blood glucose will drop dramatically and inappropriately. | ||
| • | Biguanides lower blood glucose by improving the sensitivity of cells to insulin (i.e., by diminishing insulin resistance). | ||
| • | Thiazolidinedione improves the uptake of glucose by cells in the body. | ||
| • | Alpha-glucosidase inhibitors lower the amount of glucose absorbed from the intestines, thereby reducing the rise in blood glucose that occurs after a meal. | ||
| • | Inhibitors of dipeptidyl peptidase IV are a class of drugs that work by blocking the degradation of GLP-1, which is a naturally occurring incretin. | ||
| • | Incretin mimetics work by several mechanisms including stimulating the pancreas to secrete insulin when blood glucose levels are high. |
Injected Insulin
In the subcutaneous insulin market, our competitors have made considerable efforts in
promoting rapid acting injectable insulin formulations. Humalog®, which was developed by
Lilly, and NovoLog®, which was developed by Novo Nordisk A/S, are the two principal
injectable insulin formulations with which we expect AFREZZA to compete.
Cancer Treatments
For many types of cancer, chemotherapy remains a significant component of the treatment
regimen. Increasingly, however, drugs and antibodies that specifically target the abnormal
mechanisms of proliferation, differentiation and invasion of malignant cells are being used to
treat cancer. One such cancer therapy is Rituxan® (rituximab), an antibody marketed in
the United States by Biogen IDEC Inc. and Genentech, Inc., or Genentech, a wholly-owned member of
the Roche Group, or Roche, and by Roche in the rest of the world. Genentech and Roche have also
partnered to market two other successful antibodies: Avastin® (bevacizumab) and
Herceptin® (trastuzumab). Erbitux® (cetuximab) is another antibody approved
for use in metastatic colon cancer and squamous cell carcinoma of the head and neck. This antibody
is marketed domestically by ImClone Systems Inc., a wholly-owned subsidiary of Lilly, and
Bristol-Myers Squibb Company and elsewhere by Merck KGaA.
The armamentarium of cancer treatments has been strengthened in recent years by several drugs
that target specific molecular aberrations in tumor cells. One such drug is Gleevec®,
developed and marketed by Novartis AG, which was initially approved for use in chronic myeloid
leukemia. The drug has subsequently been approved for use in additional types of cancer.
Velcade®, developed by Millenium Pharmaceuticals, Inc., a wholly owned subsidiary of
Takeda Pharmaceutical Company Limited, and Ortho Biotech Inc., now Centocor Ortho Biotech Inc.,
acts by inhibiting protein degradation, thereby inducing apoptosis. It was initially approved for
use in multiple myeloma; its label now includes an indication for mantle cell lymphoma.
Our cancer products may face competition from the products described above as well as from
other brands. In addition, our cancer immunotherapy products may face direct competition from one
or more therapeutic cancer vaccines that may be approved in the coming years. Although there have
been a number of notable failures recently among immunotherapy products in development, a few
approaches continue to show potential:
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| • | Provenge®, developed by Dendreon Corporation, or Dendreon, is a vaccine composed of autologous APC that are loaded with an antigen (prostate acid phosphatase) from prostate tumor cells then re-injected into patients. In May 2007, despite a positive vote from an Advisory Committee, Dendreon received a “Complete Response” letter from the FDA with respect to its application for the approval of Provenge® for the treatment of prostate cancer. Dendreon provided additional survival data in 2009 and is expecting a further decision from the FDA in May 2010. | ||
| • | MAGE-A3 is a tumor-specific antigen that is expressed in a large variety of cancers, including melanoma, non-small cell lung cancer, head and neck cancer, bladder cancer, with no expression in normal cells. GlaxoSmithKline P1c is evaluating a cancer vaccine that combines MAGE-A3, delivered as a purified recombinant protein, with certain immunostimulating compounds that are intended to increase the anti-tumor immune response. This investigational product is being evaluated in Phase 3 clinical trials for the treatment of non-small cell lung cancer and melanoma. | ||
| • | CDX-110 is an immunotherapy being developed by Celldex, Inc. in collaboration with Pfizer. CDX-110 targets a mutated form of epidermal growth factor receptor that is present in multiple cancer types and is currently being evaluated for the treatment of glioblastoma multiforme in a Phase 2/3 clinical trial. |
GOVERNMENT REGULATION AND PRODUCT APPROVAL
The FDA and comparable regulatory agencies in state, local and foreign jurisdictions impose
substantial requirements upon the clinical development, manufacture and marketing of medical
devices and new drug and biologic products. These agencies, through regulations that implement the
Federal Food, Drug, and Cosmetic Act, as amended, or FDCA, and other regulations, regulate research
and development activities and the development, testing, manufacture, labeling, storage, shipping,
approval, recordkeeping, advertising, promotion, sale and distribution of such products. In
addition, if our products are marketed abroad, they also are subject to export requirements and to
regulation by foreign governments. The regulatory approval process is generally lengthy, expensive
and uncertain. Failure to comply with applicable FDA and other regulatory requirements can result
in sanctions being imposed on us or the manufacturers of our products, including hold letters on
clinical research, civil or criminal fines or other penalties, product recalls, or seizures, or
total or partial suspension of production or injunctions, refusals to permit products to be
imported into or exported out of the United States, refusals of the FDA to grant approval of drugs
or to allow us to enter into government supply contracts, withdrawals of previously approved
marketing applications and criminal prosecutions.
The steps typically required before an unapproved new drug or biologic product for use in
humans may be marketed in the United States include:
| • | Preclinical studies that include laboratory evaluation of product chemistry and formulation, as well as animal studies to assess the potential safety and efficacy of the product. Certain preclinical tests must be conducted in compliance with good laboratory practice regulations. Violations of these regulations can, in some cases, lead to invalidation of the studies, or requiring such studies to be repeated. In some cases, long-term preclinical studies are conducted while clinical studies are ongoing. | ||
| • | Submission to the FDA of an investigational new drug application, or IND, which must become effective before human clinical trials may commence. The results of the preclinical studies are submitted to the FDA as part of the IND. Unless the FDA objects, the IND becomes effective 30 days following receipt by the FDA. | ||
| • | Approval of clinical protocols by independent institutional review boards, or IRBs, at each of the participating clinical centers conducting a study. The IRBs consider, among other things, ethical factors, the potential risks to individuals participating in the trials and the potential liability of the institution. The IRB also approves the consent form signed by the trial participants. | ||
| • | Adequate and well-controlled human clinical trials to establish the safety and efficacy of the product. Clinical trials involve the administration of the drug to healthy volunteers or to patients under the supervision of a qualified medical investigator according to an approved protocol. The clinical trials are conducted in accordance with protocols that detail the objectives of the study, the parameters to be used to monitor participant safety and efficacy or other criteria to be evaluated. Each protocol is submitted to the FDA as part |
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| of the IND. Human clinical trials are typically conducted in the following four sequential phases that may overlap or be combined: |
| • | In Phase 1, the drug is initially introduced into a small number of individuals and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion. Phase 1 clinical trials are often conducted in healthy human volunteers and such cases do not provide evidence of efficacy. In the case of severe or life-threatening diseases, the initial human testing is often conducted in patients rather than healthy volunteers. Because these patients already have the target disease, these studies may provide initial evidence of efficacy that would traditionally be obtained in Phase 2 clinical trials. Consequently, these types of trials are frequently referred to as Phase 1/2 clinical trials. The FDA receives reports on the progress of each phase of clinical testing and it may require the modification, suspension or termination of clinical trials if it concludes that an unwarranted risk is presented to patients or healthy volunteers. | ||
| • | Phase 2 involves clinical trials in a limited patient population to further identify any possible adverse effects and safety risks, to determine the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage. | ||
| • | Phase 3 clinical trials are undertaken to further evaluate dosage, clinical efficacy and to further test for safety in an expanded patient population at geographically dispersed clinical study sites. Phase 3 clinical trials usually include a broader patient population so that safety and efficacy can be substantially established. Phase 3 clinical trials cannot begin until Phase 2 evaluation demonstrates that a dosage range of the product may be effective and has an acceptable safety profile. | ||
| • | Phase 4 clinical trials are performed if the FDA requires, or a company pursues, additional clinical trials after a product is approved. These clinical trials may be made a condition to be satisfied after a drug receives approval. The results of Phase 4 clinical trials can confirm the effectiveness of a product candidate and can provide important safety information to augment the FDA’s voluntary adverse drug reaction reporting system. |
| • | Concurrent with clinical trials and preclinical studies, companies also must develop information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing the product in accordance with drug cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product and the manufacturer must develop methods for testing the quality, purity, and potency of the final products. Additionally, appropriate packaging must be selected and tested and chemistry stability studies must be conducted to demonstrate that the product does not undergo unacceptable deterioration over its shelf-life. |
| • | Submission to the FDA of an NDA, or Biologics License Application, or BLA, based on the clinical trials. The results of product development, preclinical studies, and clinical trials are submitted to the FDA in the form of an NDA or BLA for approval of the marketing and commercial shipment of the product. Under the Pediatric Research Equity Act of 2003, NDAs are required to include an assessment, generally based on clinical study data, of the safety and efficacy of drugs for all relevant pediatric populations. The statute provides for waivers or deferrals in certain situations but we can make no assurances that such situations will apply to us or our product candidates. |
Medical products containing a combination of new drugs, biological products, or medical
devices are regulated as “combination products” in the United States. A combination product
generally is defined as a product comprised of components from two or more regulatory categories
(e.g., drug/device, device/biologic, drug/biologic). Each component of a combination product is
subject to the requirements established by the FDA for that type of component, whether a new drug,
biologic, or device. In order to facilitate pre-market review of combination products, the FDA
designates one of its centers to have primary jurisdiction for the pre-market review and regulation
of the overall product. The determination whether a product is a combination product or two
separate products is made by the FDA on a case-by-case basis. The FDA considers AFREZZA to be a
drug-device combination product, so the review of our NDA for AFREZZA involves reviews within the
Division of Metabolism and Endocrinology Products and the Division of Pulmonary and Allergy
Products, both within the Center for Drug Evaluation and Research, as well as review within the
Center for Devices and Radiological Health, the Center within the FDA that reviews Medical Devices.
The Division of Metabolic and Endocrine Products is the lead group and obtains consulting reviews
from the other two FDA groups.
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The testing and approval process requires substantial time, effort and financial resources.
Data that we submit are subject to varying interpretations, and the FDA and comparable regulatory
authorities in foreign jurisdictions may not agree that our product candidates have been shown to
be safe and effective. We cannot be certain that any approval of our products will be granted on a
timely basis, if at all. If any of our products are approved for marketing by the FDA, we will be
subject to continuing regulation by the FDA, including record-keeping requirements, reporting of
adverse experiences with the product, submitting other periodic reports, drug sampling and
distribution requirements, notifying the FDA and gaining its approval of certain manufacturing or
labeling changes, and complying with certain electronic records and signature requirements. Prior
to and following approval, if granted, all manufacturing sites are subject to inspection by the FDA
and other national regulatory bodies and must comply with cGMP, QSR and other requirements enforced
by the FDA and other national regulatory bodies through their facilities inspection program.
Foreign manufacturing establishments must comply with similar regulations. In addition, our
drug-manufacturing facilities located in Danbury and the facilities of our insulin supplier, the
supplier(s) of our Technosphere material and the supplier(s) of our inhaler and cartridges are
subject to federal registration and listing requirements and, if applicable, to state licensing
requirements. Failure, including those of our suppliers, to obtain and maintain applicable federal
registrations or state licenses, or to meet the inspection criteria of the FDA or the other
national regulatory bodies, would disrupt our manufacturing processes and would harm our business.
In complying with standards set forth in these regulations, manufacturers must continue to expend
time, money and effort in the area of production and quality control to ensure full compliance.
Currently, we believe we are operating under all of the necessary guidelines and permits.
As a drug-device combination, we currently expect that our inhaler will be approved, if at
all, as part of the NDA for AFREZZA. However, numerous device regulatory requirements still apply
to the device part of the drug-device combination. These include:
| • | product labeling regulations; | ||
| • | general prohibition against promoting products for unapproved or “off-label” uses; | ||
| • | corrections and removals (e.g., recalls); | ||
| • | establishment registration and device listing; | ||
| • | general prohibitions against the manufacture and distribution of adulterated and misbranded devices; and | ||
| • | the Medical Device Reporting regulation, which requires that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur. |
Further, the company we contract with to manufacture our inhaler and cartridges will be
subject to the QSR, which requires manufacturers to follow elaborate design, testing, control,
documentation and other quality assurance procedures during the manufacturing process of medical
devices, among other requirements.
Failure to adhere to regulatory requirements at any stage of development, including the
preclinical and clinical testing process, the review process, or at any time afterward, including
after approval, may result in various adverse consequences. These consequences include action by
the FDA or another national regulatory body that has the effect of delaying approval or refusing to
approve a product; suspending or withdrawing an approved product from the market; seizing or
recalling a product; or imposing criminal penalties against the manufacturer. In addition, later
discovery of previously unknown problems may result in restrictions on a product, its manufacturer,
or the NDA holder, or market restrictions through labeling changes or product withdrawal. Also, new
government requirements may be established or current government requirements may be changed at any
time, which could delay or prevent regulatory approval of our products under development. For
example, healthcare reform legislation currently being considered in Congress could provide the FDA
and other federal agencies with greater authority to consider the comparative effectiveness of
products and to control costs of public spending on prescription drugs and biologics. We cannot
predict the likelihood, nature or extent of adverse governmental regulation that might arise from
future legislative or administrative action, either in the United States or abroad.
In addition, the FDA imposes a number of complex regulations on entities that advertise and
promote drugs, which include, among other requirements, standards for and regulations of
direct-to-consumer advertising, off-label promotion, industry sponsored scientific and educational
activities, and promotional activities involving the Internet. The FDA has very broad enforcement
authority under the FDCA, and failure to comply with these regulations can
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result in penalties, including the issuance of a warning letter directing us to correct
deviations from FDA standards, including corrective advertising to healthcare providers, a
requirement that future advertising and promotional materials be pre-cleared by the FDA, and state
and federal civil and criminal investigations and prosecutions.
Products manufactured in the United States and marketed outside the United States are subject
to certain FDA regulations, as well as regulation by the country in which the products are to be
sold. We also would be subject to foreign regulatory requirements governing clinical trials and
drug product sales if products are studied or marketed abroad. Whether or not FDA approval has been
obtained, approval of a product by the comparable regulatory authorities of foreign countries
usually must be obtained prior to the marketing of the product in those countries. The approval
process varies from jurisdiction to jurisdiction and the time required may be longer or shorter
than that required for FDA approval.
Product development and approval within this regulatory framework take a number of years,
involve the expenditure of substantial resources and are uncertain. Many drug products ultimately
do not reach the market because they are not found to be safe or effective or cannot meet the FDA’s
other regulatory requirements. In addition, there can be no assurance that the current regulatory
framework will not change or that additional regulation will not arise at any stage of our product
development that may affect approval, delay the submission or review of an application or require
additional expenditures by us. There can be no assurance that we will be able to obtain necessary
regulatory clearances or approvals on a timely basis, if at all, for any of our product candidates
under development, and delays in receipt or failure to receive such clearances or approvals, the
loss of previously received clearances or approvals, or failure to comply with existing or future
regulatory requirements could have a material adverse effect on our business and results of
operations.
Under European Union regulatory systems, marketing authorizations may be submitted either
under a centralized or decentralized procedure. The centralized procedure provides for the grant of
a single marketing authorization that is valid for all European Union member states. The
decentralized procedure provides for mutual recognition of national approval decisions. Under this
latter procedure, the holder of a national marketing authorization may submit an application to the
remaining member states. Within 90 days of receiving the application and assessment report, each
member state must decide whether to recognize approval. We plan to choose the appropriate route of
European regulatory filing in an attempt to accomplish the most rapid regulatory approvals.
However, the chosen regulatory strategy may not secure regulatory approvals or approvals of the
chosen product indications. In addition, these approvals, if obtained, may take longer than
anticipated.
In addition to the foregoing, we are subject to numerous federal, state and local laws
relating to such matters as laboratory practices, the experimental use of animals, the use and
disposal of hazardous or potentially hazardous substances, controlled drug substances, privacy of
individually identifiable healthcare information, safe working conditions, manufacturing practices,
environmental protection and fire hazard control. We may incur significant costs to comply with
those laws and regulations now or in the future.
Patent Restoration and Marketing Exclusivity
The Drug Price Competition and Patent Term Restoration Act of 1984, known as the Hatch-Waxman
Amendments to the Federal Food, Drug, and Cosmetic Act, permits the FDA to approve abbreviated new
drug applications, or ANDAs, for generic versions of innovator drugs and also provides certain
patent restoration and market exclusivity protections to innovator drug manufacturers. The ANDA
process permits competitor companies to obtain marketing approval for a new drug with the same
active ingredient for the same uses, dosage form and strength as an innovator drug but does not
require the conduct and submission of preclinical or clinical studies demonstrating safety and
efficacy for that product. Instead of providing completely new safety and efficacy data, the ANDA
applicant only needs to submit manufacturing information and clinical data demonstrating that the
copy is bioequivalent to the innovator’s product in order to gain marketing approval from the FDA.
Another type of marketing application allowed by the Hatch-Waxman Amendments, a Section
505(b)(2) application, may be permitted where a company does not own or have a right to reference
all the data required for approval. Section 505(b)(2) applications are often submitted for drug
products that contain the same active ingredient as those in first approved drug products and where
additional studies are required for approval, such as for changes in routes of administration or
dosage forms.
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Once an NDA is approved, the product covered thereby becomes a “listed drug” which can, in
turn, be cited by potential competitors in support of approval of an ANDA or a 505(b)(2)
application.
The Hatch-Waxman Amendments provide for a period of three years exclusivity following approval
of a listed drug that contains previously approved active ingredients but is approved in a new
dosage, dosage form, route of administration or combination, or for a new use, the approval of
which was required to be supported by new clinical trials conducted by or for the sponsor. During
this period of exclusivity, the FDA cannot grant effective approval of an ANDA or a 505(b)(2)
application based on that listed drug.
The Hatch-Waxman Amendments also provide a period of five years exclusivity following approval
of a drug containing no previously approved active ingredients. During this period of exclusivity,
ANDAs or 505(b)(2) applications based upon those drugs cannot be submitted unless the submission
accompanies a challenge to a listed patent, in which case the submission may be made four years
following the original product approval.
Additionally, in the event that the sponsor of the listed drug has informed the FDA of patents
covering its listed drug and FDA lists those patents in the Orange Book, applicants submitting an
ANDA or a 505(b)(2) application referencing that drug are required to certify whether they intend
to market their generic products prior to expiration of those patents. If an ANDA applicant
certifies that it believes one or more listed patents is invalid or not infringed, it is required
to provide notice of its filing to the NDA sponsor and the patent holder. If either party then
initiates a suit for patent infringement against the ANDA sponsor within 45 days of receipt of the
notice, the FDA cannot grant effective approval of the ANDA until either 30 months has passed or
there has been a court decision holding that the patent in question is invalid or not infringed. If
the ANDA applicant certifies that it does not intend to market its generic product before some or
all listed patents on the listed drug expire, then the FDA cannot grant effective approval of the
ANDA until those patents expire. The first ANDA applicant submitting substantially complete
applications certifying that listed patents for a particular product are invalid or not infringed
may qualify for a period of 180 days after a court decision of invalidity or non-infringement or
after it begins marketing its product, whichever occurs first. During this 180 day period,
subsequently submitted ANDAs cannot be granted effective approval.
Pediatric exclusivity, if granted, provides an additional six months of market exclusivity in
the United States for new or currently marketed drugs if certain pediatric studies requested by the
FDA are completed by the applicant and the applicant has other existing patent or exclusivity
protection for the drug. To obtain this additional six months of exclusivity, it would be necessary
for us to first receive a written request from the FDA to conduct pediatric studies and then to
conduct the requested studies according to a previously agreed timeframe and submit the report of
the study. There can be no assurances that we would receive a written request from the FDA and if
so that we would complete the studies in accordance with the requirements for this six-month
exclusivity. The current pediatric exclusivity provision is scheduled to end on October 1, 2012,
and there can be no assurances that it will be reauthorized.
EMPLOYEES
As of December 31, 2009, we had 443 full-time employees. 49 of these employees were engaged in
research and development, 157 in manufacturing, 134 in clinical, regulatory affairs and quality
assurance and 103 in administration, finance, management, information systems, marketing, corporate
development and human resources. 58 of these employees have a Ph.D. degree and/or M.D. degree and
are engaged in activities relating to research and development, manufacturing, quality assurance
and business development. None of our employees is subject to a collective bargaining agreement. We
believe relations with our employees are good.
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SCIENTIFIC ADVISORS
We seek advice from a number of leading scientists and physicians on scientific, technical and
medical matters. These advisors are leading scientists in the areas of pharmacology, chemistry,
immunology and biology. Our scientific advisors are consulted regularly to assess, among other
things:
| • | our research and development programs; | ||
| • | the design and implementation of our clinical programs; | ||
| • | our patent and publication strategies; | ||
| • | market opportunities from a clinical perspective; | ||
| • | new technologies relevant to our research and development programs; and | ||
| • | specific scientific and technical issues relevant to our business. |
Our diabetes program is supported by the following scientific advisors (and their primary
affiliations):
| Name | Primary Affiliation | |
Stephanie Amiel, MD, FRCP
|
King’s College London School of Medicine | |
Richard Bergenstal, MD
|
International Diabetes Center, Park Nicollet Institute | |
Geremia Bolli
|
University of Perugia | |
Alan D. Cherrington, PhD
|
Vanderbilt University Medical Center | |
David D’Alessio, MD
|
University of Cincinnati | |
Steven Edelman, MD
|
University of California, San Diego | |
Alexander Fleming, MD
|
Kinexum Box LLC | |
Brian Frier, MD, FECP, BS
|
Edinburgh Royal Infirmary | |
Irl B. Hirsch, MD
|
University of Washington Medical Center | |
Lois Jovanovic, MD
|
Sansum Medical Research Institute | |
Harold E Lebovitz, MD, FACE
|
State University of New York, Brooklyn | |
Daniel Lorber, MD
|
Diabetes Care & Information Center of New York | |
Sten Madsbad
|
Hvidovre University Hospital, Copenhagen | |
Chantal Mathieu, MD, PhD
|
Laboratorium voor Experimentele Geneeskunde en Endocrinologie |
|
Mark Peyrot, MD
|
Loyola College Center | |
Daniel Porte, MD
|
University of California, San Diego | |
Philip Raskin, MD, FACE, FACP
|
University of Texas | |
Julio Rosenstock, MD
|
Dallas Diabetes and Endocrinology Center | |
Jesse Roth, MD, FACP
|
North Shore-Long Island Jewish Health System | |
Richard Rubin, PhD, CDE
|
Johns Hopkins University School of Medicine | |
Robert Sherwin, MD
|
Yale University School of Medicine | |
Jay Skyler, MD, MACP
|
University of Miami, Diabetes Research Institute |
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Our cancer program is supported by the following scientific advisors (and their primary
affiliations):
| Name | Primary Affiliation | |
Kenneth Anderson, M.D.
|
Dana Farber Cancer Institute, Boston | |
Philippe Bey, Ph.D.
|
Pharmaceutical consultant | |
Jeffrey Bluestone, Ph.D.
|
University of California, San Francisco | |
W. Martin Kast, Ph.D.
|
University of Southern California | |
Antoni Ribas, M.D.
|
University of California, Los Angeles |
EXECUTIVE OFFICERS
The following table sets forth our current executive officers and their ages as of December
31, 2009:
| Name | Age | Position(s) | ||||
Alfred E. Mann
|
84 | Chairman of the Board of Directors and Chief Executive Officer | ||||
Hakan S. Edstrom
|
59 | President, Chief Operating Officer and Director | ||||
Matthew J. Pfeffer
|
52 | Corporate Vice President and Chief Financial Officer | ||||
Juergen A. Martens, Ph.D.
|
54 | Corporate Vice President, Technical Operations and Chief Technical Officer | ||||
Diane M. Palumbo
|
56 | Corporate Vice President, Human Resources | ||||
Dr. Peter C. Richardson
|
50 | Corporate Vice President and Chief Scientific Officer | ||||
David Thomson, Ph.D., J.D.
|
43 | Corporate Vice President, General Counsel and Secretary | ||||
Alfred E. Mann has been one of our directors since April 1999, our Chairman of the Board since
December 2001 and our Chief Executive Officer since October 2003. He founded and formerly served as
Chairman and Chief Executive Officer of MiniMed, Inc., a publicly traded company focused on
diabetes therapy and microinfusion drug delivery that was acquired by Medtronic, Inc. in August
2001. Mr. Mann also founded and, from 1972 through 1992, served as Chief Executive Officer of
Pacesetter Systems, Inc. and its successor, Siemens Pacesetter, Inc., a manufacturer of cardiac
pacemakers, now the Cardiac Rhythm Management Division of St. Jude Medical Corporation. Mr. Mann
founded and since 1993, has served as Chairman and until January 2008, as Co-Chief Executive
Officer of Advanced Bionics Corporation, a medical device manufacturer focused on neurostimulation
to restore hearing to the deaf and to treat chronic pain and other neural deficits, that was
acquired by Boston Scientific Corporation in June 2004. In January 2008, the former stockholders of
Advanced Bionics Corporation repurchased certain segments from Boston Scientific Corporation and
formed Advanced Bionics LLC for cochlear implants and Infusion Systems LLC for infusion pumps. Mr.
Mann was non-executive Chairman of both entities. Advanced Bionics LLC was acquired by Sonova
Holdings on December 30, 2009. Infusion Systems LLC was acquired by the Alfred E. Mann Foundation in
February 2010. Mr. Mann has also founded and is non-executive Chairman of Second Sight Medical Products, Inc., which is
developing a visual prosthesis for the blind; Bioness Inc., which is developing rehabilitation
neurostimulation systems; Quallion LLC, which produces batteries for medical products and for the
military and aerospace industries; and Stellar Microelectronics Inc., a supplier of electronic
assemblies to the medical, military and aerospace industries. Mr. Mann also founded and is the
managing member of PerQFlo, LLC, which is developing drug delivery systems. Mr. Mann is the managing
member of the Alfred Mann Foundation and is also non-executive Chairman of Alfred Mann Institutes
at the University of Southern California, AMI Purdue and AMI Technion, and the Alfred Mann
Foundation for Biomedical Engineering, which is establishing additional institutes at other
research universities. Mr. Mann is also non-executive Chairman of the Southern California
Biomedical Council and a Director of the Nevada Cancer Institute. Mr. Mann holds a bachelor’s and
master’s degree in Physics from the University of California at Los Angeles, honorary doctorates
from Johns Hopkins University, the University of Southern California, Western University and the
Technion-Israel Institute of Technology and is a member of the National Academy of Engineering.
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Hakan S. Edstrom has been our President and Chief Operating Officer since April 2001 and has
served as one of our directors since December 2001. Mr. Edstrom was with Bausch & Lomb, Inc., a
health care product company, from January 1998 to April 2001, advancing to the position of Senior
Corporate Vice President and President of Bausch & Lomb, Inc. Americas Region. From 1981 to 1997,
Mr. Edstrom was with Pharmacia Corporation, where he held various executive positions, including
President and Chief Executive Officer of Pharmacia Ophthalmics Inc. Mr. Edstrom was educated in
Sweden and holds a master’s degree in Business Administration from the Stockholm School of
Economics.
Matthew J. Pfeffer has been our Corporate Vice President and Chief Financial Officer since
April 2008. Previously, Mr. Pfeffer served as Chief Financial Officer and Senior Vice President of
Finance and Administration of VaxGen, Inc. from March 2006 until April 2008, with responsibility
for finance, tax, treasury, human resources, IT, purchasing and facilities functions. Prior to
VaxGen, Mr. Pfeffer served as CFO of Cell Genesys, Inc. During his nine year tenure at Cell Genesys,
Mr. Pfeffer served as Director of Finance before being named CFO in 1998. Prior to that, Mr.
Pfeffer served in a variety of financial management positions at other companies, including roles
as Corporate Controller, Manager of Internal Audit and Manager of Financial Reporting. Mr. Pfeffer
began his career at Price Waterhouse. Mr. Pfeffer serves on boards and advisory committees of the
Biotechnology Industry Organization and the American Institute of Certified Public Accountants. Mr.
Pfeffer has a bachelor’s degree in Accounting from the University of California, Berkeley and is a
Certified Public Accountant.
Juergen A. Martens, Ph.D. has been our Corporate Vice President of Operations and Chief
Technology Officer since September 2005. From 2000 to August 2005, he was employed by Nektar
Therapeutics, Inc., most recently as Vice President of Pharmaceutical Technology Development.
Previously, he held technical management positions at Aerojet Fine Chemicals from 1998 to 2000 and
at FMC Corporation from 1996 to 1998. From 1987 to 1996, Dr. Martens held a variety of management
positions with increased responsibility in R&D, plant management, and business process development
at Lonza, in Switzerland and in the United States. Dr. Martens holds a bachelor’s degree in
chemical engineering from the Technical College Mannheim/Germany, a bachelor’s and master’s degree
in Chemistry and a doctorate in Physical Chemistry from the University of Marburg/Germany.
Diane M. Palumbo has been our Corporate Vice President of Human Resources since November 2004.
From July 2003 to November 2004, she was President of her own human resources consulting company.
From June 1991 to July 2003, Ms. Palumbo held various positions with Amgen, Inc., a
California-based biopharmaceutical company, including Senior Director, Human Resources. In
addition, Ms. Palumbo has held Human Resources positions with Unisys and Mitsui Bank Ltd. of Tokyo.
She holds a master’s degree in Business Administration from St. John’s University, New York and a
bachelor’s degree, magna cum laude, also from St. John’s University.
Dr. Peter C. Richardson has been our Corporate Vice President and Chief Scientific Officer
since October 2005. From 1991 to October 2005, he was employed by Novartis Pharmaceuticals
Corporation, which is the U.S. affiliate of Novartis AG, a world leader in healthcare, most
recently as Senior Vice President, Global Head of Development Alliances. From 2003 until 2005, he
was Senior Vice President and Head of Development of Novartis Pharmaceuticals KK Japan. He earlier
practiced as an endocrinologist. Dr. Richardson holds a B.Med.Sci (Hons.) and a BM.BS (Hons.) from
University of Nottingham Medical School; a MRCP (UK) from the Royal College of Physicians, UK; a
Certificate in Pharmaceutical Medicine from Universities of Freibourg, Strasbourg and Basle; and a
Diploma in Pharmaceutical Medicine from the Royal College of Physicians Faculty of Pharmaceutical
Medicine.
David Thomson, Ph.D., J.D. has been our Corporate Vice President, General Counsel and
Corporate Secretary since January 2002. Prior to joining us, he practiced corporate/commercial and
securities law at the Toronto law firm of Davies Ward Phillips & Vineberg LLP. Earlier in his
career, Dr. Thomson was a post-doctoral fellow at the Rockefeller University. Dr. Thomson obtained
his bachelor’s degree, master’s degree and Ph.D. degree from Queens University and obtained his
J.D. degree from the University of Toronto.
Executive officers serve at the discretion of our Board of Directors. There are no family
relationships between any of our directors and executive officers.
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Item 1A. Risk Factors
You should consider carefully the following information about the risks described below,
together with the other information contained in this Annual Report before you decide to buy or
maintain an investment in our common stock. We believe the risks described below are the risks that
are material to us as of the date of this Annual Report. Additional risks and uncertainties that we
are unaware of may also become important factors that affect us. If any of the following risks
actually occur, our business, financial condition, results of operations and future growth
prospects would likely be materially and adversely affected. In these circumstances, the market
price of our common stock could decline, and you may lose all or part of the money you paid to buy
our common stock.
RISKS RELATED TO OUR BUSINESS
We depend heavily on the successful development and commercialization of our lead product
candidate, AFREZZA, which is not yet approved, and our other product candidates, which are in early
clinical or preclinical development.
To date, we have not commercialized any product candidates. In March 2009, we submitted an NDA
to the FDA requesting approval of AFREZZA for the treatment of adults with type 1 or type 2
diabetes for the control of hyperglycemia. The FDA accepted our NDA for filing in May 2009, meaning
the FDA determined that our submission is sufficiently complete to permit a substantive review.
On March 12, 2010, we received a Complete Response letter from the FDA regarding the
NDA for AFREZZA. A Complete Response letter is issued by the FDA’s Center for
Drug Evaluation and Research when the review of a submitted file is completed and
questions remain that preclude the approval of the NDA in its current form. As
recommended by the FDA, we will request an End-of-Review meeting with the agency to
discuss our approach for resolving the remaining issues. There can be no assurance that
we will be able to satisfy all of the FDA’s requirements with currently available data or
that the FDA will find our proposed approach acceptable. The FDA could also request
that we conduct additional clinical trials to provide sufficient data for approval of the
NDA. There can be no assurance that we will obtain approval of the NDA in a timely
manner or at all.
Our other product candidates are generally in early clinical or preclinical development. We
anticipate that in the near term, our ability to generate revenues will depend solely on the
successful development and commercialization of AFREZZA.
We have expended significant time, money and effort in the development of our lead product
candidate, AFREZZA, which has not yet received regulatory approval and which may not be approved by
the FDA in a timely manner, or at all. We must receive the necessary approvals from the FDA and
similar foreign regulatory agencies before AFREZZA can be marketed and sold in the United States or
elsewhere. Even if we were to receive regulatory approval, we ultimately may be unable to gain
market acceptance of AFREZZA for a variety of reasons, including the treatment and dosage regimen,
potential adverse effects, the availability of alternative treatments and cost effectiveness. If we
fail to commercialize AFREZZA, our business, financial condition and results of operations will be
materially and adversely affected.
We are seeking to develop and expand our portfolio of product candidates through our internal
research programs and through licensing or otherwise acquiring the rights to therapeutics in the
areas of cancer and other indications. All of these product candidates will require additional
research and development and significant preclinical, clinical and other testing prior to seeking
regulatory approval to market them. Accordingly, these product candidates will not be commercially
available for a number of years, if at all.
A significant portion of the research that we are conducting involves new and unproven compounds
and technologies, including AFREZZA, Technosphere platform technology and immunotherapy product
candidates. Research programs to identify new product candidates require substantial technical,
financial and human resources. Even if our research programs identify candidates that initially
show promise, these candidates may fail to progress to clinical development for any number of
reasons, including discovery upon further research that these candidates have adverse effects or
other characteristics that indicate they are unlikely to be effective. In addition, the clinical
results we obtain at one stage are not necessarily indicative of future testing results. If we fail
to successfully complete the development and commercialization of AFREZZA or develop or expand our
other product candidates, or are significantly delayed in doing so, our business and results of
operations will be harmed and the value of our stock could decline.
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We have a history of operating losses, we expect to continue to incur losses and we may never
become profitable.
We are a development stage company with no commercial products. All of our product candidates are
still being developed, and all but AFREZZA are still in the early stages of development. Our
product candidates will require significant additional development, clinical trials, regulatory
clearances and additional investment before they can be commercialized. We cannot be certain when
AFREZZA may be approved, or if it will be approved.
We have never been profitable and, as of December 31, 2009, we had an accumulated deficit of $1.6
billion. The accumulated deficit has resulted principally from costs incurred in our research and
development programs, the write-off of goodwill and general operating expenses. We expect to make
substantial expenditures and to incur increasing operating losses in the future in order to further
develop and commercialize our product candidates, including costs and expenses to complete clinical
trials, seek regulatory approvals and market our product candidates, including AFREZZA. This
accumulated deficit may increase significantly as we continue development and clinical trial
efforts.
Our losses have had, and are expected to continue to have, an adverse impact on our working
capital, total assets and stockholders’ equity. As of December 31, 2009, we had an accumulated
deficit in stockholders’ equity of $59.2 million. Our ability to achieve and sustain profitability
depends upon obtaining regulatory approvals for and successfully commercializing AFREZZA, either
alone or with third parties. We do not currently have the required approvals to market any of our
product candidates, and we may not receive them. We may not be profitable even if we succeed in
commercializing any of our product candidates. As a result, we cannot be sure when we will become
profitable, if at all.
If we fail to raise additional capital our financial condition and business would suffer.
It is costly to develop therapeutic product candidates and conduct clinical trials for these
product candidates. Although we are currently focusing on AFREZZA as our lead product candidate, we
have begun to conduct clinical trials for additional product candidates. Our existing capital
resources will not be sufficient to support the expense of fully commercializing AFREZZA or
developing any of our product candidates.
Based upon our current expectations, we believe that our existing capital resources, including the
loan arrangement with an entity controlled by our principal stockholder, will enable us to continue
planned operations into the first quarter of 2011. However, we cannot assure you that our plans
will not change or that changed circumstances will not result in the depletion of our capital
resources more rapidly than we currently anticipate. Accordingly, we plan to raise additional
capital, either through the sale of equity and/or debt securities, the entry into a strategic
business collaboration, or the establishment of other funding facilities, in order to continue the
development and commercialization of AFREZZA and other product candidates and to support our other
ongoing activities. However, it may be difficult for us to raise additional capital through the
sale of equity and/or debt securities. As of December 31, 2009, we had an accumulated deficit in
stockholders’ equity of $59.2 million which may affect our ability to raise additional capital. The
amount of additional funds we need will depend on a number of factors, including:
| • | the rate of progress and costs of our clinical trials and research and development activities, including costs of procuring clinical materials and expanding our own manufacturing facilities; | ||
| • | our success in establishing strategic business collaborations and the timing and amount of any payments we might receive from any collaboration we are able to establish; | ||
| • | actions taken by the FDA and other regulatory authorities affecting our products and competitive products; | ||
| • | our degree of success in commercializing AFREZZA; | ||
| • | the emergence of competing technologies and products and other adverse market developments; | ||
| • | the timing and amount of payments we might receive from potential licensees; | ||
| • | the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights or defending against claims of infringement by others; |
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| • | the costs of discontinuing projects and technologies or decommissioning existing facilities, if we undertake those activities; and | ||
| • | the costs of performing additional clinical trials to demonstrate safety and efficacy if our current trials do not deliver results sufficient for FDA approval and commercialization. |
We have raised capital in the past primarily through the sale of equity and debt securities. We may
in the future pursue the sale of additional equity and/or debt securities, or the establishment of
other funding facilities. Issuances of additional debt or equity securities or the conversion of
any of our currently outstanding convertible debt securities into shares of our common stock could
impact your rights as a holder of our common stock and may dilute your ownership percentage. We
anticipate that we will seek approval by our stockholders of an amendment to our certificate of
incorporation to increase the authorized number of shares of our common stock to facilitate any
future capital-raising transactions. Such a proposal would require approval by the holders of a
majority of the outstanding shares of our common stock. If we were unable to obtain the requisite
approval, our ability to raise additional capital by selling our equity securities would be
constrained. Moreover, the establishment of other funding facilities may impose restrictions on
our operations. These restrictions could include limitations on additional borrowing and specific
restrictions on the use of our assets, as well as prohibitions on our ability to create liens, pay
dividends, redeem our stock or make investments.
We also may seek to raise additional capital by pursuing opportunities for the licensing or sale of
certain intellectual property and other assets, including our Technosphere technology platform. We
cannot offer assurances, however, that any strategic collaborations, sales of securities or sales
or licenses of assets will be available to us on a timely basis or on acceptable terms, if at all.
We may be required to enter into relationships with third parties to develop or commercialize
products or technologies that we otherwise would have sought to develop independently, and any such
relationships may not be on terms as commercially favorable to us as might otherwise be the case.
In the event that sufficient additional funds are not obtained through strategic collaboration
opportunities, sales of securities, credit facilities, licensing arrangements and/or asset sales on
a timely basis, we may be required to reduce expenses through the delay, reduction or curtailment
of our projects, including AFREZZA commercialization, or further reduction of costs for facilities
and administration. Moreover, if we do not obtain such additional funds, there will be substantial
doubt about our ability to continue as a going concern.
Deteriorating global economic conditions may have an adverse impact on the loan facility with an
entity controlled by our principal stockholder, which we currently cannot predict.
As widely reported, financial markets in the United States, Europe and Asia have been experiencing
a period of unprecedented turmoil and upheaval characterized by extreme volatility and declines in
security prices, severely diminished liquidity and credit availability, inability to access capital
markets, the bankruptcy, failure, collapse or sale of various financial institutions and an
unprecedented level of intervention from the United States federal government and other
governments. We cannot predict the impact of these events on the loan facility with an entity
controlled by our principal stockholder. If we are unable to draw on this financial resource, our
business and financial condition will be adversely affected.
If we do not achieve our projected development and commercialization goals in the timeframes we
announce and expect, our business would be harmed and the market price of our common stock could
decline.
For planning purposes, we estimate the timing of the accomplishment of various scientific,
clinical, regulatory and other product development goals, which we sometimes refer to as
milestones. These milestones may include the commencement or completion of scientific studies and
clinical trials and the submission of regulatory filings. From time to time, we publicly announce
the expected timing of some of these milestones. All of these milestones are based on a variety of
assumptions. The actual timing of the achievement of these milestones can vary dramatically from
our estimates, in many cases for reasons beyond our control, depending on numerous factors,
including:
| • | the rate of progress, costs and results of our clinical trial and research and development activities, which will be impacted by the level of proficiency and experience of our clinical staff; |
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| • | our ability to identify and enroll patients who meet clinical trial eligibility criteria; | ||
| • | our ability to access sufficient, reliable and affordable supplies of components used in the manufacture of our product candidates, including insulin and other materials for AFREZZA; | ||
| • | the costs of expanding and maintaining manufacturing operations, as necessary; | ||
| • | the extent of scheduling conflicts with participating clinicians and clinical institutions; | ||
| • | the receipt of approvals by our competitors and by us from the FDA and other regulatory agencies; and | ||
| • | other actions by regulators. |
In addition, if we do not obtain sufficient additional funds through sales of securities, strategic
collaborations or the license or sale of certain of our assets on a timely basis, we may be
required to reduce expenses by delaying, reducing or curtailing our development of AFREZZA or other
product development activities, which would impact our ability to meet milestones. If we fail to
commence or complete, or experience delays in or are forced to curtail, our proposed clinical
programs or otherwise fail to adhere to our projected development goals in the timeframes we
announce and expect, our business and results of operations will be harmed and the market price of
our common stock may decline.
We face substantial competition in the development of our product candidates and may not be able to
compete successfully, and our product candidates may be rendered obsolete by rapid technological
change.
A number of established pharmaceutical companies have or are developing technologies for the
treatment of diabetes. We also face substantial competition for the development of our other
product candidates.
Many of our existing or potential competitors have, or have access to, substantially greater
financial, research and development, production, and sales and marketing resources than we do and
have a greater depth and number of experienced managers. As a result, our competitors may be better
equipped than we are to develop, manufacture, market and sell competing products. In addition,
gaining favorable reimbursement is critical to the success of AFREZZA. Many of our competitors have
existing infrastructure and relationships with managed care organizations and reimbursement
authorities which can be used to their advantage.
The rapid rate of scientific discoveries and technological changes could result in one or more of
our product candidates becoming obsolete or noncompetitive. Our competitors may develop or
introduce new products that render our technology and AFREZZA less competitive, uneconomical or
obsolete. Our future success will depend not only on our ability to develop our product candidates
but to improve them and keep pace with emerging industry developments. We cannot assure you that we
will be able to do so.
We also expect to face increasing competition from universities and other non-profit research
organizations. These institutions carry out a significant amount of research and development in the
areas of diabetes and cancer. These institutions are becoming increasingly aware of the commercial
value of their findings and are more active in seeking patent and other proprietary rights as well
as licensing revenues.
If we fail to enter into a strategic collaboration with respect to AFREZZA, we may not be able to
execute on our business model.
We have held extensive discussions with a number of pharmaceutical companies concerning a potential
strategic business collaboration for AFREZZA. To date we have not reached an agreement with any of
these companies on a collaboration. We cannot predict when, if ever, we could conclude an agreement with a partner. There can be no
assurance that any such collaboration will be available to us on a timely basis or on acceptable
terms. If we are not able to enter into a collaboration on terms that are favorable to us, we may
be unable to undertake and fund product development, clinical trials, manufacturing and marketing
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activities at our own expense. Accordingly, we may have to substantially reduce our development
efforts, which would delay or otherwise impede the commercialization of AFREZZA.
We will face similar challenges as we seek to develop our other product candidates. Our current
strategy for developing, manufacturing and commercializing our other product candidates includes
evaluating the potential for collaborating with pharmaceutical and biotechnology companies at some
point in the drug development process and for these collaborators to undertake the advanced
clinical development and commercialization of our product candidates. It may be difficult for us to
find third parties that are willing to enter into collaborations on economic terms that are
favorable to us, or at all. Failure to enter into a collaboration with respect to any other product
candidate could substantially increase our requirements for capital and force us to substantially
reduce our development effort.
If we enter into collaborative agreements with respect to AFREZZA and if our third-party
collaborators do not perform satisfactorily or if our collaborations fail, development or
commercialization of AFREZZA may be delayed and our business could be harmed.
We may enter into license agreements, partnerships or other collaborative arrangements to support
the financing, development and marketing of AFREZZA. We may also license technology from others to
enhance or supplement our technologies. These various collaborators may enter into arrangements
that would make them potential competitors. These various collaborators also may breach their
agreements with us and delay our progress or fail to perform under their agreements, which could
harm our business.
If we enter into collaborative arrangements, we will have less control over the timing, planning
and other aspects of our clinical trials, and the sale and marketing of AFREZZA and our other
product candidates. We cannot offer assurances that we will be able to enter into satisfactory
arrangements with third parties as contemplated or that any of our existing or future
collaborations will be successful.
Continued testing of AFREZZA or our other product candidate may not yield successful results, and
even if it does, we may still be unable to commercialize our product candidate.
Our research and development programs are designed to test the safety and efficacy of AFREZZA and
our other product candidates through extensive nonclinical and clinical testing. We may experience
numerous unforeseen events during, or as a result of, the testing process that could delay or
prevent commercialization of AFREZZA or any of our other product candidates, including the
following:
| • | safety and efficacy results obtained in our nonclinical and initial clinical testing may be inconclusive or may not be predictive of results obtained in later-stage clinical trials or following long-term use, and we may as a result be forced to stop developing product candidates that we currently believe are important to our future; | ||
| • | the data collected from clinical trials of our product candidates may not be sufficient to support FDA or other regulatory approval; | ||
| • | after reviewing test results, we or any potential collaborators may abandon projects that we previously believed were promising; and | ||
| • | our product candidates may not produce the desired effects or may result in adverse health effects or other characteristics that preclude regulatory approval or limit their commercial use if approved. |
Forecasts about the effects of the use of drugs, including AFREZZA, over terms longer than the
clinical trials or in much larger populations may not be consistent with the clinical results. If
use of AFREZZA results in adverse health effects or reduced efficacy or both, the FDA or other
regulatory agencies may terminate our ability to market and sell AFREZZA, may narrow the approved
indications for use or otherwise require restrictive product labeling or marketing, or may require
further clinical trials, which may be time-consuming and expensive and may not produce favorable
results.
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As a result of any of these events, we, any collaborator, the FDA, or any other regulatory
authorities, may suspend or terminate clinical trials or marketing of AFREZZA at any time. Any
suspension or termination of our clinical trials or marketing activities may harm our business and
results of operations and the market price of our common stock may decline.
If we are unable to transition successfully from a development company to a company that
commercializes therapeutics, our business would suffer.
We require a well-structured plan to make the transition from the development stage to being a
company with commercial operations. We have a number of executive personnel, particularly in
clinical development, regulatory and manufacturing production, including personnel with significant
Phase 3-to-commercialization experience. In order to implement our commercialization strategy, we
will need to:
| • | align our management structure to accommodate the increasing complexity of our operations; | ||
| • | develop comprehensive and detailed commercialization, clinical development and regulatory plans; and | ||
| • | implement standard operating procedures. |
If we are unable to accomplish these measures in a timely manner, we would be at considerable risk
of failing to develop the capabilities necessary for FDA inspection and commercial operations.
If our suppliers fail to deliver materials and services needed for the production of AFREZZA in a
timely and sufficient manner, or they fail to comply with applicable regulations, our business and
results of operations would be harmed and the market price of our common stock could decline.
For AFREZZA to be commercially viable, we need access to sufficient, reliable and affordable
supplies of insulin, our AFREZZA inhaler, the related cartridges and other materials. We have a
long-term agreement with N.V. Organon for the supply of insulin. In June 2009, we purchased from
Pfizer, a portion of its inventory of bulk insulin and acquired an option to purchase the remainder
of Pfizer’s insulin inventory, in whole or in part, at a specified price to the extent that Pfizer
has not otherwise disposed of or used the retained insulin.
We have obtained FDKP, the precursor raw material for AFREZZA, from two sources, both of which are
major chemical manufacturers with facilities in Europe and North America. We have completed a
successful validation campaign of FDKP at commercial scale. We can also utilize our in-house
chemical manufacturing plant for supplemental capacity. We believe our contract manufacturers have
the capacity to supply our current clinical and future commercial requirements. We have obtained
our AFREZZA inhaler and cartridges from two large plastic molding companies.
We must rely on our suppliers to comply with relevant regulatory and other legal requirements,
including the production of insulin in accordance with the FDA’s cGMP for drug products, and the
production of AFREZZA inhaler and related cartridges in accordance with QSR. The supply of all of
these materials may be limited or the manufacturer may not meet relevant regulatory requirements,
and if we are unable to obtain these materials in sufficient amounts, in a timely manner and at
reasonable prices, or if we should encounter delays or difficulties in our relationships with
manufacturers or suppliers, the development or manufacturing of AFREZZA may be delayed. Any such
events could delay market introduction and subsequent sales of AFREZZA and, if so, our business and
results of operations will be harmed and the market price of our common stock may decline.
We have never manufactured AFREZZA or any other product candidates in commercial quantities, and if
we fail to develop an effective manufacturing capability for our product candidates or to engage
third-party manufacturers with this capability, we may be unable to commercialize these products.
We use our Danbury facility to formulate AFREZZA, fill plastic cartridges with AFREZZA and blister
package the cartridges for our clinical trials. This facility has been fully qualified and
undergone regulatory inspection that is expected to result in approval to manufacture commercially.
The manufacture of pharmaceutical products requires significant expertise and capital investment,
including the development of advanced manufacturing techniques and process controls. Manufacturers
of pharmaceutical products often encounter difficulties in production, especially in scaling up
initial production. These problems include difficulties with production costs and yields, quality
control
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and assurance and shortages of qualified personnel, as well as compliance with strictly enforced
federal, state and foreign regulations. If we engage a third-party manufacturer, we would need to
transfer our technology to that third-party manufacturer and gain FDA approval, potentially causing
delays in product delivery. In addition, our third-party manufacturer may not perform as agreed or
may terminate its agreement with us.
Additionally, when we manufacture commercial material on a significantly larger production scale
than the production scale for clinical trial materials, we are required by the FDA to establish
that the results obtained from the clinical trials may reasonably be extrapolated to such
commercial material. We have submitted documentation to the FDA to show correlation to the
clinical-scale production materials with no assurance that approval would be obtained.
Any of these factors could cause us to delay or suspend clinical trials, regulatory submissions,
required approvals or commercialization of our product candidates, entail higher costs and result
in our being unable to effectively commercialize our products. Furthermore, if we or a third-party
manufacturer fail to deliver the required commercial quantities of any product on a timely basis,
and at commercially reasonable prices and acceptable quality, and we were unable to promptly find
one or more replacement manufacturers capable of production at a substantially equivalent cost, in
substantially equivalent volume and quality on a timely basis, we would likely be unable to meet
demand for such products and we would lose potential revenues.
We deal with hazardous materials and must comply with environmental laws and regulations, which can
be expensive and restrict how we do business.
Our research and development work involves the controlled storage and use of hazardous materials,
including chemical, radioactive and biological materials. In addition, our manufacturing operations
involve the use of a chemical that is stable and non-hazardous under normal storage conditions, but
may form an explosive mixture under certain conditions. Our operations also produce hazardous waste
products. We are subject to federal, state and local laws and regulations governing how we use,
manufacture, store, handle and dispose of these materials. Moreover, the risk of accidental
contamination or injury from hazardous materials cannot be completely eliminated, and in the event
of an accident, we could be held liable for any damages that may result, and any liability could
fall outside the coverage or exceed the limits of our insurance. Currently, our general liability
policy provides coverage up to $1 million per occurrence and $2 million in the aggregate and is
supplemented by an umbrella policy that provides a further $4 million of coverage; however, our
insurance policy excludes pollution coverage and we do not carry a separate hazardous materials
policy. In addition, we could be required to incur significant costs to comply with environmental
laws and regulations in the future. Finally, current or future environmental laws and regulations
may impair our research, development or production efforts.
When we purchased the facilities located in Danbury, Connecticut in 2001, there was a soil cleanup
plan in process. As part of the purchase, we obtained an indemnification from the seller related to
the remediation of the soil for all known environmental conditions that existed at the time the
seller acquired the property. The seller is, in turn, indemnified for these known environmental
conditions by the previous owner. We also received an indemnification from the seller for
environmental conditions created during its ownership of the property and for environmental
problems unknown at the time that the seller acquired the property. These additional indemnities
are limited to the purchase price that we paid for the Danbury facilities.
During the construction of our expanded manufacturing facility, we completed the final stages of
the soil cleanup plan in the third quarter of 2008, at a cost of approximately $2.25 million.
We are in discussions with the party responsible for remediation regarding their contribution to past clean-up
costs and their obligation to pay for or
indemnify us for any future costs and expenses directly related to the final closure of the environmental remediation. If we are unable
to collect these future costs and expenses, if any, from the responsible party, our business and
results of operations may be harmed.
If we fail to enter into collaborations with third parties, we would be required to establish our
own sales, marketing and distribution capabilities, which could impact the commercialization of our
products and harm our business.
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Our products are intended to be used by a large number of healthcare professionals who will require
substantial education and support. For example, a broad base of physicians, including primary care
physicians and endocrinologists, treat patients with diabetes. A large sales force will be required
in order to educate these physicians about the benefits and advantages of AFREZZA and to provide
adequate support for them. Therefore, we plan to enter into collaborations with one or more
pharmaceutical companies to market, distribute and sell AFREZZA, if it is approved. If we fail to
enter into collaborations, we would be required to establish our own direct sales, marketing and
distribution capabilities. Establishing these capabilities can be time-consuming and expensive.
Because we lack experience in selling pharmaceutical products to the diabetes market, we would be
at a disadvantage compared to our potential competitors, all of whom have substantially more
resources and experience than we do. For example, several other companies selling products to treat
diabetes have existing sales forces in excess of 1,500 sales representatives. We, acting alone,
would not initially be able to field a sales force as large as our competitors or provide the same
degree of market research or marketing support. Also, we would not be able to match our
competitor’s spending levels for pre-launch marketing preparation, including medical education. We
cannot assure you that we will succeed in entering into acceptable collaborations, that any such
collaboration will be successful or, if not, that we will successfully develop our own sales,
marketing and distribution capabilities.
If any product that we may develop does not become widely accepted by physicians, patients,
third-party payers and the healthcare community, we may be unable to generate significant revenue,
if any.
AFREZZA and our other product candidates are new and unproven. Even if any of our product
candidates obtains regulatory approvals, it may not gain market acceptance among physicians,
patients, third-party payers and the healthcare community. Failure to achieve market acceptance
would limit our ability to generate revenue and would adversely affect our results of operations.
The degree of market acceptance of AFREZZA and our other product candidates will depend on many
factors, including the:
| • | claims for which FDA approval can be obtained, including superiority claims; | ||
| • | perceived advantages and disadvantages of competitive products; | ||
| • | willingness and ability of patients and the healthcare community to adopt new technologies; | ||
| • | ability to manufacture the product in sufficient quantities with acceptable quality and at an acceptable cost; | ||
| • | perception of patients and the healthcare community, including third-party payers, regarding the safety, efficacy and benefits of the product compared to those of competing products or therapies; | ||
| • | convenience and ease of administration of the product relative to existing treatment methods; | ||
| • | pricing and reimbursement of the product relative to other treatment therapeutics and methods; and | ||
| • | marketing and distribution support for the product. |
Physicians will not recommend a product until clinical data or other factors demonstrate the safety
and efficacy of the product as compared to other treatments. Even if the clinical safety and
efficacy of our product candidates is established, physicians may elect not to recommend these
product candidates for a variety of factors, including the reimbursement policies of government and
third-party payers and the effectiveness of our competitors in marketing their therapies. Because
of these and other factors, any product that we may develop may not gain market acceptance, which
would materially harm our business, financial condition and results of operations.
If third-party payers do not reimburse consumers for our products, our products might not be used
or purchased, which would adversely affect our revenues.
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Our future revenues and potential for profitability may be affected by the continuing efforts of
governments and third-party payers to contain or reduce the costs of healthcare through various
means. For example, in certain foreign markets the pricing of prescription pharmaceuticals is
subject to governmental control. In the United States, there has been, and we expect that there
will continue to be, a number of federal and state proposals to implement similar governmental
controls. We cannot be certain what legislative proposals will be adopted or what actions federal,
state or private payers for healthcare goods and services may take in response to any healthcare
reform proposals or legislation. Such reforms may make it difficult to complete the development and
testing of AFREZZA and our other product candidates, and therefore may limit our ability to
generate revenues from sales of our product candidates and achieve profitability. Further, to the
extent that such reforms have a material adverse effect on the business, financial condition and
profitability of other companies that are prospective collaborators for some of our product
candidates, our ability to commercialize our product candidates under development may be adversely
affected.
In the United States and elsewhere, sales of prescription pharmaceuticals still depend in large
part on the availability of reimbursement to the consumer from third-party payers, such as
governmental and private insurance plans. Third-party payers are increasingly challenging the
prices charged for medical products and services. In addition, because each third-party payer
individually approves reimbursement, obtaining these approvals is a time-consuming and costly
process. We would be required to provide scientific and clinical support for the use of any product
to each third-party payer separately with no assurance that approval would be obtained. This
process could delay the market acceptance of any product and could have a negative effect on our
future revenues and operating results. Even if we succeed in bringing one or more products to
market, we cannot be certain that any such products would be considered cost-effective or that
reimbursement to the consumer would be available, in which case our business and results of
operations would be harmed and the market price of our common stock could decline.
If product liability claims are brought against us, we may incur significant liabilities and suffer
damage to our reputation.
The testing, manufacturing, marketing and sale of AFREZZA and our other product candidates expose
us to potential product liability claims. A product liability claim may result in substantial
judgments as well as consume significant financial and management resources and result in adverse
publicity, decreased demand for a product, injury to our reputation, withdrawal of clinical trial
volunteers and loss of revenues. We currently carry worldwide liability insurance in the amount of
$10 million. We believe these limits are reasonable to cover us from potential damages arising from
current and previous clinical trials of AFREZZA. In addition, we carry local policies per trial in
each country in which we conduct clinical trials that require us to carry coverage based on local
statutory requirements. We intend to obtain product liability coverage for commercial sales in the
future if AFREZZA is approved. However, we may not be able to obtain insurance coverage that will
be adequate to satisfy any liability that may arise, and because insurance coverage in our industry
can be very expensive and difficult to obtain, we cannot assure you that we will be able to obtain
sufficient coverage at an acceptable cost, if at all. If losses from such claims exceed our
liability insurance coverage, we may ourselves incur substantial liabilities. If we are required to
pay a product liability claim our business and results of operations would be harmed and the market
price of our common stock may decline.
If we lose any key employees or scientific advisors, our operations and our ability to execute our
business strategy could be materially harmed.
In order to commercialize our product candidates successfully, we will be required to expand our
work force, particularly in the areas of manufacturing, clinical trials management, regulatory
affairs, business development, and sales and marketing. These activities will require the addition
of new personnel, including management, and the development of additional expertise by existing
personnel. We face intense competition for qualified employees among companies in the biotechnology
and biopharmaceutical industries. Our success depends upon our ability to attract, retain and
motivate highly skilled employees. We may be unable to attract and retain these individuals on
acceptable terms, if at all.
The loss of the services of any principal member of our management and scientific staff could
significantly delay or prevent the achievement of our scientific and business objectives. All of
our employees are “at will” and we currently do not have employment agreements with any of the
principal members of our management or scientific staff, and we do not have key person life
insurance to cover the loss of any of these individuals. Replacing key employees may be difficult
and time-consuming because of the limited number of individuals in our industry with
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the skills and experience required to develop, gain regulatory approval of and commercialize our
product candidates successfully.
We have relationships with scientific advisors at academic and other institutions to conduct
research or assist us in formulating our research, development or clinical strategy. These
scientific advisors are not our employees and may have commitments to, and other obligations with,
other entities that may limit their availability to us. We have limited control over the activities
of these scientific advisors and can generally expect these individuals to devote only limited time
to our activities. Failure of any of these persons to devote sufficient time and resources to our
programs could harm our business. In addition, these advisors are not prohibited from, and may have
arrangements with, other companies to assist those companies in developing technologies that may
compete with our product candidates.
If our Chief Executive Officer is unable to devote sufficient time and attention to our business,
our operations and our ability to execute our business strategy could be materially harmed.
Alfred Mann, our Chairman and Chief Executive Officer, is involved in many other business and
charitable activities. As a result, the time and attention Mr. Mann devotes to the operation of our
business varies, and he may not expend the same time or focus on our activities as other, similarly
situated chief executive officers. If Mr. Mann is unable to devote the time and attention necessary
to running our business, we may not be able to execute our business strategy and our business could
be materially harmed.
Our facilities that are located in Southern California may be affected by man-made or natural
disasters.
Our headquarters and some of our research and development activities are located in Southern
California, where they are subject to a risk of man-made disasters, terrorism, and an enhanced risk
of natural and other disasters such as fires, power and telecommunications failures, mudslides, and
earthquakes. An act of terrorism, fire, earthquake or other catastrophic loss that causes
significant damage to our facilities or interruption of our business could harm our business. We do
not carry insurance to cover losses caused by earthquakes, and the insurance coverage that we carry
for fire damage and for business interruption may be insufficient to compensate us for any losses
that we may incur.
If our internal controls over financial reporting are not considered effective, our business and
stock price could be adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our
internal controls over financial reporting as of the end of each fiscal year, and to include a
management report assessing the effectiveness of our internal controls over financial reporting in
our annual report on Form 10-K for that fiscal year. Section 404 also requires our independent
registered public accounting firm to attest to, and report on, our internal controls over financial
reporting.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect
that our internal controls over financial reporting will prevent all errors and all fraud. A
control system, no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system’s objectives will be met. Further, the design of a
control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud involving a company have been, or will be, detected. The design of any
system of controls is based in part on certain assumptions about the likelihood of future events,
and we cannot assure you that any design will succeed in achieving its stated goals under all
potential future conditions. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with policies or procedures. Because of the
inherent limitations in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected. We cannot assure you that we or our independent registered public
accounting firm will not identify a material weakness in our internal controls in the future. A
material weakness in our internal controls over financial reporting would require management and
our independent registered public accounting firm to evaluate our internal controls as ineffective.
If our internal controls over financial reporting are not considered effective, we may experience a
loss of public confidence, which could have an adverse effect on our business and on the market
price of our common stock.
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RISKS RELATED TO REGULATORY APPROVALS
Our product candidates must undergo rigorous nonclinical and clinical testing and we must obtain
regulatory approvals, which could be costly and time-consuming and subject us to unanticipated
delays or prevent us from marketing any products.
Our research and development activities, as well as the manufacturing and marketing of our product
candidates, including AFREZZA, are subject to regulation, including regulation for safety, efficacy
and quality, by the FDA in the United States and comparable authorities in other countries. FDA
regulations and the regulation of comparable foreign regulatory authorities are wide-ranging and
govern, among other things:
| • | product design, development, manufacture and testing; | ||
| • | product labeling; | ||
| • | product storage and shipping; | ||
| • | pre-market clearance or approval; | ||
| • | advertising and promotion; and | ||
| • | product sales and distribution. |
Clinical testing can be costly and take many years, and the outcome is uncertain and susceptible to
varying interpretations. We cannot be certain if or when the FDA might request additional studies,
under what conditions such studies might be requested, or what the size or length of any such
studies might be. The clinical trials of our product candidates may not be completed on schedule,
the FDA or foreign regulatory agencies may order us to stop or modify our research, or these
agencies may not ultimately approve any of our product candidates for commercial sale. The data
collected from our clinical trials may not be sufficient to support regulatory approval of our
various product candidates, including AFREZZA. Even if we believe the data collected from our
clinical trials are sufficient, the FDA has substantial discretion in the approval process and may
disagree with our interpretation of the data. Our failure to adequately demonstrate the safety and
efficacy of any of our product candidates would delay or prevent regulatory approval of our product
candidates, which could prevent us from achieving profitability.
The requirements governing the conduct of clinical trials and manufacturing and marketing of our
product candidates, including AFREZZA, outside the United States vary widely from country to
country. Foreign approvals may take longer to obtain than FDA approvals and can require, among
other things, additional testing and different clinical trial designs. Foreign regulatory approval
processes include essentially all of the risks associated with the FDA approval processes. Some of
those agencies also must approve prices of the products. Approval of a product by the FDA does not
ensure approval of the same product by the health authorities of other countries. In addition,
changes in regulatory policy in the United States or in foreign countries for product approval
during the period of product development and regulatory agency review of each submitted new
application may cause delays or rejections.
The process of obtaining FDA and other required regulatory approvals, including foreign approvals,
is expensive, often takes many years and can vary substantially based upon the type, complexity and
novelty of the products involved. We are not aware of any precedent for the successful
commercialization of products based on our technology. On January 26, 2006, the FDA approved the
first pulmonary insulin product, Exubera. This approval has had an impact on and, notwithstanding
the voluntary withdrawal of the product from the market by its manufacturer, could still impact the
development and registration of AFREZZA in different ways. For example, Exubera may be used as a
reference for safety and efficacy evaluations of AFREZZA, and the approval standards set for
Exubera may be applied to other products that follow, including AFREZZA.
On March 16, 2009, we submitted an NDA for AFREZZA, which the FDA accepted for review on May 16,
2009. The FDA has advised us that it will regulate AFREZZA as a “combination product” because of
the complex nature of the system that includes the combination of a new drug (AFREZZA) and a new
medical device (the AFREZZA inhaler used to administer the insulin). The FDA indicated that the
review of our drug marketing application for AFREZZA will involve several separate review groups of
the FDA including: (1) the Metabolic and Endocrine Drug Products Division; (2) the Pulmonary Drug
Products Division; and (3) the Center for Devices and Radiological Health, which reviews medical
devices. The Metabolic and Endocrine Drug Products Division is the
lead group and obtains consulting reviews from the other two FDA groups. We can make no
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assurances at this time about what impact FDA review by multiple groups will have on the approvability of our product.
On March 12, 2010, we received a Complete Response letter from the FDA regarding the
NDA for AFREZZA. A Complete Response letter is issued by the FDA’s Center for
Drug Evaluation and Research when the review of a submitted file is completed and
questions remain that preclude the approval of the NDA in its current form. As
recommended by the FDA, we will request an End-of-Review meeting with the agency to
discuss our approach for resolving the remaining issues. There can be no assurance that
we will be able to satisfy all of the FDA’s requirements with currently available data or
that the FDA will find our proposed approach acceptable. The FDA could also request
that we conduct additional clinical trials to provide sufficient data for approval of the
NDA. There can be no assurance that we will obtain approval of the NDA in a timely
manner or at all.
Also, questions that have been raised about the safety of marketed drugs generally, including
pertaining to the lack of adequate labeling, may result in increased cautiousness by the FDA in
reviewing new drugs based on safety, efficacy, or other regulatory considerations and may result in
significant delays in obtaining regulatory approvals. Such regulatory considerations may also
result in the imposition of more restrictive drug labeling or marketing requirements as conditions
of approval, which may significantly affect the marketability of our drug products. FDA review of
AFREZZA as a combination product may lengthen the product development and regulatory approval
process, increase our development costs and delay or prevent the commercialization of AFREZZA.
We are developing AFREZZA as a new treatment for diabetes utilizing unique, proprietary components.
As a combination product, any changes to either the AFREZZA inhaler, or AFREZZA, including new
suppliers, could possibly result in FDA requirements to repeat certain clinical studies. This
means, for example, that switching to an alternate delivery system, such as our next-generation
inhaler, could require us to undertake additional clinical trials and other studies, which could
significantly delay the development and commercialization of AFREZZA. Our product candidates that
are currently in development for the treatment of cancer also face similar obstacles and costs.
We also must obtain final approval from the FDA for the trade name of our product. The FDA had
informed us that the name previously proposed for our product may be too similar to other drugs on
the market and that we had to propose another trade name for our product. In September 2009, we
proposed AFREZZA as a trade name, which the FDA found conditionally acceptable in December 2009.
We have only limited experience in filing and pursuing applications necessary to gain regulatory
approvals, which may impede our ability to obtain timely approvals from the FDA or foreign
regulatory agencies, if at all.
We will not be able to commercialize AFREZZA or any other product candidates until we have obtained
regulatory approval. Until we prepared and submitted our NDA for AFREZZA, we had no experience as a
company in late-stage regulatory filings, such as preparing and submitting NDAs, which may place us
at risk of delays, overspending and human resources inefficiencies. Any delay in obtaining, or
inability to obtain, regulatory approval could harm our business. We are currently reviewing the Complete Review letter issued
by the FDA regarding the NDA for AFREZZA and working with the FDA to provide the requested information and data as quickly as possible. As
recommended by the FDA, we will request an End-of-Review meeting with the agency to
discuss our approach for resolving the remaining issues. There can be no assurance that
we will be able to satisfy all of the FDA’s requirements with currently available data or
that the FDA will find our proposed approach acceptable. The FDA could also request
that we conduct additional clinical trials to provide sufficient data for approval of the
NDA. There can be no assurance that we will obtain approval of the NDA in a timely
manner or at all.
If we do not comply with regulatory requirements at any stage, whether before or after marketing
approval is obtained, we may be subject to criminal prosecution, fined or forced to remove a
product from the market or experience other adverse consequences, including restrictions or delays
in obtaining regulatory marketing approval.
Even if we comply with regulatory requirements, we may not be able to obtain the labeling claims
necessary or desirable for product promotion. We may also be required to undertake post-marketing
trials. In addition, if we or other parties identify adverse effects after any of our products are
on the market, or if manufacturing problems occur, regulatory approval may be withdrawn and a
reformulation of our products, additional clinical trials, changes in labeling of, or indications
of use for, our products and/or additional marketing applications may be required. If we encounter
any of the foregoing problems, our business and results of operations will be harmed and the market
price of our common stock may decline.
Even if we obtain regulatory approval for our product candidates, such approval may be limited and
we will be subject to stringent, ongoing government regulation.
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Even if regulatory authorities approve any of our product candidates, they could approve less than
the full scope of uses or labeling that we seek or otherwise require special warnings or other
restrictions on use or marketing or could require potentially costly post-marketing follow-up
clinical trials. Regulatory authorities may limit the segments of the diabetes population to which
we or others may market AFREZZA or limit the target population for our other product candidates.
Based on currently available clinical studies, we believe that AFREZZA may have certain advantages
over currently approved insulin products including its approximation of the natural early insulin
secretion normally seen in healthy individuals following the beginning of a meal. Nonetheless,
there are no assurances that these or any other advantages of AFREZZA will be agreed to by the FDA
or otherwise included in product labeling or advertising and, as a result, AFREZZA may not have our
expected competitive advantages when compared to other insulin products.
The manufacture, marketing and sale of any of our product candidates will be subject to stringent
and ongoing government regulation. The FDA may also withdraw product approvals if problems
concerning safety or efficacy of a product occurs following approval. We cannot be sure that FDA
and United States Congressional initiatives pertaining to ensuring the safety of marketed drugs or
other developments pertaining to the pharmaceutical industry will not adversely affect our
operations.
We also are required to register our establishments and list our products with the FDA and certain
state agencies. We and any third-party manufacturers or suppliers must continually adhere to
federal regulations setting forth requirements, known as cGMP (for drugs) and QSR (for medical
devices), and their foreign equivalents, which are enforced by the FDA and other national
regulatory bodies through their facilities inspection programs. If our facilities, or the
facilities of our manufacturers or suppliers, cannot pass a preapproval plant inspection, the FDA
will not approve the marketing of our product candidates. In complying with cGMP and foreign
regulatory requirements, we and any of our potential third-party manufacturers or suppliers will be
obligated to expend time, money and effort in production, record-keeping and quality control to
ensure that our products meet applicable specifications and other requirements. QSR requirements
also impose extensive testing, control and documentation requirements. State regulatory agencies
and the regulatory agencies of other countries have similar requirements. In addition, we will be
required to comply with regulatory requirements of the FDA, state regulatory agencies and the
regulatory agencies of other countries concerning the reporting of adverse events and device
malfunctions, corrections and removals (e.g., recalls), promotion and advertising and general
prohibitions against the manufacture and distribution of adulterated and misbranded devices.
Failure to comply with these regulatory requirements could result in civil fines, product seizures,
injunctions and/or criminal prosecution of responsible individuals and us. Any such actions would
have a material adverse effect on our business and results of operations.
Our insulin supplier does not yet supply human recombinant insulin for an FDA-approved product and
will be subject to an FDA preapproval inspection before the agency will approve a future marketing
application for AFREZZA.
Our insulin supplier for purposes of the AFREZZA NDA sells its product outside of the United
States. However, we can make no assurances that our insulin supplier will be acceptable to the FDA.
If we were required to find a new or additional supplier of insulin, we would be required to
evaluate the new supplier’s ability to provide insulin that meets our specifications and quality
requirements, which would require significant time and expense and could delay the manufacturing
and future commercialization of AFREZZA. We also depend on suppliers for other materials that
comprise AFREZZA, including our AFREZZA inhaler and cartridges. All of our device suppliers must
comply with relevant regulatory requirements including QSR. The FDA is currently in the process of
conducting a preapproval inspection of our suppliers. There can be no assurance, in the conduct of
a preapproval inspection of our suppliers, that the agency would find that the supplier
substantially comply with the QSR or cGMP requirements, where applicable. If we or any potential
third-party manufacturer or supplier fails to comply with these requirements or comparable
requirements in foreign countries, regulatory authorities may subject us to regulatory action,
including criminal prosecutions, fines and suspension of the manufacture of our products.
Reports of side effects or safety concerns in related technology fields or in other companies’
clinical trials could delay or prevent us from obtaining regulatory approval or negatively impact
public perception of our product candidates.
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At present, there are a number of clinical trials being conducted by us and other pharmaceutical
companies involving insulin delivery systems. If we discover that AFREZZA is associated with a
significantly increased frequency of adverse events, or if other pharmaceutical companies announce
that they observed frequent adverse events in their trials involving the pulmonary delivery of
insulin, we could encounter delays in the timing of our clinical trials or difficulties in
obtaining approval of AFREZZA. As well, the public perception of AFREZZA might be adversely
affected, which could harm our business and results of operations and cause the market price of our
common stock to decline, even if the concern relates to another company’s products or product
candidates.
There are also a number of clinical trials being conducted by other pharmaceutical companies
involving compounds similar to, or competitive with, our other product candidates. Adverse results
reported by these other companies in their clinical trials could delay or prevent us from obtaining
regulatory approval or negatively impact public perception of our product candidates, which could
harm our business and results of operations and cause the market price of our common stock to
decline.
RISKS RELATED TO INTELLECTUAL PROPERTY
If we are unable to protect our proprietary rights, we may not be able to compete effectively, or
operate profitably.
Our commercial success depends, in large part, on our ability to obtain and maintain intellectual
property protection for our technology. Our ability to do so will depend on, among other things,
complex legal and factual questions, and it should be noted that the standards regarding
intellectual property rights in our fields are still evolving. We attempt to protect our
proprietary technology through a combination of patents, trade secrets and confidentiality
agreements. We own a number of domestic and international patents, have a number of domestic and
international patent applications pending and have licenses to additional patents. We cannot assure
you that our patents and licenses will successfully preclude others from using our technologies,
and we could incur substantial costs in seeking enforcement of our proprietary rights against
infringement. Even if issued, the patents may not give us an advantage over competitors with
similar alternative technologies.
Moreover, the issuance of a patent is not conclusive as to its validity or enforceability and it is
uncertain how much protection, if any, will be afforded by our patents. A third party may challenge
the validity or enforceability of a patent after its issuance by various proceedings such as
oppositions in foreign jurisdictions or re-examinations in the United States. If we attempt to
enforce our patents, they may be challenged in court where they could be held invalid,
unenforceable, or have their breadth narrowed to an extent that would destroy their value.
We also rely on unpatented technology, trade secrets, know-how and confidentiality agreements. We
require our officers, employees, consultants and advisors to execute proprietary information and
invention and assignment agreements upon commencement of their relationships with us. We also
execute confidentiality agreements with outside collaborators. There can be no assurance, however,
that these agreements will provide meaningful protection for our inventions, trade secrets,
know-how or other proprietary information in the event of unauthorized use or disclosure of such
information. If any trade secret, know-how or other technology not protected by a patent were to be
disclosed to or independently developed by a competitor, our business, results of operations and
financial condition could be adversely affected.
If we become involved in lawsuits to protect or enforce our patents or the patents of our
collaborators or licensors, we would be required to devote substantial time and resources to
prosecute or defend such proceedings.
Competitors may infringe our patents or the patents of our collaborators or licensors. To counter
infringement or unauthorized use, we may be required to file infringement claims, which can be
expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a
patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using
the technology at issue on the grounds that our patents do not cover its technology. A court may
also decide to award us a royalty from an infringing party instead of issuing an injunction against
the infringing activity. An adverse determination of any litigation or defense proceedings could
put one or more of our patents at risk of being invalidated or interpreted narrowly and could put
our patent applications at risk of not issuing.
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Interference proceedings brought by the USPTO may be necessary to determine the priority of
inventions with respect to our patent applications or those of our collaborators or licensors.
Litigation or interference proceedings may fail and, even if successful, may result in substantial
costs and be a distraction to our management. We may not be able, alone or with our collaborators
and licensors, to prevent misappropriation of our proprietary rights, particularly in countries
where the laws may not protect such rights as fully as in the United States. We may not prevail in
any litigation or interference proceeding in which we are involved. Even if we do prevail, these
proceedings can be very expensive and distract our management.
Furthermore, because of the substantial amount of discovery required in connection with
intellectual property litigation, there is a risk that some of our confidential information could
be compromised by disclosure during this type of litigation. In addition, during the course of this
kind of litigation, there could be public announcements of the results of hearings, motions or
other interim proceedings or developments. If securities analysts or investors perceive these
results to be negative, the market price of our common stock may decline.
If our technologies conflict with the proprietary rights of others, we may incur substantial costs
as a result of litigation or other proceedings and we could face substantial monetary damages and
be precluded from commercializing our products, which would materially harm our business.
Over the past three decades the number of patents issued to biotechnology companies has expanded
dramatically. As a result it is not always clear to industry participants, including us, which
patents cover the multitude of biotechnology product types. Ultimately, the courts must determine
the scope of coverage afforded by a patent and the courts do not always arrive at uniform
conclusions.
A patent owner may claim that we are making, using, selling or offering for sale an invention
covered by the owner’s patents and may go to court to stop us from engaging in such activities.
Such litigation is not uncommon in our industry.
Patent lawsuits can be expensive and would consume time and other resources. There is a risk that a
court would decide that we are infringing a third party’s patents and would order us to stop the
activities covered by the patents, including the commercialization of our products. In addition,
there is a risk that we would have to pay the other party damages for having violated the other
party’s patents (which damages may be increased, as well as attorneys’ fees ordered paid, if
infringement is found to be willful), or that we will be required to obtain a license from the
other party in order to continue to commercialize the affected products, or to design our products
in a manner that does not infringe a valid patent. We may not prevail in any legal action, and a
required license under the patent may not be available on acceptable terms or at all, requiring
cessation of activities that were found to infringe a valid patent. We also may not be able to
develop a non-infringing product design on commercially reasonable terms, or at all.
Moreover, certain components of AFREZZA and/or our cancer vaccines may be manufactured outside the
United States and imported into the United States. As such, third parties could file complaints
under 19 U.S.C. Section 337(a)(1)(B), or a 337 action, with the International Trade Commission, or
the ITC. A 337 action can be expensive and would consume time and other resources. There is a risk
that the ITC would decide that we are infringing a third party’s patents and either enjoin us from
importing the infringing products or parts thereof into the United States or set a bond in an
amount that the ITC considers would offset our competitive advantage from the continued importation
during the statutory review period. The bond could be up to 100% of the value of the patented
products. We may not prevail in any legal action, and a required license under the patent may not
be available on acceptable terms, or at all, resulting in a permanent injunction preventing any
further importation of the infringing products or parts thereof into the United States. We also may
not be able to develop a non-infringing product design on commercially reasonable terms, or at all.
Although we own a number of domestic and foreign patents and patent applications relating to
AFREZZA and cancer vaccine products under development, we have identified certain third-party
patents having claims relating to pulmonary insulin delivery that may trigger an allegation of
infringement upon the commercial manufacture and sale of AFREZZA. We have also identified
third-party patents disclosing methods of use and compositions of matter related to cancer vaccines
that also may trigger an allegation of infringement upon the commercial manufacture and sale of our
cancer therapy. If a court were to determine that our insulin products or cancer therapies were
infringing
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any of these patent rights, we would have to establish with the court that these patents were
invalid or unenforceable in order to avoid legal liability for infringement of these patents.
However, proving patent invalidity or unenforceability can be difficult because issued patents are
presumed valid. Therefore, in the event that we are unable to prevail in an infringement or
invalidity action we will have to either acquire the third-party patents outright or seek a
royalty-bearing license. Royalty-bearing licenses effectively increase production costs and
therefore may materially affect product profitability. Furthermore, should the patent holder refuse
to either assign or license us the infringed patents, it may be necessary to cease manufacturing
the product entirely and/or design around the patents, if possible. In either event, our business
would be harmed and our profitability could be materially adversely impacted.
Furthermore, because of the substantial amount of discovery required in connection with
intellectual property litigation, there is a risk that some of our confidential information could
be compromised by disclosure during this type of litigation. In addition, during the course of this
kind of litigation, there could be public announcements of the results of hearings, motions or
other interim proceedings or developments. If securities analysts or investors perceive these
results to be negative, the market price of our common stock may decline.
In addition, patent litigation may divert the attention of key personnel and we may not have
sufficient resources to bring these actions to a successful conclusion. At the same time, some of
our competitors may be able to sustain the costs of complex patent litigation more effectively than
we can because they have substantially greater resources. An adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent us from
manufacturing and selling our products or result in substantial monetary damages, which would
adversely affect our business and results of operations and cause the market price of our common
stock to decline.
We may not obtain trademark registrations for our potential trade names.
We have not selected trade names for some of our products and product candidates; therefore, we
have not filed trademark registrations for our potential trade names for our products in all
jurisdictions, nor can we assure that we will be granted registration of those potential trade
names for which we have filed. Although we intend to defend any opposition to our trademark
registrations, no assurance can be given that any of our trademarks will be registered in the
United States or elsewhere or that the use of any of our trademarks will confer a competitive
advantage in the marketplace. Furthermore, even if we are successful in our trademark
registrations, the FDA has its own process for drug nomenclature and its own views concerning
appropriate proprietary names. It also has the power, even after granting market approval, to
request a company to reconsider the name for a product because of evidence of confusion in the
marketplace. We cannot assure you that the FDA or any other regulatory authority will approve of
any of our trademarks or will not request reconsideration of one of our trademarks at some time in
the future.
RISKS RELATED TO OUR COMMON STOCK
Our stock price is volatile.
The current turbulence in the U.S. and global financial markets could adversely affect our stock
price and our ability to raise additional capital through the sale of equity and/or debt
securities. The stock market, particularly in recent years, has experienced significant volatility
particularly with respect to pharmaceutical and biotechnology stocks, and this trend may continue.
The volatility of pharmaceutical and biotechnology stocks often does not relate to the operating
performance of the companies represented by the stock. Our business and the market price of our
common stock may be influenced by a large variety of factors, including:
| • | the progress and results of our clinical trials; | ||
| • | general economic, political or stock market conditions; | ||
| • | announcements by us or our competitors concerning clinical trial results, acquisitions, strategic alliances, technological innovations, newly approved commercial products, product discontinuations, or other developments; |
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| • | the availability of critical materials used in developing and manufacturing AFREZZA or other product candidates; |
| • | developments or disputes concerning our patents or proprietary rights; | ||
| • | the expense and time associated with, and the extent of our ultimate success in, securing regulatory approvals; | ||
| • | announcements by us concerning our financial condition or operating performance; | ||
| • | changes in securities analysts’ estimates of our financial condition or operating performance; | ||
| • | general market conditions and fluctuations for emerging growth and pharmaceutical market sectors; | ||
| • | sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders; and | ||
| • | discussion of AFREZZA, our other product candidates, competitors’ products, or our stock price by the financial and scientific press, the healthcare community and online investor communities such as chat rooms. |
Any of these risks, as well as other factors, could cause the market price of our common stock to
decline.
If other biotechnology and biopharmaceutical companies or the securities markets in general
encounter problems, the market price of our common stock could be adversely affected.
Public companies in general and companies included on the Nasdaq Stock Market in particular have
experienced extreme price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of those companies. There has been particular
volatility in the market prices of securities of biotechnology and other life sciences companies,
and the market prices of these companies have often fluctuated because of problems or successes in
a given market segment or because investor interest has shifted to other segments. These broad
market and industry factors may cause the market price of our common stock to decline, regardless
of our operating performance. We have no control over this volatility and can only focus our
efforts on our own operations, and even these may be affected due to the state of the capital
markets.
In the past, following periods of large price declines in the public market price of a company’s
securities, securities class action litigation has often been initiated against that company.
Litigation of this type could result in substantial costs and diversion of management’s attention
and resources, which would hurt our business. Any adverse determination in litigation could also
subject us to significant liabilities.
Our Chief Executive Officer and principal stockholder can individually control our direction and
policies, and his interests may be adverse to the interests of our other stockholders. After his
death, his stock will be left to his funding foundations for distribution to various charities, and
we cannot assure you of the manner in which those entities will manage their holdings.
At February 19, 2010, Mr. Mann beneficially owned approximately 42.3% of our outstanding shares of
capital stock. We believe members of Mr. Mann’s family beneficially owned approximately an
additional 1% of our outstanding shares of common stock, although Mr. Mann does not have voting or
investment power with respect to these shares. By virtue of his holdings, Mr. Mann can and will
continue to be able to effectively control the election of the members of our board of directors,
our management and our affairs and prevent corporate transactions such as mergers, consolidations
or the sale of all or substantially all of our assets that may be favorable from our standpoint or
that of our other stockholders or cause a transaction that we or our other stockholders may view as
unfavorable.
Subject to compliance with United States federal and state securities laws, Mr. Mann is free to
sell the shares of our stock he holds at any time. Upon his death, we have been advised by Mr. Mann
that his shares of our capital stock will be left to the Alfred E. Mann Medical Research
Organization, or AEMMRO, and AEM Foundation for Biomedical Engineering, or AEMFBE, not-for-profit
medical research foundations that serve as funding
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organizations for Mr. Mann’s various charities, including the Alfred Mann Foundation, or AMF, and
the Alfred Mann Institute at the University of Southern California, the Technion-Israel Institute
of Technology, and at Purdue University, and that may serve as funding organizations for any other
charities that he may establish. The AEMMRO is a membership foundation consisting of six members,
including Mr. Mann, his wife, three of his children and Dr. Joseph Schulman, the chief scientist of
the AEMFBE. The AEMFBE is a membership foundation consisting of five members, including Mr. Mann,
his wife, and the same three of his children. Although we understand that the members of AEMMRO and
AEMFBE have been advised of Mr. Mann’s objectives for these foundations, once Mr. Mann’s shares of
our capital stock become the property of the foundations, we cannot assure you as to how those
shares will be distributed or how they will be voted.
The future sale of our common stock or the conversion of our senior convertible notes into common
stock could negatively affect our stock price.
Substantially all of the outstanding shares of our common stock are available for public sale,
subject in some cases to volume and other limitations or delivery of a prospectus. If our common
stockholders sell substantial amounts of common stock in the public market, or the market perceives
that such sales may occur, the market price of our common stock may decline. Likewise the issuance
of additional shares of our common stock upon the conversion of some or all of our senior
convertible notes could adversely affect the trading price of our common stock. In addition, the
existence of these notes may encourage short selling of our common stock by market participants.
Furthermore, if we were to include in a company-initiated registration statement shares held by our
stockholders pursuant to the exercise of their registrations rights, the sale of those shares could
impair our ability to raise needed capital by depressing the price at which we could sell our
common stock.
In addition, we will need to raise substantial additional capital in the future to fund our
operations. If we raise additional funds by issuing equity securities or additional convertible
debt, the market price of our common stock may decline and our existing stockholders may experience
significant dilution.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition
of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our
stockholders to replace or remove our current management.
We are incorporated in Delaware. Certain anti-takeover provisions under Delaware law and in our
certificate of incorporation and amended and restated bylaws, as currently in effect, may make a
change of control of our company more difficult, even if a change in control would be beneficial to
our stockholders. Our anti-takeover provisions include provisions such as a prohibition on
stockholder actions by written consent, the authority of our board of directors to issue preferred
stock without stockholder approval, and supermajority voting requirements for specified actions. In
addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law,
which generally prohibits stockholders owning 15% or more of our outstanding voting stock from
merging or combining with us in certain circumstances. These provisions may delay or prevent an
acquisition of us, even if the acquisition may be considered beneficial by some of our
stockholders. In addition, they may frustrate or prevent any attempts by our stockholders to
replace or remove our current management by making it more difficult for stockholders to replace
members of our board of directors, which is responsible for appointing the members of our
management.
Because we do not expect to pay dividends in the foreseeable future, you must rely on stock
appreciation for any return on your investment.
We have paid no cash dividends on any of our capital stock to date, and we currently intend to
retain our future earnings, if any, to fund the development and growth of our business. As a
result, we do not expect to pay any cash dividends in the foreseeable future, and payment of cash
dividends, if any, will also depend on our financial condition, results of operations, capital
requirements and other factors and will be at the discretion of our board of directors.
Furthermore, we may in the future become subject to contractual restrictions on, or prohibitions
against, the payment of dividends. Accordingly, the success of your investment in our common stock
will likely depend entirely upon any future appreciation. There is no guarantee that our common
stock will appreciate in value after the offering or even maintain the price at which you purchased
your shares, and you may not realize a return on your investment in our common stock.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
In 2001, we acquired a facility in Danbury, Connecticut that included two buildings comprising
approximately 190,000 square feet encompassing 17.5 acres. In September 2008, we completed the
construction of approximately 140,000 square feet of new manufacturing space providing us with two
buildings totaling approximately 328,000 square feet, housing our research and development,
administrative and manufacturing functions, primarily for AFREZZA, filling and packaging. We
believe the Danbury facility will have sufficient space to satisfy potential commercial demand for
the launch of AFREZZA and, with the expansion completed, the first few years thereafter for AFREZZA
and other AFREZZA-related products.
We own and occupy approximately 147,000 square feet of laboratory, office and manufacturing
space in Valencia, California. The facility contains our principal executive offices and houses our
research and development laboratories for our cancer and other programs. We also use this facility
to provide support for the development of our AFREZZA programs.
We lease approximately 59,000 square feet of office space in Paramus, New Jersey pursuant to a
lease that ends in May 2010, with an option to extend the lease through May 2012.
Item 3. Legal Proceedings
None.
Item 4. (Removed and Reserved)
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PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Market Price
Our common stock has been traded on the Nasdaq Global Market under the symbol “MNKD” since
July 28, 2004. The following table sets forth for the quarterly periods indicated, the high and low
sales prices for our common stock as reported by the Nasdaq Global Market.
| High | Low | |||||||
Year ended December 31, 2008 |
||||||||
First quarter |
$ | 8.62 | $ | 4.25 | ||||
Second quarter |
$ | 6.44 | $ | 1.86 | ||||
Third quarter |
$ | 5.25 | $ | 2.39 | ||||
Fourth quarter |
$ | 4.30 | $ | 2.61 | ||||
Year ended December 31, 2009 |
||||||||
First quarter |
$ | 4.09 | $ | 2.00 | ||||
Second quarter |
$ | 9.25 | $ | 3.35 | ||||
Third quarter |
$ | 12.30 | $ | 6.62 | ||||
Fourth quarter |
$ | 9.94 | $ | 5.02 | ||||
The closing sales price of our common stock on the Nasdaq Global Market was $10.10 on February
19, 2010 and there were 188 registered holders of record as of that date.
Performance Measurement Comparison
The material in this section is not “soliciting material,” is not deemed “filed” with the SEC
and shall not be incorporated by reference by any general statement incorporating by reference this
Annual Report on Form 10-K into any of our filings under the Securities Act of 1933, as amended, or
the Securities Act, or the Exchange Act of 1934, as amended, or the Exchange Act, except to the
extent we specifically incorporate this section by reference.
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Performance Measurement Comparison
The following graph illustrates a comparison of the cumulative total stockholder return
(change in stock price plus reinvested dividends) of our common stock with (i) the Nasdaq Composite
Index and (ii) the Nasdaq Biotechnology Index. The comparisons in the graph are required by the SEC
and are not intended to forecast or be indicative of possible future performance of our common
stock.
Assumes a $100 investment, on December 31, 2004, in (i) our common stock, (ii) the securities
comprising the Nasdaq Composite Index and (iii) the securities comprising the Nasdaq Biotechnology
Index.
Dividend Policy
We have never declared or paid any cash dividends on our common stock. We currently intend to
retain all available funds and any future earnings for use in the operation and expansion of our
business. Accordingly, we do not anticipate paying any cash dividends on our common stock in the
foreseeable future. Any future determination to pay dividends will be at the discretion of our
board of directors.
Recent Sales of Unregistered Securities
Not applicable.
Use of Proceeds
None.
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Item 6. Selected Financial Data
The following selected consolidated financial data should be read in conjunction with our
consolidated financial statements and notes thereto and with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” which are included elsewhere in this Annual
Report on Form 10-K.
| Year Ended December 31, | ||||||||||||||||||||
Statement of Operations Data: |
2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||
Revenue |
$ | — | $ | 100 | $ | 10 | $ | 20 | $ | — | ||||||||||
Operating expenses: |
||||||||||||||||||||
Research and development |
95,347 | 191,796 | 256,844 | 250,442 | 156,331 | |||||||||||||||
General and administrative |
22,775 | 42,001 | 50,523 | 55,343 | 53,447 | |||||||||||||||
Total operating expenses |
118,122 | 233,797 | 307,367 | 305,785 | 209,778 | |||||||||||||||
Loss from operations |
(118,122 | ) | (233,697 | ) | (307,357 | ) | (305,765 | ) | (209,778 | ) | ||||||||||
Other income (expense) |
78 | 208 | (197 | ) | (62 | ) | 51 | |||||||||||||
Interest expense on note payable to
principal stockholder |
— | (1,511 | ) | — | (12 | ) | (5,679 | ) | ||||||||||||
Interest expense on senior convertible notes |
— | (222 | ) | (3,408 | ) | (2,327 | ) | (4,768 | ) | |||||||||||
Interest income |
3,707 | 4,679 | 17,775 | 5,129 | 70 | |||||||||||||||
Loss before provision for income taxes |
(114,337 | ) | (230,543 | ) | (293,187 | ) | (303,037 | ) | (220,104 | ) | ||||||||||
Income taxes |
(1 | ) | (5 | ) | (3 | ) | (2 | ) | — | |||||||||||
Net loss |
(114,338 | ) | (230,548 | ) | (293,190 | ) | (303,039 | ) | (220,104 | ) | ||||||||||
Deemed dividends related to beneficial
conversion feature of convertible preferred
stock |
— | — | — | — | — | |||||||||||||||
Accretion on redeemable preferred stock |
— | — | — | — | — | |||||||||||||||
Net loss applicable to common stockholders |
$ | (114,338 | ) | $ | (230,548 | ) | $ | (293,190 | ) | $ | (303,039 | ) | $ | (220,104 | ) | |||||
Basic and diluted net loss per share |
$ | (2.87 | ) | $ | (4.52 | ) | $ | (3.66 | ) | $ | (2.98 | ) | $ | (2.07 | ) | |||||
Shares used to compute basic and diluted
net loss per share |
39,871 | 50,970 | 80,038 | 101,561 | 106,534 | |||||||||||||||
| As of December 31, | ||||||||||||||||||||
Balance Sheet Data: |
2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||
| (In thousands) | ||||||||||||||||||||
Cash, cash equivalents and marketable
securities |
$ | 145,634 | $ | 436,479 | $ | 368,285 | $ | 46,492 | $ | 32,494 | ||||||||||
Working capital |
128,507 | 404,588 | 311,154 | 503 | 8,813 | |||||||||||||||
Total assets |
228,371 | 539,737 | 543,443 | 282,459 | 247,397 | |||||||||||||||
Deferred compensation and other liabilities |
29 | 24 | 24 | — | — | |||||||||||||||
Senior convertible notes |
— | 111,267 | 111,761 | 112,253 | 112,765 | |||||||||||||||
Note payable to related party |
— | — | — | 30,000 | 165,000 | |||||||||||||||
Deficit accumulated during the development
stage |
(557,301 | ) | (787,849 | ) | (1,081,039 | ) | (1,384,078 | ) | (1,604,182 | ) | ||||||||||
Total stockholders’ equity (deficit) |
206,977 | 383,487 | 364,100 | 86,734 | (59,221 | ) | ||||||||||||||
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read
in conjunction with our consolidated financial statements and notes thereto included in this Annual
Report on Form 10-K.
OVERVIEW
We are a biopharmaceutical company focused on the discovery, development and commercialization
of therapeutic products for diseases such as diabetes and cancer. Our lead product candidate,
AFREZZA, is an ultra rapid-acting insulin. In March 2009, we submitted an NDA to the FDA requesting
approval of AFREZZA for the treatment of adults with type 1 or type 2 diabetes for the control of
hyperglycemia. The FDA accepted our NDA for filing in May 2009. On March 12, 2010, we received a Complete Response letter from the FDA regarding the
NDA for AFREZZA. A Complete Response letter is issued by the FDA’s Center for
Drug Evaluation and Research when the review of a submitted file is completed and
questions remain that preclude the approval of the NDA in its current form. As
recommended by the FDA, we will request an End-of-Review meeting with the agency to
discuss our approach for resolving the remaining issues. There can be no assurances that
we will be able to satisfy all of the FDA’s requirements with currently available data or
that the FDA will find our proposed approach acceptable. The FDA could also request
that we conduct additional clinical trials to provide sufficient data for approval of the
NDA. No assurances can be made that we will obtain approval of the NDA in a timely
manner or at all.
We are a development stage enterprise and have incurred significant losses since our inception
in 1991. As of December 31, 2009, we have incurred a cumulative net loss of $1.6 billion and
accumulated deficit in stockholders’ equity of $59.2 million. To date, we have not generated any
product revenues and have funded our operations primarily through the sale of equity securities and
convertible debt securities. As discussed below in “Liquidity and Capital Resources,” if we are
unable to obtain additional funding in the future, there will be substantial doubt about our
ability to continue as a going concern.
We have held extensive discussions with a number of pharmaceutical companies concerning a
potential strategic business collaboration for AFREZZA. We cannot predict when, if ever, we could conclude an agreement with a partner.
There can be no assurance that any such collaboration will be available to us on a timely basis or
on acceptable terms, if at all.
We do not expect to record sales of any product prior to regulatory approval and
commercialization of AFREZZA. We currently do not have the required approvals to market any of our
product candidates, and we may not receive such approvals. We may not be profitable even if we
succeed in commercializing any of our product candidates. We expect to make substantial
expenditures and to incur additional operating losses for at least the next several years as we:
| • | continue the clinical development of AFREZZA and new inhalation systems for the treatment of diabetes; | ||
| • | seek regulatory approval to sell AFREZZA in the United States and other markets; | ||
| • | increase our manufacturing capacity for AFREZZA to meet our currently anticipated commercial production needs; | ||
| • | expand our cancer research, discovery and development programs; | ||
| • | expand our proprietary Technosphere platform technology and develop additional applications for the pulmonary delivery of other drugs; and | ||
| • | enter into sales and marketing collaborations with other companies, if available on commercially reasonable terms, or develop these capabilities ourselves. |
Our business is subject to significant risks, including but not limited to the risks inherent
in our ongoing clinical trials and the regulatory approval process, the results of our research and
development efforts, competition from other products and technologies and uncertainties associated
with obtaining and enforcing patent rights.
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RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses consist mainly of costs associated with the clinical
trials of our product candidates that have not yet received regulatory approval for marketing and
for which no alternative future use has been identified. This includes the salaries, benefits and
stock-based compensation of research and development personnel, raw materials, such as insulin
purchases, laboratory supplies and materials, facility costs, costs for consultants and related
contract research, licensing fees, and depreciation of laboratory equipment. We track research and
development costs by the type of cost incurred. We partially offset research and development
expenses with the recognition of estimated amounts receivable from the State of Connecticut
pursuant to a program under which we can exchange qualified research and development income tax
credits for cash. Included in research and development expenses for the year ended December 31,
2009 were purchases of insulin totaling $12.1 million.
Our research and development staff conducts our internal research and development activities,
which include research, product development, clinical development, manufacturing and related
activities. This staff is located in our facilities in Valencia, California; Paramus, New Jersey;
and Danbury, Connecticut. We expense the majority of research and development costs as we incur
them.
Clinical development timelines, likelihood of success and total costs vary widely. We are
focused primarily on advancing AFREZZA through regulatory filings. Based on the results of
preclinical studies, we plan to develop additional applications of our Technosphere technology.
Additionally, we anticipate that we will continue to determine which research and development
projects to pursue, and how much funding to direct to each project, on an ongoing basis, in
response to the scientific and clinical success of each product candidate. We cannot be certain
when any revenues from the commercialization of our products will commence.
At this time, due to the risks inherent in the clinical trial process and given the early
stage of development of our product candidates other than AFREZZA, we are unable to estimate with
any certainty the costs that we will incur in the continued development of our product candidates
for commercialization. The costs required to complete the development of AFREZZA will be largely
dependent on the cost and efficiency of our manufacturing process and discussions with the FDA
regarding its requirements.
GENERAL AND ADMINISTRATIVE EXPENSES
Our general and administrative expenses consist primarily of salaries, benefits and
stock-based compensation for administrative, finance, business development, human resources, legal
and information systems support personnel. In addition, general and administrative expenses include
professional service fees and business insurance costs.
CRITICAL ACCOUNTING POLICIES
We have based our discussion and analysis of our financial condition and results of operations
on our financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets, liabilities and
expenses. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on
historical experience and on various assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making estimates of expenses such as stock
option expenses and judgments about the carrying values of assets and liabilities. Actual results
may differ from these estimates under different assumptions or conditions. The significant
accounting policies that are critical to the judgments and estimates used in the preparation of our
financial statements are described in more detail below.
Impairment of long-lived assets
Assessing long-lived assets for impairment requires us to make assumptions and judgments
regarding the carrying value of these assets. We evaluate long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset may not be
recoverable. The assets are considered to be impaired if we determine that the carrying value may
not be recoverable based upon our assessment of the following events or changes in circumstances:
| • | significant changes in our strategic business objectives and utilization of the assets; |
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| • | a determination that the carrying value of such assets cannot be recovered through undiscounted cash flows; | ||
| • | loss of legal ownership or title to the assets; or | ||
| • | the impact of significant negative industry or economic trends. |
If we believe our assets to be impaired, the impairment we recognize is the amount by which
the carrying value of the assets exceeds the fair value of the assets. Any write-downs would be
treated as permanent reductions in the carrying amount of the asset and an operating loss would be
recognized. In addition, we base the useful lives and related amortization or depreciation expense
on our estimate of the useful lives of the assets. If a change were to occur in any of the
above-mentioned factors or estimates, our reported results could materially change.
To date, we have had recurring operating losses, and the recoverability of our long-lived
assets is contingent upon executing our business plan. If we are unable to execute our business
plan, we may be required to write down the value of our long-lived assets in future periods.
Clinical trial expenses
Our clinical trial accrual process seeks to account for expenses resulting from our
obligations under contract with vendors, consultants, and clinical site agreements in connection
with conducting clinical trials. The financial terms of these contracts are subject to negotiations
which vary from contract to contract and may result in payment flows that do not match the periods
over which materials or services are provided to us under such contracts. Our objective is to
reflect the appropriate trial expenses in our financial statements by matching period expenses with
period services and efforts expended. We account for these expenses according to the progress of
the trial as measured by patient progression and the timing of various aspects of the trial. We
determine accrual estimates through discussions with internal clinical personnel and outside
service providers as to the progress or state of completion of trials, or the services completed.
Service provider status is then compared to the contractual obligated fee to be paid for such
services. During the course of a clinical trial, we adjust our rate of clinical expense recognition
if actual results differ from our estimates. In the event that we do not identify certain costs
that have begun to be incurred or we underestimate or overestimate the level of services performed
or the costs of such services, our reported expenses for a period would be too low or too high. The
date on which certain services commence, the level of services performed on or before a given date
and the cost of the services are often judgmental. We make these judgments based upon the facts and
circumstances known to us in accordance with generally accepted accounting principles.
Stock-based compensation
We account for stock-based compensation in accordance with Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) 718 (“ASC 718”) Compensation- Stock
Compensation, previously FASB Statement No. 123R, Accounting for Stock-Based Compensation. ASC 718
requires all share-based payments to employees, including grants of stock options and the
compensatory elements of employee stock purchase plans, to be recognized in the income statement
based upon the fair value of the awards at the grant date. We use the Black-Scholes option
valuation model to estimate the grant date fair value of employee stock options and the
compensatory elements of employee stock purchase plans.
Accounting for income taxes
We must make management judgments when determining our provision for income taxes, our
deferred tax assets and liabilities and any valuation allowance recorded against our net deferred
tax assets. At December 31, 2009, we have established a valuation allowance of $575.7 million
against all of our net deferred tax asset balance, due to uncertainties related to our deferred tax
assets as a result of our history of operating losses. The valuation allowance is based on our
estimates of taxable income by jurisdiction in which we operate and the period over which our
deferred tax assets will be recoverable. In the event that actual results differ from these
estimates or we adjust these estimates in future periods, we may need to change the valuation
allowance, which could materially impact our financial position and results of operations.
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RESULTS OF OPERATIONS
Years ended December 31, 2009 and 2008
Revenues
During the year ended December 31, 2009 we recognized no revenue, and during the year ended
December 31, 2008, we recognized $20,000 in revenue under a license agreement. We do not anticipate
sales of any product prior to regulatory approval and commercialization of AFREZZA.
Research and Development Expenses
The following table provides a comparison of the research and development expense categories
for the years ended December 31, 2009 and 2008 (dollars in thousands):
| Year Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2009 | 2008 | $ Change | % Change | |||||||||||||
Clinical |
$ | 44,163 | $ | 114,922 | $ | (70,759 | ) | (62 | )% | |||||||
Manufacturing |
82,116 | 92,935 | (10,819 | ) | (12 | )% | ||||||||||
Research |
19,259 | 30,081 | (10,822 | ) | (36 | )% | ||||||||||
Research and development tax credit |
(1,322 | ) | (1,846 | ) | 524 | (28 | )% | |||||||||
Stock-based compensation expense |
12,115 | 14,350 | (2,235 | ) | (16 | )% | ||||||||||
Research and development expenses |
$ | 156,331 | $ | 250,442 | $ | (94,111 | ) | (38 | )% | |||||||
The decrease in research and development expenses for the year ended December 31, 2009, as
compared to the year ended December 31, 2008, was primarily due to decreased costs associated with
the clinical development of AFREZZA as we completed our pivotal AFREZZA trials during 2008,
including decreased raw material purchases and clinical supplies costs, offset by a loss on
disposal of approximately $12.8 million in manufacturing expense related to the abandonment of
MedTone specific assets, which would no longer be used as we pursue the commercialization of the
next-generation device. The decrease in research expenses reflects reduced salary-related and other
research costs as a result of a reduction in force that we implemented in April 2009. We anticipate
that our research and development expenses will increase in 2010 as a result of our obligation to
purchase an increased amount of insulin as well as increased costs associated with the development
of our commercial inhaler.
The research and development tax credit recognized for the years ended December 31, 2009 and
2008 partially offsets our research and development expenses. The State of Connecticut provides an
opportunity to exchange certain research and development income tax credit carryforwards for cash
in exchange for forgoing the carryforward of the research and development credits. Estimated
amounts receivable under the program are recorded as a reduction of research and development
expenses. During the years ended December 31, 2009 and 2008, research and development expenses were
offset by $1.3 million and $1.8 million, respectively, in connection with the program.
General and Administrative Expenses
The following table provides a comparison of the general and administrative expense categories
for the years ended December 31, 2009 and 2008 (dollars in thousands):
| Year Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2009 | 2008 | $ Change | % Change | |||||||||||||
Salaries, employee related and other general expenses |
$ | 45,343 | $ | 44,900 | $ | 443 | 1 | % | ||||||||
Stock-based compensation expense |
8,104 | 10,443 | (2,339 | ) | (22 | )% | ||||||||||
General and administrative expenses |
$ | 53,447 | $ | 55,343 | $ | (1,896 | ) | (3 | )% | |||||||
The decrease in general and administrative expenses for the year ended December 31, 2009, as
compared to the year ended December 31, 2008, was primarily due to decreased stock compensation
expense and the purchase of
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patents from Emisphere Technologies, Inc. during the first quarter of 2008, offset by
increased professional fees related to the recently completed transaction with Pfizer during the
second quarter of 2009 and partnership efforts during the third quarter of 2009. We expect general
and administrative expenses to remain effectively the same in 2010.
Interest Income and Expense
Interest income for the year ended December 31, 2009 decreased $5.1 million as compared to the
year ended December 31, 2008 primarily due to lower cash and cash equivalent balances as we used cash to fund operating
and capital expenditures. Interest expense for the year ended December 31, 2008 was related to the
convertible notes issued in December 2006 and amortization of the debt issuance costs, partially
offset by capitalized interest related to construction in progress. Interest expense for the year
ended December 31, 2009 also included interest related to amounts borrowed under the loan agreement
with our principal stockholder in December 2008.
Years ended December 31, 2008 and 2007
Revenues
During the year ended December 31, 2008 and 2007, we recognized $20,000 and $10,000,
respectively, in revenue under a license agreement.
Research and Development Expenses
The following table provides a comparison of the research and development expense categories
for the years ended December 31, 2008 and 2007 (dollars in thousands):
| Year Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2008 | 2007 | $ Change | % Change | |||||||||||||
Clinical |
$ | 114,922 | $ | 124,655 | $ | (9,733 | ) | (8 | )% | |||||||
Manufacturing |
92,935 | 86,473 | 6,462 | 7 | % | |||||||||||
Research |
30,081 | 36,720 | (6,639 | ) | (18 | )% | ||||||||||
Research and development tax credit |
(1,846 | ) | (753 | ) | (1,093 | ) | 145 | % | ||||||||
Stock-based compensation expense |
14,350 | 9,749 | 4,601 | 47 | % | |||||||||||
Research and development expenses |
$ | 250,442 | $ | 256,844 | $ | (6,402 | ) | (2 | )% | |||||||
The decrease in research and development expenses for the year ended December 31, 2008, as
compared to the year ended December 31, 2007, was primarily due to decreased costs associated with
the clinical development of AFREZZA as we completed our pivotal AFREZZA trials during 2008, offset
by increases in manufacturing costs associated with preparations for commercial scale manufacturing
of AFREZZA, including the expansion, qualification and validation of our commercial manufacturing
processes and facilities.
During the years ended December 31, 2008 and 2007, research and development expenses were
offset by $1.8 million and $0.8 million, respectively, in connection with the Connecticut program
to exchange certain research and development income tax credit carryforwards for cash.
General and Administrative Expenses
The following table provides a comparison of the general and administrative expense categories
for the years ended December 31, 2008 and 2007 (dollars in thousands):
| Year Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2008 | 2007 | $ Change | % Change | |||||||||||||
Salaries, employee related and other general expenses |
$ | 44,900 | $ | 42,627 | $ | 2,273 | 5 | % | ||||||||
Stock-based compensation expense |
10,443 | 7,896 | 2,547 | 32 | % | |||||||||||
General and administrative expenses |
$ | 55,343 | $ | 50,523 | $ | 4,820 | 10 | % | ||||||||
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The increase in general and administrative expenses for the year ended December 31, 2008, as
compared to the year ended December 31, 2007, was primarily due to increased salary-related
expenses and consulting fees.
Interest Income and Expense
Interest income for the year ended December 31, 2008 decreased $12.6 million as compared to
the year ended December 31, 2007 primarily due to lower cash balances as we used cash to fund
operating and capital expenditures. Interest expense for the year ended December 31, 2007 was
related to the convertible notes issued in December 2006 and amortization of the debt issuance
costs, partially offset by capitalized interest related to construction in progress. Interest
expense for the year ended December 31, 2008 also included interest related to amounts borrowed
under the loan agreement with our principal stockholder in December 2008.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through the sale of equity securities and convertible
debt securities and borrowings under our related party loan.
In October 2007, we entered into a loan arrangement with our principal stockholder allowing us
to borrow up to a total of $350.0 million. On February 26, 2009, as a result of our principal
stockholder being licensed as a finance lender under the California Finance Lenders Law, the
promissory note underlying the loan arrangement was revised to reflect the lender as The Mann Group
LLC, an entity controlled by our principal stockholder. Interest will accrue on each outstanding
advance at a fixed rate equal to the one-year LIBOR rate as reported by the Wall Street Journal on
the date of such advance plus 3% per annum and will be payable quarterly in arrears. Principal
repayment is due on December 31, 2011. At any time after January 1, 2010, the lender can require us
to prepay up to $200.0 million in advances that have been outstanding for at least 12 months. If
the lender exercises this right, we will have until the earlier of 180 days after the lender
provides written notice or December 31, 2011 to prepay such advances. The principal stockholder
has agreed not to exercise his prepayment right if such prepayment would require the use of
existing working capital resources to repay the loan. In the event of a default, all unpaid
principal and interest either becomes immediately due and payable or may be accelerated at the
lender’s option, and the interest rate will increase to the one-year LIBOR rate calculated on the
date of the initial advance or in effect on the date of default, whichever is greater, plus 5% per
annum. Any borrowings under the loan arrangement will be unsecured. The loan arrangement contains
no financial covenants. There are no warrants associated with the loan arrangement, nor are
advances convertible into our common stock. As of December 31, 2009, the amount borrowed and
outstanding under the arrangement was $165.0 million.
During the year ended December 31, 2009, we used $184.1 million of cash for our operations compared
to using $271.3 million for our operations in the year ended December 31, 2008. We had a net loss
of $220.1 million for the year ended December 31, 2009, of which $38.9 million consisted of
non-cash charges such as depreciation and amortization, and stock-based compensation. We expect our
negative operating cash flow to continue at least until we obtain regulatory approval and achieve
commercialization of AFREZZA.
We used $3.1 million of cash in investing activities during the year ended December 31, 2009,
compared to $99.9 million for the years ended December 31, 2008. For the years ended December 31,
2009 and 2008, $18.9 million and $82.5 million, respectively, were used to purchase machinery and
equipment to expand our manufacturing operations and our quality systems that support clinical
trials for AFREZZA.
Our financing activities generated $189.5 million of cash for the year ended December 31, 2009,
compared to $30.6 million for the same period in 2008. For the year ended December 31, 2009, cash
from financing activities was primarily from the common stock offering completed in August 2009 and
related party borrowings as well as the exercise of stock options.
As of December 31, 2009, we had $32.5 million in cash, cash equivalents and marketable securities
(including a $2.0 million certificate of deposit held as collateral for foreign exchange hedging
instruments). Although we believe our existing cash resources, including the $185.0 million
remaining available under our loan arrangement with an entity controlled by our principal
stockholder, will be sufficient to fund our anticipated cash requirements into the first quarter of
2011, we will require significant additional financing in the future to fund our operations and if
we are unable to do so, there will be substantial doubt about our ability to continue as a going
concern. Accordingly, we expect that we will need to raise additional capital, either through the
sale of equity and/or debt securities, the entry into a strategic business collaboration with a
pharmaceutical or biotechnology company or the establishment of other
51
Table of Contents
funding facilities, in order to continue the development and commercialization of AFREZZA and other
product candidates and to support our other ongoing activities.
We intend to use our capital resources to continue the development and commercialization of
AFREZZA, if approved, and to develop additional applications for our proprietary Technosphere
platform technology. In addition, portions of our capital resources will be devoted to expanding
our other product development programs for the treatment of different types of cancers. We are
expending a portion of our capital to scale up our manufacturing capabilities in our Danbury
facilities. We also intend to use our capital resources for general corporate purposes, which may
include in-licensing or acquiring additional technologies.
We have held extensive discussions with a number of pharmaceutical companies concerning a potential
strategic business collaboration for AFREZZA. We cannot predict when, if ever, we could conclude an agreement with a partner. There can
be no assurance that any such collaboration will be available to us on a timely basis or on
acceptable terms, if at all.
If we enter into a strategic business collaboration with a pharmaceutical or biotechnology company,
we would expect, as part of the transaction, to receive additional capital. In addition, we expect
to pursue the sale of equity and/or debt securities, or the establishment of other funding
facilities. Issuances of debt or additional equity could impact the rights of our existing
stockholders, dilute the ownership percentages of our existing stockholders and may impose
restrictions on our operations. These restrictions could include limitations on additional
borrowing, specific restrictions on the use of our assets as well as prohibitions on our ability to
create liens, pay dividends, redeem our stock or make investments. We also may seek to raise
additional capital by pursuing opportunities for the licensing, sale or divestiture of certain
intellectual property and other assets, including our Technosphere technology platform. There can
be no assurance, however, that any strategic collaboration, sale of securities or sale or license
of assets will be available to us on a timely basis or on acceptable terms, if at all. If we are
unable to raise additional capital, we may be required to enter into agreements with third parties
to develop or commercialize products or technologies that we otherwise would have sought to develop
independently, and any such agreements may not be on terms as commercially favorable to us.
However, we cannot provide assurances that our plans will not change or that changed circumstances
will not result in the depletion of our capital resources more rapidly than we currently
anticipate. If planned operating results are not achieved or we are not successful in raising
additional capital through equity or debt financing or entering a business collaboration, we may be
required to reduce expenses through the delay, reduction or curtailment of our projects, including
AFREZZA development activities, or further reduction of costs for facilities and administration,
and there will be substantial doubt about our ability to continue as a going concern.
Off-Balance Sheet Arrangements
As of December 31, 2009, we did not have any off-balance sheet arrangements.
COMMITMENTS AND CONTINGENCIES
Our contractual obligations represent future cash commitments and liabilities under agreements
with third parties, and exclude contingent liabilities for which we cannot reasonably predict
future payments. Accordingly, the table below excludes contractual obligations relating to
milestone and royalty payments due to third parties, all of which are contingent upon certain
future events. The expected timing of payment of the obligations presented below is estimated based
on current information. Future payments relate to operating lease obligations (including facility
leases executed in March 2005 and November 2005), the senior convertible notes, and open purchase
order and supply commitments consisted of the following at December 31, 2009 (in thousands):
52
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| Payments Due in | ||||||||||||||||||||
| Less Than | More Than | |||||||||||||||||||
Contractual Obligations |
One Year | 1-3 Years | 3-5 Years | 5 Years | Total | |||||||||||||||
Open purchase order and supply commitments(1) |
$ | 34,904 | $ | 90,164 | $ | — | $ | — | $ | 125,068 | ||||||||||
Senior Convertible Note Obligations(2) |
4,372 | 8,757 | 119,372 | — | 132,501 | |||||||||||||||
Note Payable to Principal Stockholder(3) |
7,975 | 172,976 | — | — | 180,951 | |||||||||||||||
Operating lease obligations |
798 | 14 | 2 | — | 814 | |||||||||||||||
Total contractual obligations |
$ | 48,049 | $ | 271,911 | $ | 119,374 | $ | — | $ | 439,334 | ||||||||||
| (1) | The amounts included in open purchase order and supply commitments are subject to performance under the purchase order or contract by the supplier of the goods or services and do not become our obligation until such performance is rendered. The amount shown is principally for the purchase of materials for our clinical trials, the acquisition of manufacturing equipment, and commitments related to the expansion of our manufacturing plant and the purchase of raw materials under long-term supply agreements. | |
| (2) | The senior convertible note obligation amounts include future interest payments at a fixed rate of 3.75% and payment of the notes in full upon maturity in 2013. | |
| (3) | The obligation for the note payable to the principal stockholder includes future principal and interest payments related to the $165.0 million of borrowings as of December 31, 2009. Interest is paid based on a fixed rate equal to the one-year LIBOR rate on the date of advance plus 3% and the principal payment is due on December 31, 2011. |
RELATED PARTY TRANSACTIONS
For a description of our related party transactions see Note 15 — Related Party Transactions
in the notes to our financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In October of 2009, the FASB ratified the Emerging Issues Task Force (“EITF”) consensus on
EITF Issue No. 08-1 Revenue Arrangements with Multiple Deliverables, and issued Accounting
Standards Update (“ASU”) 2009-13 which amends the guidance in ASC 605-25 on multiple-element
revenue arrangements. This guidance addresses the unit of accounting for arrangements involving
multiple deliverables and how arrangement consideration should be allocated to the separate units
of accounting, when applicable. The ASU is effective for fiscal year beginning on or after June
15, 2010. Early adoption is permitted. Adoptions of this guidance is expected to have a
significant effect on how revenue arrangements entered into subsequent to January 1, 2011 are
reflected in the financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk related to changes in interest rates impacting our short-term
investment portfolio as well as the interest rate on our credit facility with an entity controlled
by our principal stockholder. The interest rate on our credit facility with our principal
stockholder is a fixed rate equal to the one-year LIBOR rate as reported by the Wall Street Journal
on the date of such advance plus 3% per annum. Our current policy requires us to maintain a highly
liquid short-term investment portfolio consisting mainly of U.S. money market funds and
investment-grade corporate, government and municipal debt. None of these investments is entered
into for trading purposes. Our cash is deposited in and invested through highly rated financial
institutions in North America. Our short-term investments at December 31, 2009 are comprised mainly
of a certificate of deposit and a common stock investment. We have entered into a foreign exchange
hedging transaction as part of our risk management program. We continue to utilize our $350.0
million credit facility to fund operations. As of December 31, 2009, the amount borrowed and
outstanding under the credit facility was $165.0 million. The interest rate is fixed at the time
of the draw. If interest rates were to increase from levels at December 31, 2009 we could
experience a higher level of interest expense than assumed in our current operating plan.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is included in Items 15(a)(1) and (2) of Part IV of this
Annual Report on Form 10-K.
53
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our reports filed under the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms and that
such information is accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate, to allow for timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, and management is required
to apply its judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
Our chief executive officer and chief financial officer performed an evaluation under the
supervision and with the participation of our management, of our disclosure controls and procedures
(as defined in Rule 13a-15(e) and 15d-15(e)of the Exchange Act) as of December 31, 2009. Based on
that evaluation, our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision
and with the participation of our management, including our chief executive officer and chief
financial officer, we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework set forth in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our
evaluation under the framework set forth in Internal Control — Integrated Framework, our
management concluded that our internal control over financial reporting was effective as of
December 31, 2009. Deloitte & Touche LLP, the independent registered public accounting firm that
audited the financial statements included in this 2009 Form 10-K, has issued an attestation report
on our internal control over financial reporting as of December 31, 2009, which is included herein.
54
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of MannKind Corporation
Valencia, California
Valencia, California
We have audited the internal control over financial reporting of MannKind Corporation (the
“Company”) as of December 31, 2009, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2009, based on the criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the financial statements as of and for the year ended December 31,
2009 of the Company and our report dated March 16, 2010 expressed an unqualified opinion on those
financial statements.
/s/ DELOITTE & TOUCHE LLP |
Los Angeles, California |
March 16, 2010 |
55
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Item 9B. Other Information.
None.
PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K because we
will file our Proxy Statement within 120 days after the end of our fiscal year pursuant to
Regulations 14A for our 2010 Annual Meeting of Stockholders, and the information included in the
Proxy Statement is incorporated herein by reference.
Item 10. Directors, Executive Officers and Corporate Governance.
(a) Executive Officers — For information regarding the identification and business experience
of our executive officers, see “Executive Officers” in Part I, Item 1 of this Annual Report on Form
10-K.
(b) Directors — The information required by this Item regarding the identification and
business experience of our directors and corporate governance matters is contained in the section
entitled “Proposal 1- Election of Directors” and “Corporate Governance Principles and Board and
Committee Matters” in the Proxy Statement, and is incorporated herein by reference.
Additional information required by this Item is incorporated by reference to this section
entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
We have adopted a Code of Business Conduct and Ethics Policy that applies to our directors and
employees (including our principal executive officer, principal financial officer, principal
accounting officer and controller), and have posted the text of the policy on our website
(www.mannkindcorp.com) in connection with “Investors” materials. In addition, we intend to promptly
disclose on our website (i) the nature of any amendment to the policy that applies to our principal
executive officer, principal financial officer, principal accounting officer or controller, or
persons performing similar functions and (ii) the nature of any waiver, including an implicit
waiver, from a provision of the policy that is granted to one of these specified individuals, the
name of such person who is granted the waiver and the date of the waiver.
Item 11. Executive Compensation
The information under the caption “Executive Compensation” in the Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information under the captions “Security Ownership of Certain Beneficial Owners and
Management” and “Executive Compensation — Securities Authorized for Issuance under Equity
Compensation Plans” in the Proxy Statement is incorporated herein by this reference.
Item 13. Certain Relationships, Related Transactions and Director Independence
The information under the caption “Certain Transactions” and “Corporate Governance Principles
and Board and Committee Matters” in the Proxy Statement is incorporated herein by reference. With
the exception of the information specifically incorporated by reference from the Proxy Statement in
this Annual Report on Form 10-K, the Proxy Statement shall not be deemed to be filed as part of
this report. Without limiting the foregoing, the information under the captions “Report of the
Audit Committee of the Board of Directors” and “Report of the Compensation Committee of the Board
of Directors” in the Proxy Statement is not incorporated by reference.
Item 14. Principal Accounting Fees and Services
The information under the caption “Principal Accounting Fees and Services” in the Proxy
Statement is incorporated herein by reference.
56
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of, or incorporated by reference into, this
Annual Report on Form 10-K:
(1)(2) Financial Statements and Financial Statement Schedules. The following Financial
Statements of MannKind Corporation, Financial Statement Schedules and Report of Independent
Registered Public Accounting Firm are included in a separate section of this report beginning on
page F-2:
Report of Independent Registered Public Accounting Firm |
62 | |||
Consolidated Balance Sheets |
63 | |||
Consolidated Statements of Operations |
64 | |||
Consolidated Statements of Stockholders’ Equity (Deficit) |
65 | |||
Consolidated Statements of Cash Flows |
70 | |||
Notes to Consolidated Financial Statements |
72 |
All financial statement schedules have been omitted because the required information is not
applicable or not present in amounts sufficient to require submission of the schedule, or because
the information required is included in the consolidated financial statements or the notes thereto.
(3) Exhibits. The exhibits listed under Item 15(b) hereof are filed with, or incorporated by
reference into, this Annual Report on Form 10-K. Each management contract or compensatory plan or
arrangement is identified separately in Item 15(b) hereof.
(b) Exhibits. The following exhibits are filed as part of, or incorporated by reference into,
this Annual Report on Form 10-K:
57
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Exhibit Index
| Exhibit | ||
| Number | Description of Document | |
2.1**(14)
|
LIP Asset or Business Sale and Purchase Agreement, dated March 6, 2009, by and among Pfizer Manufacturing Frankfurt GmbH, Pfizer Inc., MannKind Deutschland GmbH and MannKind, as amended on April 3, 2009. | |
2.2**(14)
|
Insulin Sale and Purchase Agreement, dated March 6, 2009, by and among Pfizer Manufacturing Frankfurt GmbH, Pfizer Inc. and MannKind. | |
3.1(1)
|
Amended and Restated Certificate of Incorporation. | |
3.2(12)
|
Certificate of Amendment of Amended and Restated Certificate of Incorporation. | |
3.3(9)
|
Amended and Restated Bylaws. | |
4.1(10)
|
Indenture, by and between MannKind and Wells Fargo Bank, N.A., dated November 1, 2006. | |
4.2(3)
|
First Supplemental Indenture, by and between MannKind and Wells Fargo Bank, N.A., dated December 12, 2006. | |
4.3(3)
|
Form of 3.75% Senior Convertible Note due 2013. | |
4.4(1)
|
Form of common stock certificate. | |
4.5(1)
|
Registration Rights Agreement, dated October 15, 1998 by and among CTL ImmunoTherapies Corp., Medical Research Group, LLC, McLean Watson Advisory Inc. and Alfred E. Mann, as amended. | |
10.1(15)
|
Promissory Note made by MannKind in favor of The Mann Group LLC dated February 26, 2009. | |
10.2(12)
|
Agreement, dated September 13, 2006, between MannKind and Torcon, Inc. | |
10.3(2)
|
Securities Purchase Agreement, dated August 2, 2005 by and among MannKind and the purchasers listed on Exhibit A thereto. | |
10.4**(4)
|
Supply Agreement, dated December 31, 2004, between MannKind and Vaupell, Inc. | |
10.5*(1)
|
Form of Indemnity Agreement entered into between MannKind and each of its directors and officers. | |
10.6*(8)
|
Description of Officers’ Incentive Program. | |
10.7*(5)
|
Description of 2006 executive officer salaries. | |
10.8*(5)
|
Description of 2006 non-employee director compensation. | |
10.9*(11)
|
Executive Severance Agreement, dated October 10, 2007, between MannKind and Hakan Edstrom. | |
10.10*(11)
|
Executive Severance Agreement, dated October 10, 2007, between MannKind and David Thomson. | |
10.11*(11)
|
Executive Severance Agreement, dated October 10, 2007, between MannKind and Peter Richardson. | |
10.12*(11)
|
Executive Severance Agreement, dated October 10, 2007, between MannKind and Juergen Martens. | |
10.13*(11)
|
Executive Severance Agreement, dated October 10, 2007, between MannKind and Diane Palumbo. | |
10.14*(11)
|
Executive Severance Agreement, dated April 21, 2008, between MannKind and Matthew J. Pfeffer. | |
10.15*(11)
|
Change of Control Agreement, dated October 10, 2007, between MannKind and Hakan Edstrom. | |
10.16*(11)
|
Change of Control Agreement, dated October 10, 2007, between MannKind and David Thomson. | |
10.17*(11)
|
Change of Control Agreement, dated October 10, 2007, between MannKind and Peter Richardson. | |
10.18*(11)
|
Change of Control Agreement, dated October 10, 2007, between MannKind and Juergen Martens. | |
10.19*(11)
|
Change of Control Agreement, dated October 10, 2007, between MannKind and Diane Palumbo. | |
10.20*(11)
|
Change of Control Agreement, dated April 21, 2008, between MannKind and Matthew J. Pfeffer. | |
10.21*(13)
|
Agreement dated December 20, 2007, between MannKind and Richard L. Anderson. | |
10.22*(7)
|
2004 Equity Incentive Plan, as amended. | |
10.23*(1)
|
Form of Stock Option Agreement under the 2004 Equity Incentive Plan. | |
10.24*(6)
|
Form of Phantom Stock Award Agreement under the 2004 Equity Incentive Plan. | |
10.25*(8)
|
2004 Non-Employee Directors’ Stock Option Plan and form of stock option agreement there under. | |
10.26*(1)
|
2004 Employee Stock Purchase Plan and form of offering document there under. | |
10.27*(1)
|
Pharmaceutical Discovery Corporation 1991 Stock Option Plan. | |
10.28*(1)
|
Pharmaceutical Discovery Corporation 1999 Stock Plan and form of stock option plan there under. | |
10.29*(1)
|
AlleCure Corp. 2000 Stock Option and Stock Plan. | |
10.30*(1)
|
CTL Immunotherapies Corp. 2000 Stock Option and Stock Plan. | |
10.31*(1)
|
2001 Stock Awards Plan. | |
10.32**(16)
|
Supply Agreement, dated November 16, 2007, between MannKind and N.V. Organon. | |
10.33**(14)
|
Insulin Maintenance and Call-Option Agreement, dated June 19, 2009, by and among Pfizer Manufacturing Frankfurt GmbH, Pfizer Inc. and MannKind. | |
23.1
|
Consent of Independent Registered Public Accounting Firm |
58
Table of Contents
| Exhibit | ||
| Number | Description of Document | |
31.1
|
Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended. | |
31.2
|
Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended. | |
32
|
Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Rules 13a-14(b) and 15d-14(b) of the Securities Exchange Act of 1934, as amended and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350) |
| * | Indicates management contract or compensatory plan. | |
| ** | Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC. | |
| (1) | Incorporated by reference to MannKind’s Registration Statement on Form S-1 (File No. 333-115020) filed with the SEC on April 30, 2004, as amended. | |
| (2) | Incorporated by reference to MannKind’s Current Report on Form 8-K filed with the SEC on August 5, 2005. | |
| (3) | Incorporated by reference to MannKind’s Current Report on Form 8-K filed with the SEC on December 12, 2006. | |
| (4) | Incorporated by reference to MannKind’s Current Report on Form 8-K (File No. 000-50865) filed with the SEC on February 23, 2005. | |
| (5) | Incorporated by reference to MannKind’s Current Report on Form 8-K filed with the SEC on February 22, 2006. | |
| (6) | Incorporated by reference to MannKind’s Current Report on Form 8-K filed with the SEC on December 14, 2005. | |
| (7) | Incorporated by reference to MannKind’s Current Report on Form 8-K filed with the SEC on June 9, 2009. | |
| (8) | Incorporated by reference to MannKind’s Annual Report on Form 10-K filed with the SEC on March 16, 2006. | |
| (9) | Incorporated by reference to MannKind’s Current Report on Form 8-K filed with the SEC on November 19, 2007. | |
| (10) | Incorporated by reference to MannKind’s Registration Statement on Form S-3 (File No. 333-138373) filed with the SEC on November 2, 2006. | |
| (11) | Incorporated by reference to MannKind’s Current Report on Form 8-K, as amended, filed with the SEC on October 16, 2007. | |
| (12) | Incorporated by reference to MannKind’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2007. | |
| (13) | Incorporated by reference to MannKind’s Quarterly Report on Form 10-Q filed with the SEC on December 20, 2007. | |
| (14) | Incorporated by reference to MannKind’s Quarterly Report on Form 10-Q filed with the SEC on May 4, 2009. | |
| (15) | Incorporated by reference to MannKind’s Annual Report on Form 10-K filed with the SEC on February 27, 2009. | |
| (16) | Incorporated by reference to MannKind’s Annual Report on Form 10-K filed with the SEC on March 14, 2008. |
59
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| Mannkind Corporation |
||||
| By: | /s/ Alfred E. Mann | |||
| Alfred E. Mann | ||||
| Chief Executive Officer | ||||
Dated: March 16, 2010
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Hakan S. Edstrom, Matthew Pfeffer and David Thomson, and each of them, as his or her true
and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for
him or her and in his or her name, place, and stead, in any and all capacities, to sign any and all
amendments to this Report, and any other documents in connection therewith, and to file the same,
with all exhibits thereto, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them or their or his substitute or substituted,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
| Signature | Title | Date | ||
/s/ Alfred E. Mann
|
Chief Executive Officer and Chairman of
the Board of Directors (Principal Executive Officer) |
March 16, 2010 | ||
/s/ Hakan S. Edstrom
|
President, Chief Operating Officer and Director |
March 16, 2010 | ||
/s/ Matthew J. Pfeffer
|
Corporate Vice President and Chief
Financial Officer (Principal Financial and Accounting Officer) |
March 16, 2010 | ||
| Director | March 16, 2010 | |||
A. E. Cohen |
||||
/s/ Ronald J. Consiglio
|
Director | March 16, 2010 | ||
Ronald J. Consiglio |
||||
/s/ Michael Friedman, M.D.
|
Director | March 16, 2010 | ||
Michael Friedman, M.D. |
||||
/s/ Kent Kresa
|
Director | March 16, 2010 | ||
Kent Kresa |
||||
/s/ David H. MacCallum
|
Director | March 16, 2010 | ||
David H. MacCallum |
||||
| Director | March 16, 2010 | |||
Henry L. Nordhoff |
||||
/s/ James S. Shannon
|
Director | March 16, 2010 | ||
James S. Shannon, M.D., MRCP(UK) |
60
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
| 62 | ||||
| 63 | ||||
| 64 | ||||
| 65 | ||||
| 70 | ||||
| 72 |
61
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of MannKind Corporation
Valencia, California
Valencia, California
We have audited the accompanying consolidated balance sheets of MannKind Corporation (a
development stage company) (the “Company”) as of December 31, 2008 and 2009 and the related
consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of
the three years in the period ended December 31, 2009 and for the period from February 14, 1991
(date of inception) to December 31, 2009. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on the financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the
financial position of MannKind Corporation as of December 31, 2008 and 2009, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2009 and
for the period from February 14, 1991 (date of inception) to December 31, 2009, in conformity with
accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial reporting as of
December 31, 2009, based on the criteria established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
March 16, 2010 expressed an unqualified opinion on the Company’s internal control over financial
reporting.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
March 16, 2010
March 16, 2010
62
Table of Contents
MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| 2008 | 2009 | |||||||
| (In thousands, except | ||||||||
| share data) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 27,648 | $ | 30,019 | ||||
Marketable securities |
18,844 | 2,475 | ||||||
State research and development credit exchange receivable — current |
1,500 | 1,500 | ||||||
Prepaid expenses and other current assets |
5,983 | 3,672 | ||||||
Total current assets |
53,975 | 37,666 | ||||||
Property and equipment — net |
226,436 | 208,229 | ||||||
State research and development credit exchange receivable — net of
current portion |
1,500 | 918 | ||||||
Other assets |
548 | 584 | ||||||
Total |
$ | 282,459 | $ | 247,397 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 15,630 | $ | 6,519 | ||||
Accrued expenses and other current liabilities |
37,842 | 22,334 | ||||||
Total current liabilities |
53,472 | 28,853 | ||||||
Senior convertible notes |
112,253 | 112,765 | ||||||
Note payable to related party |
30,000 | 165,000 | ||||||
Total liabilities |
195,725 | 306,618 | ||||||
Commitments and contingencies Stockholders’ equity (deficit): |
||||||||
Undesignated preferred stock, $0.01 par value — 10,000,000 shares
authorized; no shares issued or outstanding at December 31, 2008 and
2009 |
— | — | ||||||
Common stock, $0.01 par value — 150,000,000 shares authorized at
December 31, 2008 and 2009; 102,008,096 and 113,025,291 shares
issued and outstanding at December 31, 2008 and 2009, respectively |
1,020 | 1,130 | ||||||
Additional paid-in capital |
1,469,497 | 1,544,112 | ||||||
Accumulated other comprehensive income (loss) |
295 | (281 | ) | |||||
Deficit accumulated during the development stage |
(1,384,078 | ) | (1,604,182 | ) | ||||
Total stockholders’ equity (deficit) |
86,734 | (59,221 | ) | |||||
Total |
$ | 282,459 | $ | 247,397 | ||||
See notes to consolidated financial statements.
63
Table of Contents
MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
| Cumulative | ||||||||||||||||
| Period from | ||||||||||||||||
| February 14, | ||||||||||||||||
| 1991 (Date of | ||||||||||||||||
| Inception) to | ||||||||||||||||
| Year Ended December 31, | December 31, | |||||||||||||||
| 2007 | 2008 | 2009 | 2009 | |||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
Revenue |
$ | 10 | $ | 20 | $ | — | $ | 2,988 | ||||||||
Operating expenses: |
||||||||||||||||
Research and development |
256,844 | 250,442 | 156,331 | 1,153,813 | ||||||||||||
General and administrative |
50,523 | 55,343 | 53,447 | 299,289 | ||||||||||||
In-process research and development costs |
— | — | — | 19,726 | ||||||||||||
Goodwill impairment |
— | — | — | 151,428 | ||||||||||||
Total operating expenses |
307,367 | 305,785 | 209,778 | 1,624,256 | ||||||||||||
Loss from operations |
(307,357 | ) | (305,765 | ) | (209,778 | ) | (1,621,268 | ) | ||||||||
Other income (expense) |
(197 | ) | (62 | ) | 51 | (1,892 | ) | |||||||||
Interest expense on note payable to principal stockholder |
— | (12 | ) | (5,679 | ) | (7,202 | ) | |||||||||
Interest expense on senior convertible notes |
(3,408 | ) | (2,327 | ) | (4,768 | ) | (10,725 | ) | ||||||||
Interest income |
17,775 | 5,129 | 70 | 36,931 | ||||||||||||
Loss before provision for income taxes |
(293,187 | ) | (303,037 | ) | (220,104 | ) | (1,604,156 | ) | ||||||||
Income taxes |
(3 | ) | (2 | ) | — | (26 | ) | |||||||||
Net loss |
(293,190 | ) | (303,039 | ) | (220,104 | ) | (1,604,182 | ) | ||||||||
Deemed dividend related to beneficial conversion feature
of convertible preferred stock |
— | — | — | (22,260 | ) | |||||||||||
Accretion on redeemable preferred stock |
— | — | — | (952 | ) | |||||||||||
Net loss applicable to common stockholders |
$ | (293,190 | ) | $ | (303,039 | ) | $ | (220,104 | ) | $ | (1,627,394 | ) | ||||
Net loss per share applicable to common stockholders —
basic and diluted |
$ | (3.66 | ) | $ | (2.98 | ) | $ | (2.07 | ) | |||||||
Shares used to compute basic and diluted net loss per
share applicable to common stockholders |
80,038 | 101,561 | 106,534 | |||||||||||||
See notes to consolidated financial statements.
64
Table of Contents
MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
| Series C | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series C | Convertible | Deficit | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series B | Series C | Convertible | Preferred | Notes | Notes | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible | Convertible | Preferred | Stock | Additional | Receivable | Receivable | Other | During the | ||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Stock | Subscriptions | Common Stock | Paid-In | from | from | Comprehensive | Development | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Issuable | Receivable | Shares | Amount | Capital | Stockholders | Officers | Income | Stage | Total | |||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for cash |
— | $ | — | — | $ | — | $ | — | $ | — | 998 | $ | 10 | $ | 890 | $ | — | $ | — | $ | — | $ | — | $ | 900 | |||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (911 | ) | (911 | ) | ||||||||||||||||||||||||||||||||||||||||
BALANCE, FEBRUARY 29, 1992 |
— | — | — | — | — | — | 998 | 10 | 890 | — | — | — | (911 | ) | (11 | ) | ||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for cash and
services |
— | — | — | — | — | — | 73 | 1 | 887 | — | — | — | — | 888 | ||||||||||||||||||||||||||||||||||||||||||
Capital contribution |
— | — | — | — | — | — | — | — | 20 | — | — | — | — | 20 | ||||||||||||||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (1,175 | ) | (1,175 | ) | ||||||||||||||||||||||||||||||||||||||||
BALANCE, FEBRUARY 28, 1993 |
— | — | — | — | — | — | 1,071 | 11 | 1,797 | — | — | — | (2,086 | ) | (278 | ) | ||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for cash |
— | — | — | — | — | — | 11 | — | 526 | — | — | — | — | 526 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of stock for notes receivable |
— | — | — | — | — | — | 8 | — | 400 | (400 | ) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | — | — | — | — | — | — | (1,156 | ) | (1,156 | ) | |||||||||||||||||||||||||||||||||||||||||
BALANCE, FEBRUARY 28, 1994 |
— | — | — | — | — | — | 1,090 | 11 | 2,723 | (400 | ) | — | — | (3,242 | ) | (908 | ) | |||||||||||||||||||||||||||||||||||||||
Issuance of common stock for cash and
services |
— | — | — | — | — | — | 36 | — | 1,805 | — | — | — | — | 1,805 | ||||||||||||||||||||||||||||||||||||||||||
Collection of stock subscription |
— | — | — | — | — | — | — | — | — | 400 | — | — | — | 400 | ||||||||||||||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (2,004 | ) | (2,004 | ) | ||||||||||||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 1994 |
— | — | — | — | — | — | 1,126 | 11 | 4,528 | — | — | — | (5,246 | ) | (707 | ) | ||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for services |
— | — | — | — | — | — | — | — | 8 | — | — | — | — | 8 | ||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options |
— | — | — | — | — | — | 1 | — | 22 | — | — | — | — | 22 | ||||||||||||||||||||||||||||||||||||||||||
Stock compensation |
— | — | — | — | — | — | — | — | 384 | — | — | — | — | 384 | ||||||||||||||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (2,815 | ) | (2,815 | ) | ||||||||||||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 1995 |
— | — | — | — | — | — | 1,127 | 11 | 4,942 | — | — | — | (8,061 | ) | (3,108 | ) | ||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for cash and
services |
— | — | — | — | — | — | 1 | — | 59 | — | — | — | — | 59 | ||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options |
— | — | — | — | — | — | 3 | — | 12 | — | — | — | — | 12 | ||||||||||||||||||||||||||||||||||||||||||
Stock compensation |
— | — | — | — | — | — | — | — | 126 | — | — | — | — | 126 | ||||||||||||||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (2,570 | ) | (2,570 | ) | ||||||||||||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 1996 |
— | — | — | — | — | — | 1,131 | 11 | 5,139 | — | — | — | (10,631 | ) | (5,481 | ) | ||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for cash and
services |
— | — | — | — | — | — | 548 | 6 | 190 | — | — | — | — | 196 | ||||||||||||||||||||||||||||||||||||||||||
Stock compensation |
— | — | — | — | — | — | — | — | 2 | — | — | — | — | 2 | ||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options |
— | — | — | — | — | — | 27 | — | 135 | — | — | — | — | 135 | ||||||||||||||||||||||||||||||||||||||||||
Conversion of notes payable |
— | — | — | — | — | — | 12 | — | 60 | — | — | — | — | 60 | ||||||||||||||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (2,280 | ) | (2,280 | ) | ||||||||||||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 1997 |
— | — | — | — | — | — | 1,718 | 17 | 5,526 | — | — | — | (12,911 | ) | (7,368 | ) | ||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for cash and
services |
— | — | — | — | — | — | 2,253 | 23 | 12,703 | — | — | — | — | 12,726 | ||||||||||||||||||||||||||||||||||||||||||
Stock compensation |
— | — | — | — | — | — | — | — | 150 | — | — | — | — | 150 | ||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options |
— | — | — | — | — | — | 68 | 1 | 24 | — | — | — | — | 25 | ||||||||||||||||||||||||||||||||||||||||||
Conversion of notes payable |
— | — | — | — | — | — | 215 | 2 | 1,200 | — | — | — | — | 1,202 | ||||||||||||||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (3,331 | ) | (3,331 | ) | ||||||||||||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 1998 |
— | — | — | — | — | — | 4,254 | 43 | 19,603 | — | — | — | (16,242 | ) | 3,404 | |||||||||||||||||||||||||||||||||||||||||
Issuance of common stock |
— | — | — | — | — | — | 162 | 2 | 532 | — | — | — | — | 534 | ||||||||||||||||||||||||||||||||||||||||||
Conversion of notes payable |
— | — | — | — | — | — | 80 | 1 | 994 | — | — | — | — | 995 | ||||||||||||||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (5,679 | ) | (5,679 | ) | ||||||||||||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 1999 |
— | — | — | — | — | — | 4,496 | 46 | 21,129 | — | — | — | (21,921 | ) | (746 | ) | ||||||||||||||||||||||||||||||||||||||||
Conversion of notes payable |
— | — | — | — | — | — | 63 | 1 | 1,073 | — | — | — | — | 1,074 | ||||||||||||||||||||||||||||||||||||||||||
65
Table of Contents
MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) — (Continued)
| Series C | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series C | Convertible | Deficit | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series B | Series C | Convertible | Preferred | Notes | Notes | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible | Convertible | Preferred | Stock | Additional | Receivable | Receivable | Other | During the | ||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Stock | Subscriptions | Common Stock | Paid-In | from | from | Comprehensive | Development | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Issuable | Receivable | Shares | Amount | Capital | Stockholders | Officers | Income | Stage | Total | |||||||||||||||||||||||||||||||||||||||||||
Issuance of Series B preferred stock
for cash |
193 | 15,000 | — | — | — | — | — | — | — | — | — | — | — | 15,000 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for cash,
services and notes |
— | — | — | — | — | — | 4,690 | 46 | 33,945 | (2,358 | ) | — | — | — | 31,633 | |||||||||||||||||||||||||||||||||||||||||
Discount on notes below market rate |
— | — | — | — | — | — | — | — | — | 241 | — | — | — | 241 | ||||||||||||||||||||||||||||||||||||||||||
Accrued interest on notes |
— | — | — | — | — | — | — | — | — | (117 | ) | — | — | — | (117 | ) | ||||||||||||||||||||||||||||||||||||||||
Purchase of Series A redeemable
convertible preferred stock |
— | — | — | — | — | — | — | — | (993 | ) | — | — | — | — | (993 | ) | ||||||||||||||||||||||||||||||||||||||||
Amount in excess of redemption
obligation |
— | — | — | — | — | — | — | — | 999 | — | — | — | — | 999 | ||||||||||||||||||||||||||||||||||||||||||
Accretion to redemption value on
Series A redeemable convertible
preferred stock |
— | — | — | — | — | — | — | — | (149 | ) | — | — | — | — | (149 | ) | ||||||||||||||||||||||||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | — | — | — | 9,609 | — | — | — | — | 9,609 | ||||||||||||||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (24,661 | ) | (24,661 | ) | ||||||||||||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2000 |
193 | 15,000 | — | — | — | — | 9,249 | 93 | 65,613 | (2,234 | ) | — | — | (46,582 | ) | 31,890 | ||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for cash |
— | — | — | — | — | — | 3,052 | 30 | 78,000 | — | — | — | — | 78,030 | ||||||||||||||||||||||||||||||||||||||||||
Cash received for common stock to be
issued |
— | — | — | — | — | — | — | — | 3,900 | — | — | — | — | 3,900 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for services |
— | — | — | — | — | — | 3 | — | 60 | — | — | — | — | 60 | ||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options |
— | — | — | — | — | — | 1 | — | 13 | — | — | — | — | 13 | ||||||||||||||||||||||||||||||||||||||||||
Accrued interest on notes |
— | — | — | — | — | — | — | — | — | (189 | ) | — | — | — | (189 | ) | ||||||||||||||||||||||||||||||||||||||||
Payments on notes receivable |
— | — | — | — | — | — | — | — | — | 28 | — | — | — | 28 | ||||||||||||||||||||||||||||||||||||||||||
Accretion to redemption value on
Series A redeemable convertible
preferred stock |
— | — | — | — | — | — | — | — | (239 | ) | — | — | — | — | (239 | ) | ||||||||||||||||||||||||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | — | — | — | 1,565 | — | — | — | — | 1,565 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of put option by stockholder |
— | — | — | — | — | — | — | — | (2,949 | ) | — | — | — | — | (2,949 | ) | ||||||||||||||||||||||||||||||||||||||||
Record merger of entities |
— | — | — | — | — | — | — | — | 171,154 | — | — | — | — | 171,154 | ||||||||||||||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (48,245 | ) | (48,245 | ) | ||||||||||||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2001 |
193 | 15,000 | — | — | — | — | 12,305 | 123 | 317,117 | (2,395 | ) | — | — | (94,827 | ) | 235,018 | ||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for cash |
— | — | — | — | — | — | 3,922 | 40 | 58,775 | — | — | — | — | 58,815 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for cash
already received |
— | — | — | — | — | — | 234 | 2 | (2 | ) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Issuance of stock award to employee |
— | — | — | — | — | — | 3 | — | 84 | — | — | — | — | 84 | ||||||||||||||||||||||||||||||||||||||||||
Cash received for common stock issuable |
— | — | — | — | — | — | — | — | 98 | — | — | — | — | 98 | ||||||||||||||||||||||||||||||||||||||||||
Accrued interest on notes |
— | — | — | — | — | — | — | — | — | (229 | ) | — | — | — | (229 | ) | ||||||||||||||||||||||||||||||||||||||||
Payments on notes receivable |
— | — | — | — | — | — | — | — | — | 1,314 | — | — | — | 1,314 | ||||||||||||||||||||||||||||||||||||||||||
Beneficial conversion feature of
Series B convertible preferred stock |
— | — | — | — | — | — | — | — | 1,421 | — | — | — | — | 1,421 | ||||||||||||||||||||||||||||||||||||||||||
Deemed dividend related to beneficial
conversion feature of Series B
convertible preferred stock |
— | — | — | — | — | — | — | — | (1,421 | ) | — | — | — | — | (1,421 | ) | ||||||||||||||||||||||||||||||||||||||||
Accretion to redemption value on
Series A redeemable convertible
preferred stock |
— | — | — | — | — | — | — | — | (251 | ) | — | — | — | — | (251 | ) | ||||||||||||||||||||||||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | — | — | — | 268 | — | — | — | — | 268 | ||||||||||||||||||||||||||||||||||||||||||
Put option redemption by stockholder |
— | — | — | — | — | — | — | — | 1,921 | — | — | — | — | 1,921 | ||||||||||||||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (206,265 | ) | (206,265 | ) | ||||||||||||||||||||||||||||||||||||||||
66
Table of Contents
MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) — (Continued)
| Series C | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series C | Convertible | Deficit | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series B | Series C | Convertible | Preferred | Notes | Notes | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible | Convertible | Preferred | Stock | Additional | Receivable | Receivable | Other | During the | ||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Stock | Subscriptions | Common Stock | Paid-In | from | from | Comprehensive | Development | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Issuable | Receivable | Shares | Amount | Capital | Stockholders | Officers | Income | Stage | Total | |||||||||||||||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2002 |
193 | 15,000 | — | — | — | — | 16,464 | 165 | 378,010 | (1,310 | ) | — | — | (301,092 | ) | 90,773 | ||||||||||||||||||||||||||||||||||||||||
Issuance of Series C convertible
preferred stock subscriptions |
— | — | — | — | 50,000 | (50,000 | ) | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Cash collected on Series C convertible
preferred stock subscriptions |
— | — | — | — | — | 31,847 | — | — | — | — | — | — | — | 31,847 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for cash |
— | — | — | — | — | — | 3,494 | 35 | 49,965 | — | — | — | — | 50,000 | ||||||||||||||||||||||||||||||||||||||||||
Non-cash compensation expense of
officer resulting from stockholder
contribution |
— | — | — | — | — | — | — | — | 70 | — | — | — | — | 70 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for cash
already received |
— | — | — | — | — | — | 17 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Notes receivable by stockholder issued
to officers |
— | — | — | — | — | — | 225 | — | (225 | ) | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
Accrued interest on notes |
— | — | — | — | — | — | — | — | — | (102 | ) | (3 | ) | — | — | (105 | ) | |||||||||||||||||||||||||||||||||||||||
Beneficial conversion feature of
Series B convertible preferred stock |
— | — | — | — | — | — | — | — | 1,017 | — | — | — | — | 1,017 | ||||||||||||||||||||||||||||||||||||||||||
Deemed dividend related to beneficial
conversion feature of Series B
convertible preferred stock |
— | — | — | — | — | — | — | — | (1,017 | ) | — | — | — | — | (1,017 | ) | ||||||||||||||||||||||||||||||||||||||||
Accretion to redemption value on
Series A redeemable convertible
preferred stock |
— | — | — | — | — | — | — | — | (253 | ) | — | — | — | — | (253 | ) | ||||||||||||||||||||||||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | — | — | — | 4,501 | — | — | — | — | 4,501 | ||||||||||||||||||||||||||||||||||||||||||
Put shares sold to majority stockholder |
— | — | — | — | — | — | — | — | 623 | — | — | — | — | 623 | ||||||||||||||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (65,879 | ) | (65,879 | ) | ||||||||||||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2003 |
193 | 15,000 | — | — | 50,000 | (18,153 | ) | 19,975 | 200 | 433,141 | (1,412 | ) | (228 | ) | — | (366,971 | ) | 111,577 | ||||||||||||||||||||||||||||||||||||||
Issuance of Series C convertible
preferred stock for cash |
— | — | 356 | 18,153 | (18,153 | ) | 18,153 | — | — | — | — | — | — | — | 18,153 | |||||||||||||||||||||||||||||||||||||||||
Issuance of Series C convertible
preferred stock for cash already
received |
— | — | 624 | 31,847 | (31,847 | ) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Exercise of stock options |
— | — | — | — | — | — | 86 | — | 1,079 | — | — | — | — | 1,079 | ||||||||||||||||||||||||||||||||||||||||||
Exercise of warrants |
— | — | — | — | — | — | 4 | — | 46 | — | — | — | — | 46 | ||||||||||||||||||||||||||||||||||||||||||
Accrued interest on notes |
— | — | — | — | — | — | — | — | — | (107 | ) | — | — | — | (107 | ) | ||||||||||||||||||||||||||||||||||||||||
Repayment of notes receivable by
stockholder issued to officers |
— | — | — | — | — | — | — | — | (225 | ) | — | 228 | — | — | 3 | |||||||||||||||||||||||||||||||||||||||||
Repayment of stock note receivable |
— | — | — | — | — | — | (90 | ) | (1 | ) | (1,518 | ) | 1,519 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Conversion of Series A convertible
preferred stock to common stock |
— | — | — | — | — | — | 891 | 9 | 5,239 | — | — | — | — | 5,248 | ||||||||||||||||||||||||||||||||||||||||||
Conversion of Series B convertible
preferred stock to common stock |
(193 | ) | (15,000 | ) | — | — | — | — | 811 | 8 | 14,992 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Conversion of Series C convertible
preferred stock to common stock |
— | — | (980 | ) | (50,000 | ) | — | — | 4,464 | 45 | 49,955 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Issuance of common shares in exchange
for warrants |
— | — | — | — | — | — | 22 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common shares under
Employee Stock Purchase Plan |
— | — | — | — | — | — | 36 | — | 430 | — | — | — | — | 430 | ||||||||||||||||||||||||||||||||||||||||||
Net proceeds from initial public offering |
— | — | — | — | — | — | 6,557 | 66 | 83,110 | — | — | — | — | 83,176 | ||||||||||||||||||||||||||||||||||||||||||
Beneficial conversion feature of
Series B convertible preferred stock |
— | — | — | — | — | — | — | — | 19,822 | — | — | — | — | 19,822 | ||||||||||||||||||||||||||||||||||||||||||
Deemed dividends related to beneficial
conversion feature of Series B and
Series C convertible preferred stock |
— | — | — | — | — | — | — | — | (19,822 | ) | — | — | — | — | (19,822 | ) | ||||||||||||||||||||||||||||||||||||||||
67
Table of Contents
MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) — (Continued)
| Series C | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series C | Convertible | Deficit | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series B | Series C | Convertible | Preferred | Notes | Notes | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible | Convertible | Preferred | Stock | Additional | Receivable | Receivable | Other | During the | ||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Stock | Subscriptions | Common Stock | Paid-In | from | from | Comprehensive | Development | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Issuable | Receivable | Shares | Amount | Capital | Stockholders | Officers | Income | Stage | Total | |||||||||||||||||||||||||||||||||||||||||||
Accretion to redemption value on
Series A redeemable convertible
preferred stock |
— | — | — | — | — | — | — | — | (60 | ) | — | — | — | — | (60 | ) | ||||||||||||||||||||||||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | — | — | — | 6,810 | — | — | — | — | 6,810 | ||||||||||||||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (75,992 | ) | (75,992 | ) | ||||||||||||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2004 |
— | — | — | — | — | — | 32,756 | 327 | 592,999 | — | — | — | (442,963 | ) | 150,363 | |||||||||||||||||||||||||||||||||||||||||
Issuance of common shares in exchange
for warrants |
— | — | — | — | — | — | 24 | — | 245 | — | — | — | — | 245 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common shares under
Employee Stock Purchase Plan |
— | — | — | — | — | — | 58 | 1 | 494 | — | — | — | — | 495 | ||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options |
— | — | — | — | — | — | 304 | 3 | 1,948 | — | — | — | — | 1,951 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of stock awards to consultants |
— | — | — | — | — | — | 40 | 1 | (146 | ) | — | — | — | — | (145 | ) | ||||||||||||||||||||||||||||||||||||||||
Issuance of stock and warrants for cash |
— | — | — | — | — | — | 17,132 | 171 | 170,063 | — | — | — | — | 170,234 | ||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | — | — | — | (1,828 | ) | — | — | — | — | (1,828 | ) | ||||||||||||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (114,338 | ) | (114,338 | ) | ||||||||||||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2005 |
— | — | — | — | — | — | 50,314 | 503 | 763,775 | — | — | — | (557,301 | ) | 206,977 | |||||||||||||||||||||||||||||||||||||||||
Exercise of warrants |
— | — | — | — | — | — | 339 | 3 | 2,691 | — | — | — | — | 2,694 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common shares under
Employee Stock Purchase Plan |
— | — | — | — | — | — | 86 | 1 | 980 | — | — | — | — | 981 | ||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options |
— | — | — | — | — | — | 263 | 3 | 2,309 | — | — | — | — | 2,312 | ||||||||||||||||||||||||||||||||||||||||||
Cancellation of common shares for
stock notes receivable |
— | — | — | — | — | — | (844 | ) | (8 | ) | 8 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Issuance of stock for cash |
— | — | — | — | — | — | 23,000 | 230 | 384,440 | — | — | — | — | 384,670 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common shares from the
release of restricted stock units |
— | — | — | — | — | — | 102 | 1 | (341 | ) | — | — | — | — | (340 | ) | ||||||||||||||||||||||||||||||||||||||||
Issuance of common shares pursuant to
research agreement |
— | — | — | — | — | — | 100 | 1 | 2,073 | — | — | — | — | 2,074 | ||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | — | — | — | 14,667 | — | — | — | — | 14,667 | ||||||||||||||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (230,548 | ) | (230,548 | ) | ||||||||||||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2006 |
— | — | — | — | — | — | 73,360 | 734 | 1,170,602 | — | — | — | (787,849 | ) | 383,487 | |||||||||||||||||||||||||||||||||||||||||
Issuance of common shares under
Employee Stock Purchase Plan |
— | — | — | — | — | — | 124 | 1 | 1,064 | — | — | — | — | 1,065 | ||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options |
— | — | — | — | — | — | 607 | 6 | 4,917 | — | — | — | — | 4,923 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of stock awards to consultants |
— | — | — | — | — | — | 30 | — | 123 | — | — | — | — | 123 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of stock for cash |
— | — | — | — | — | — | 27,014 | 270 | 249,480 | — | — | — | — | 249,750 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common shares from the
release of restricted stock units |
— | — | — | — | — | — | 146 | 2 | (526 | ) | — | — | — | — | (524 | ) | ||||||||||||||||||||||||||||||||||||||||
Issuance of common shares pursuant to
research agreement |
— | — | — | — | — | — | 100 | 1 | 943 | — | — | — | — | 944 | ||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | — | — | — | 17,522 | — | — | — | — | 17,522 | ||||||||||||||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (293,190 | ) | (293,190 | ) | ||||||||||||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2007 |
— | — | — | — | — | — | 101,381 | 1,014 | 1,444,125 | — | — | — | (1,081,039 | ) | 364,100 | |||||||||||||||||||||||||||||||||||||||||
Issuance of common shares under
Employee Stock Purchase Plan |
— | — | — | — | — | — | 349 | 4 | 896 | — | — | — | — | 900 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of stock awards to consultants |
— | — | — | — | — | — | 30 | — | (18 | ) | — | — | — | — | (18 | ) | ||||||||||||||||||||||||||||||||||||||||
Issuance of common shares from the
release of restricted stock units |
— | — | — | — | — | — | 248 | 2 | (317 | ) | — | — | — | — | (315 | ) | ||||||||||||||||||||||||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | — | — | — | 24,811 | — | — | — | — | 24,811 | ||||||||||||||||||||||||||||||||||||||||||
68
Table of Contents
MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) — (Continued)
| Series C | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series C | Convertible | Deficit | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series B | Series C | Convertible | Preferred | Notes | Notes | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible | Convertible | Preferred | Stock | Additional | Receivable | Receivable | Other | During the | ||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Stock | Subscriptions | Common Stock | Paid-In | from | from | Comprehensive | Development | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Issuable | Receivable | Shares | Amount | Capital | Stockholders | Officers | Income | Stage | Total | |||||||||||||||||||||||||||||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (303,039 | ) | (303,039 | ) | ||||||||||||||||||||||||||||||||||||||||
Unrealized gain (loss) on
available-for-sale securities |
— | — | — | — | — | — | — | — | — | — | — | 295 | — | 295 | ||||||||||||||||||||||||||||||||||||||||||
Comprehensive loss |
(302,744 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2008 |
— | — | — | — | — | — | 102,008 | 1,020 | 1,469,497 | — | — | 295 | (1,384,078 | ) | 86,734 | |||||||||||||||||||||||||||||||||||||||||
Issuance of common shares under
Employee Stock Purchase Plan |
— | — | — | — | — | — | 323 | 3 | 1,397 | — | — | — | — | 1,400 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of stock for cash |
— | — | — | — | — | — | 8,360 | 84 | 59,640 | — | — | — | — | 59,724 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common shares from the
release of restricted stock units |
— | — | — | — | — | — | 2,240 | 22 | (7,023 | ) | — | — | — | — | (7,001 | ) | ||||||||||||||||||||||||||||||||||||||||
Exercise of stock options |
— | — | — | — | — | — | 94 | 1 | 382 | — | — | — | — | 383 | ||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | — | — | — | 20,219 | — | — | — | — | 20,219 | ||||||||||||||||||||||||||||||||||||||||||
Comprehensive loss: |
— | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | — | — | — | — | — | — | — | (220,104 | ) | (220,104 | ) | ||||||||||||||||||||||||||||||||||||||||
Unrealized gain (loss) on
available-for-sale securities |
— | — | — | — | — | — | — | — | — | — | — | (581 | ) | — | (581 | ) | ||||||||||||||||||||||||||||||||||||||||
Unrealized gain (loss) on foreign
currency translation |
— | — | — | — | — | — | — | — | — | — | — | 5 | — | 5 | ||||||||||||||||||||||||||||||||||||||||||
Comprehensive loss |
(220,680 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2009 |
— | $ | — | — | $ | — | — | — | 113,025 | $ | 1,130 | $ | 1,544,112 | $ | — | $ | — | $ | (281 | ) | $ | (1,604,182 | ) | $ | (59,221 | ) | ||||||||||||||||||||||||||||||
See notes to consolidated financial statements.
69
Table of Contents
MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Cumulative | ||||||||||||||||
| Period from | ||||||||||||||||
| February 14, | ||||||||||||||||
| 1991 (Date of | ||||||||||||||||
| Inception) to | ||||||||||||||||
| Years Ended December 31, | December 31, | |||||||||||||||
| 2007 | 2008 | 2009 | 2009 | |||||||||||||
| (In thousands) | ||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||||||
Net loss |
$ | (293,190 | ) | $ | (303,039 | ) | $ | (220,104 | ) | $ | (1,604,182 | ) | ||||
Adjustments to reconcile net loss to net cash used
in operating activities: |
||||||||||||||||
Depreciation and amortization |
8,973 | 12,287 | 18,725 | 79,139 | ||||||||||||
Stock-based compensation expense |
17,645 | 24,793 | 20,219 | 99,842 | ||||||||||||
Stock expense for shares issued pursuant to research
agreement |
944 | — | — | 3,018 | ||||||||||||
Loss on sale, abandonment/disposal or impairment of
property and equipment |
7,047 | 213 | 12,869 | 23,575 | ||||||||||||
Accrued interest on investments, net of amortization
of premiums (discounts) |
— | (237 | ) | (12 | ) | (191 | ) | |||||||||
In-process research and development |
— | — | — | 19,726 | ||||||||||||
Goodwill impairment |
— | — | — | 151,428 | ||||||||||||
Loss on available-for-sale securities |
— | — | — | 229 | ||||||||||||
Other, net |
— | — | 5 | 1,110 | ||||||||||||
Changes in assets and liabilities: |
||||||||||||||||
State research and development credit exchange
receivable |
1,587 | (669 | ) | 582 | (2,418 | ) | ||||||||||
Prepaid expenses and other current assets |
2,654 | 3,613 | 2,311 | (2,072 | ) | |||||||||||
Other assets |
(186 | ) | — | (36 | ) | (584 | ) | |||||||||
Accounts payable |
16,265 | (14,620 | ) | (6,371 | ) | 5,989 | ||||||||||
Accrued expenses and other current liabilities |
(6,885 | ) | 6,395 | (12,271 | ) | 21,483 | ||||||||||
Other liabilities |
— | (24 | ) | — | (2 | ) | ||||||||||
Net cash used in operating activities |
(245,146 | ) | (271,288 | ) | (184,083 | ) | (1,203,910 | ) | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||||||
Purchase of marketable securities |
(169,801 | ) | (63,651 | ) | (2,000 | ) | (792,601 | ) | ||||||||
Sales of marketable securities |
286,725 | 46,100 | 17,800 | 790,565 | ||||||||||||
Purchase of property and equipment |
(78,262 | ) | (82,453 | ) | (18,852 | ) | (310,709 | ) | ||||||||
Proceeds from sale of property and equipment |
— | 70 | — | 284 | ||||||||||||
Net cash (used in) provided by investing activities |
38,662 | (99,934 | ) | (3,052 | ) | (312,461 | ) | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||||||
Issuance of common stock and warrants |
255,738 | 902 | 61,507 | 1,202,055 | ||||||||||||
Collection of Series C convertible preferred stock
subscriptions receivable |
— | — | — | 50,000 | ||||||||||||
70
Table of Contents
MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
| Cumulative | ||||||||||||||||
| Period from | ||||||||||||||||
| February 14, | ||||||||||||||||
| 1991 (Date of | ||||||||||||||||
| Inception) to | ||||||||||||||||
| Years Ended December 31, | December 31, | |||||||||||||||
| 2007 | 2008 | 2009 | 2009 | |||||||||||||
| (In thousands) | ||||||||||||||||
Issuance of Series B convertible preferred stock for cash |
— | — | — | 15,000 | ||||||||||||
Cash received for common stock to be issued |
— | — | — | 3,900 | ||||||||||||
Repurchase of common stock |
— | — | — | (1,028 | ) | |||||||||||
Put shares sold to majority stockholder |
— | — | — | 623 | ||||||||||||
Borrowings under lines of credit |
— | — | — | 4,220 | ||||||||||||
Proceeds from notes receivables |
— | — | — | 1,742 | ||||||||||||
Borrowings on notes payable from principal
stockholder |
— | 30,000 | 135,000 | 235,000 | ||||||||||||
Principal payments on notes payable to principal stockholder |
— | — | — | (70,000 | ) | |||||||||||
Borrowings on notes payable |
— | — | — | 3,460 | ||||||||||||
Principal payments on notes payable |
— | — | — | (1,667 | ) | |||||||||||
Payable to stockholder |
— | — | — | — | ||||||||||||
Proceeds from senior convertible notes |
— | — | — | 111,267 | ||||||||||||
Payment of employment taxes related to vested restricted
stock units |
(524 | ) | (317 | ) | (7,001 | ) | (8,182 | ) | ||||||||
Net cash provided by financing activities |
255,214 | 30,585 | 189,506 | 1,546,390 | ||||||||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
$ | 48,730 | $ | (340,637 | ) | $ | 2,371 | $ | 30,019 | |||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
319,555 | 368,285 | 27,648 | — | ||||||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 368,285 | $ | 27,648 | $ | 30,019 | $ | 30,019 | ||||||||
SUPPLEMENTAL CASH FLOWS DISCLOSURES: |
||||||||||||||||
Cash paid for income taxes |
$ | 3 | $ | 2 | $ | — | $ | 26 | ||||||||
Interest paid in cash |
4,348 | 4,313 | 8,131 | 18,487 | ||||||||||||
Accretion on redeemable convertible preferred stock |
— | — | — | (952 | ) | |||||||||||
Issuance of common stock upon conversion of notes payable |
— | — | — | 3,331 | ||||||||||||
Increase in additional paid-in capital resulting from merger |
— | — | — | 171,154 | ||||||||||||
Issuance of common stock for notes receivable |
— | — | — | 2,758 | ||||||||||||
Issuance of put option by stockholder |
— | — | — | (2,949 | ) | |||||||||||
Put option redemption by stockholder |
— | — | — | 1,921 | ||||||||||||
Issuance of Series C convertible preferred stock
subscriptions |
— | — | — | 50,000 | ||||||||||||
Issuance of Series A redeemable convertible preferred stock |
— | — | — | 4,296 | ||||||||||||
Conversion of Series A redeemable convertible preferred stock |
— | — | — | (5,248 | ) | |||||||||||
Non-cash construction in progress and property and equipment |
13,219 | 6,597 | 620 | 620 | ||||||||||||
Non-cash transfer from property and equipment to other
current assets |
1,600 | — | — | — | ||||||||||||
In connection with the Company’s initial public offering, all shares of Series B and Series C
convertible preferred stock, in the amount of $15.0 million and $50.0 million, respectively,
automatically converted into common stock in August 2004.
See notes to consolidated financial statements.
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
1. Description of business and basis of presentation
Business — MannKind Corporation (the “Company”) is a biopharmaceutical company focused on the
discovery, development and commercialization of therapeutic products for diseases such as diabetes
and cancer. The Company’s lead product candidate, AFREZZA, is an ultra rapid-acting insulin. In
March 2009, the Company submitted a new drug application (“NDA”) to the U.S. Food and Drug
Administration (“FDA”) requesting approval of AFREZZA for the treatment of adults with type 1 or
type 2 diabetes for the control of hyperglycemia. In March 2010, the
FDA provided a complete response letter regarding this NDA,
requesting additional information. Currently, AFREZZA remains under
regulatory review. AFREZZA consists of the Company’s proprietary Technosphere particles onto which insulin
molecules are loaded. These loaded particles are then aerosolized and inhaled deep into the lung
using the Company’s AFREZZA inhaler.
Basis of Presentation — The Company is considered to be in the development stage 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. Since its inception through December 31, 2009 the Company has reported accumulated
net losses of $1.6 billion, which include a goodwill impairment charge of $151.4 million (see Note
2), and cumulative negative cash flow from operations of $1.2 billion. It is costly to develop
therapeutic products and conduct clinical trials for these products. At December 31, 2009 the
Company’s capital resources consisted of cash, cash equivalents, and marketable securities of $32.5
million (including a $2.0 million certificate of deposit held as collateral for foreign exchange
hedging instruments) and $185.0 million of available borrowings under the loan agreement with an
entity controlled by the Company’s principal stockholder (see Note 7). Based upon the Company’s
current expectations, management believes the Company’s existing capital resources will enable it
to continue planned operations into the first quarter of 2011. However, the Company cannot provide
assurances that its plans will not change or that changed circumstances will not result in the
depletion of its capital resources more rapidly than it currently anticipates. Accordingly, the
Company expects that it will need to raise additional capital, either through the sale of equity
and/or debt securities, a strategic business collaboration with a pharmaceutical company or the
establishment of other funding facilities, in order to continue the development and
commercialization of AFREZZA and other product candidates and to support its other ongoing
activities.
On December 12, 2001, the stockholders of AlleCure Corp. (“AlleCure”) and CTL ImmunoTherapies
Corp. (“CTL”) voted to exchange their shares for shares of Pharmaceutical Discovery Corporation
(“PDC”). Upon approval of the merger, PDC then changed its name to MannKind Corporation. PDC was
incorporated in the State of Delaware on February 14, 1991. The stockholders of PDC did not vote on
the merger. At the date of the merger, Mr. Alfred Mann owned 76% of PDC, 59% of AlleCure and 69% of
CTL. Accordingly, only the minority interest of AlleCure and CTL was stepped up to fair value using
the purchase method of accounting. As a result of this purchase accounting, in-process research and
development of $19.7 million and goodwill of $151.4 million were recorded at the entity level. The
historical basis of PDC and the historical basis relating to the ownership interests of Mr. Mann in
AlleCure and CTL have been reflected in the financial statements. For periods prior to December 12,
2001, the results of operations have been presented on a combined basis. All references in the
accompanying financial statements and notes to the financial statements to number of shares, sales
price and per share amounts of the Company’s capital stock have been retroactively restated to
reflect the share exchange ratios for each of the entities that participated in the merger.
For periods subsequent to December 12, 2001, the accompanying financial statements have been
presented on a consolidated basis and include the wholly-owned subsidiaries, AlleCure and CTL. On
December 31, 2002, AlleCure and CTL merged with and into MannKind and ceased to be separate
entities.
Segment Information — In accordance with Accounting Standards Codification (“ASC”) 280-10-50
Segment Reporting, Overall, Disclosure, previously Financial Accounting Standards Board (“FASB”)
Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, operating
segments are identified as components of an enterprise about which separate discrete financial
information is available for evaluation by the chief operating decision-maker in making decisions
regarding resource allocation and assessing performance. To date, the Company has viewed its
operations and manages its business as one segment operating entirely in the United States of
America.
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2. Summary of significant accounting policies
Financial Statement Estimates — The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents — The Company considers all highly liquid investments with a
purchased maturity date of three months or less to be cash equivalents.
Concentration of Credit Risk — Financial instruments that potentially subject the Company to
concentration of credit risk consist of cash and cash equivalents and marketable securities. Cash
and cash equivalents consist primarily of interest-bearing accounts and are regularly monitored by
management and held in high credit quality institutions. Marketable securities consist of a $2.0
million certificate of deposit held as collateral for foreign exchange hedging instruments, and a
common stock investment.
Marketable Securities — The Company accounts for marketable securities as available for sale,
in accordance with ASC 320-10 Investments- Debt and Equity Securities, Overall, previously FASB
Statement No. 115, Accounting for Certain Debt and Equity Securities. Unrealized holding gains and
losses for available-for-sale securities are reported as a separate component of stockholders’
equity until realized. The Company reviews the portfolio for other than temporary impairment in
accordance with ASC 320-10-35 Investment- Debt and Equity Securities Overall Subsequent
Measurement, previously Emerging Issues Task Force (“EITF”) Issue No. 03-01, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments and FASB Staff Position
No. 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments.
State Research and Development Credit Exchange Receivable — The State of Connecticut provides
certain companies with the opportunity to exchange certain research and development income tax
credit carryforwards for cash in exchange for foregoing the carryforward of the research and
development credits. The program provides for an exchange of research and development income tax
credits for cash equal to 65% of the value of corporation tax credit available for exchange.
Estimated amounts receivable under the program are recorded as a reduction of research and
development expenses.
Fair Value of Financial Instruments — The carrying amounts of financial instruments, which
include cash equivalents, marketable securities and accounts payable, approximate their fair values
due to their relatively short maturities. The fair value of the note payable to related party
cannot be reasonably estimated as the Company would not be able to obtain a similar credit
arrangement in the current economic environment. The senior convertible notes had a carrying value
of $112.3 and $112.8 million and an estimated fair value of $53.9 and $80.3 million as of December
31, 2008 and 2009, respectively, which is calculated based on quoted prices in an active market
(Level 1 in the fair value hierarchy).
Goodwill and Identifiable Intangibles — As a result of the merger with AlleCure and CTL on
December 12, 2001, as described in Note 1, goodwill of $151.4 million was recorded at the entity
level in 2001. Upon adoption of FASB Statement No. 142, Goodwill and Other Intangible Assets, or
ASC 350-10 Intangibles- Goodwill and Other Overall, the Company adopted a policy of testing
goodwill and intangible assets with indefinite lives for impairment at least annually, as of
December 31, with any related impairment losses being recognized in earnings when identified. In
December 2002 the Company concluded that the major AlleCure product development program should be
terminated and that the clinical trials of the CTL product should be halted and returned to the
research stage. As a result of this determination, the Company closed the CTL facility and reduced
headcount for AlleCure and CTL by approximately 50%. In connection with the annual test for
impairment of goodwill as of December 31, 2002, the Company determined that on the basis of the
internal study, the goodwill recorded for the AlleCure and CTL units was potentially impaired. The
Company performed the second step of the annual impairment test as of December 31, 2002 for each of
the potentially impaired reporting units and estimated the fair value of the AlleCure and CTL
programs using the expected present value of future cash flows which were expected to be
negligible. Accordingly, the goodwill balance of $151.4 million was determined to be fully impaired
and an impairment loss
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
was recorded in 2002. Subsequent to December 31, 2002, the Company had no goodwill or intangibles with
indefinite lives included on its balance sheet.
Property and Equipment — Property and equipment are recorded at cost and depreciated using
the straight-line method over the estimated useful lives of the related assets. Leasehold
improvements are amortized over the term of the lease or the service lives of the improvements,
whichever is shorter. Assets under construction are not depreciated until placed into service.
Impairment of Long-Lived Assets — The Company evaluates long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying value of an asset may not be
recoverable in accordance with ASC 360-10-35 Property Plant and Equipment Overall Subsequent
Measurement, previously FASB Statement No. 144, Accounting for the Impairment or Disposal of Long
Lived-Assets. Assets are considered to be impaired if the carrying value may not be recoverable
based upon management’s assessment of the following events or changes in circumstances:
| • | significant changes in the Company’s strategic business objectives and utilization of the assets; | ||
| • | a determination that the carrying value of such assets can not be recovered through undiscounted cash flows; | ||
| • | loss of legal ownership or title to the assets; or | ||
| • | the impact of significant negative industry or economic trends. |
If the Company believes an asset to be impaired, the impairment recognized is the amount by
which the carrying value of the assets exceeds the fair value of the assets. Any write-downs would
be treated as permanent reductions in the carrying amount of the asset and an operating loss would
be recognized. No asset impairment was recognized during the year ended December 31, 2009. During
the years ended December 31, 2007 and 2008, asset impairments of approximately $6.6 million and
$0.5 million, respectively, were recognized as described in Note 5 — Property and Equipment.
Accounts Payable and Accrued Expenses — All liabilities, including accounts payable and
accrued expenses, are recorded consistent with the definition of liabilities and accrual
accounting.
Income Taxes —Deferred income tax assets and liabilities are recorded for the expected future
tax consequences of temporary differences between the financial statement carrying amounts and the
income tax basis of assets and liabilities. A valuation allowance is recorded to reduce net
deferred income tax assets to amounts that are more likely than not to be realized (see Note 14).
Income tax positions are considered for uncertainty in accordance with ASC 740-10-25 Income
Taxes Overall Recognition, previously FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes — an interpretation of FASB Statement No. 109 (“FIN 48”). The Company believes that
its income tax filing positions and deductions will be sustained on audit and does not anticipate
any adjustments that will result in a material change to its financial position. Therefore, no
reserves for uncertain income tax positions have been recorded.
Significant management judgment is involved in determining the provision for income taxes,
deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax
assets. Due to uncertainties related to deferred tax assets as a result of the history of operating
losses, a valuation allowance has been established against the gross deferred tax asset balance.
The valuation allowance is based on management’s estimates of taxable income by jurisdiction in
which the Company operates and the period over which deferred tax assets will be recoverable. In
the event that actual results differ from these estimates or the Company adjusts these estimates in
future periods, a change in the valuation allowance may be needed, which could materially impact
the Company’s financial position and results of operations.
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Contingencies — Contingencies are recorded in accordance with ASC 450 Contingencies,
previously FASB Statement No. 5, Accounting for Contingencies. Accordingly, the Company records a
loss contingency for a liability when it is both probable that a liability has been incurred and
the amount of the loss can be reasonably estimated.
Stock-Based Compensation — As of December 31, 2009, the Company had three active stock-based
compensation plans, which are described more fully in Note 10. The Company accounts for all
share-based payments to employees, including grants of stock awards and the compensatory elements
of the employee stock purchase plan in accordance with ASC 718 Compensation- Stock Compensation
(“ASC 718”), previously FASB Statement No. 123R Share-based Payment. ASC 718 requires all
share-based payments to employees, including grants of stock options and the compensatory elements
of employee stock purchase plans, to be recognized in the income statement based upon the fair
value of the awards at the grant date. The Company uses the Black-Scholes option valuation model
to estimate the grant date fair value of employee stock options and the compensatory elements of
employee stock purchase plans.
Warrants — The Company has issued warrants to purchase shares of its common stock. Warrants
have been accounted for as equity in accordance with the provisions of ASC 815-40 Derivatives and
Hedging, Contracts in an Entity’s Own Stock, previously EITF Issue No. 00-19: Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.
Comprehensive Income (Loss) — Other Comprehensive Income (loss) (OCI) is recorded in
accordance with ASC 220-10-45 Comprehensive Income, Overall, Other Presentation, previously FASB
Statement No. 130, “Reporting Comprehensive Income”, which requires that all components of
comprehensive income (loss) be reported in the financial statements in the period in which they are
recognized. OCI includes certain changes in stockholders’ equity that are excluded from net income.
Specifically, the Company includes in OCI unrealized gains and losses on its available-for-sale
securities and cumulative translation gains and losses.
Research and Development Expenses — Research and development expenses consist primarily of
costs associated with the clinical trials of the Company’s product candidates, manufacturing
supplies and other development materials, including raw material purchases of insulin, compensation
and other expenses for research and development personnel, costs for consultants and related
contract research, facility costs, and depreciation. Research and development costs, which are net
of any tax credit exchange recognized for the Connecticut state research and development credit
exchange program, are expensed as incurred consistent with ASC 730-10 Research and Development,
Overall, previously FASB Statement No. 2, Accounting for Research and Development Costs.
Clinical Trial Expenses — Clinical trial expenses, which are reflected in research and
development expenses in the accompanying statements of operations, result from obligations under
contracts with vendors, consultants, and clinical site agreements in connection with conducting
clinical trials. The financial terms of these contracts are subject to negotiations which vary from
contract to contract and may result in payment flows that do not match the periods over which
materials or services are provided to the Company under such contracts. The appropriate level of
trial expenses are reflected in the Company’s financial statements by matching period expenses with
period services and efforts expended. These expenses are recorded according to the progress of the
trial as measured by patient progression and the timing of various aspects of the trial. Clinical
trial accrual estimates are determined through discussions with internal clinical personnel and
outside service providers as to the progress or state of completion of trials, or the services
completed. Service provider status is then compared to the contractually obligated fee to be paid
for such services. During the course of a clinical trial, the Company may adjust the rate of
clinical expense recognized if actual results differ from management’s estimates. The date on which
certain services commence, the level of services performed on or before a given date and the cost
of the services are often judgmental.
Interest Expense — Interest costs are expensed as incurred, except to the extent such
interest is related to construction in progress, in which case interest is capitalized. Interest
expense, net, for the years ended December 31, 2007, 2008 and 2009 was $3.4 million, $2.3 million
and $10.4 million, respectively. Interest costs capitalized for the years ended December 31, 2008
and 2009 were $2.5 million and $0.1 million, respectively.
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net Loss Per Share of Common Stock — Basic net loss per share excludes dilution for
potentially dilutive securities and is computed by dividing loss applicable to common stockholders
by the weighted average number of common shares outstanding during the period. Diluted net loss per
share reflects the potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. Potentially dilutive securities are
excluded from the computation of diluted net loss per share for all of the periods presented in the
accompanying statements of operations because the reported net loss in each of these periods
results in their inclusion being antidilutive.
Potentially dilutive securities outstanding are summarized as follows:
| December 31, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
Exercise of common stock options |
6,886,657 | 5,591,101 | 6,403,498 | |||||||||
Conversion of senior convertible notes into common stock |
5,117,523 | 5,117,523 | 5,117,523 | |||||||||
Exercise of common stock warrants |
2,882,873 | 2,882,873 | 2,882,873 | |||||||||
Vesting of restricted stock units |
1,359,662 | 5,947,408 | 3,419,533 | |||||||||
Exit or Disposal Activities — The obligations related to exit or disposal obligations,
including reductions in force, are accounted for in accordance with ASC 420-10-30 Exit or Disposal
Cost Obligations, Initial Measurement (“ASC 420-10-30”), previously FASB Statement No. 146,
Accounting for Costs Associated with Exit or Disposal Activities and EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Costs to Exit and Disposal Activity
(Including Certain Costs Incurred in a Restructuring). In accordance with ASC 420-10-30, a
liability for costs associated with an exit or disposal activity is recognized when the liability
is incurred and establishes that fair value is the objective for initial measurements of the
liability.
Recently Issued Accounting Standards — In October of 2009, the FASB ratified the EITF
consensus on EITF Issue No. 08-1 Revenue Arrangements with Multiple Deliverables, and issued
Accounting Standards Update (“ASU”) 2009-13 which amends the guidance in ASC 605-25 on
multiple-element revenue arrangements. This guidance addresses the unit of accounting for
arrangements involving multiple deliverables and how arrangement consideration should be allocated
to the separate units of accounting, when applicable. The ASU is effective for fiscal year
beginning on or after June 15, 2010. Early adoption is permitted. Adoptions of this guidance is
expected to have a significant effect on how revenue arrangements entered into subsequent to
January 1, 2011 are reflected in the financial statements.
3. Investment in securities
The following is a summary of the available-for-sale securities classified as current assets
(in thousands).
| December 31, | December 31, | |||||||||||||||||||||||
| 2008 | 2009 | |||||||||||||||||||||||
| Gross | Gross | |||||||||||||||||||||||
| Unrealized | Cost | Unrealized | Fair | |||||||||||||||||||||
| Cost Basis | Gain | Fair Value | Basis | Loss | Value | |||||||||||||||||||
Available-for-sale securities |
$ | 18,549 | $ | 295 | $ | 18,844 | $ | 2,761 | $ | (286 | ) | $ | 2,475 | |||||||||||
The Company’s available-for-sale securities at December 31, 2008 consist principally of US
agency securities, which are stated at fair value based on quoted prices for similar securities in
active markets (Level 2 in the fair value hierarchy). The Company’s available-for-sale securities
at December 31, 2009 consist principally of a $2.0 million certificate of deposit with a maturity
greater than 90 days, held as collateral for foreign exchange hedging instruments, and a common
stock investment. The certificate of deposit is stated at fair value based on quoted prices for
similar instruments in an active market (Level 2 in the fair value hierarchy) and the common stock
investment is stated at fair value based on quoted prices in an active market (Level 1 in the fair
value hierarchy). The Company’s policy is to maintain a highly liquid short-term investment
portfolio. Proceeds from the sales and maturities of available-for-sale securities amounted to
approximately $286.7 million, $46.1 million and $17.8 million for the years ended December 31,
2007, 2008 and 2009, respectively. Gross realized gains and losses for available-for-sale
securities were insignificant for the years ended December 31, 2007, 2008 and 2009. Gross realized
gains and losses
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
for available-for-sale securities are recorded as other income (expense). The cost of
securities sold is based on the specific identification method. Unrealized gains and losses for
available-for-sale securities were a gain of $295,000 for the year ended December 31, 2008 and a
loss of $581,000 for the year ended December 31, 2009. Unrealized gains and losses are included in
other comprehensive income (loss).
4. State research and development credit exchange receivable
The State of Connecticut provides certain companies with the opportunity to exchange certain
research and development income tax credit carryforwards for cash in exchange for forgoing the
carryforward of the research and development income tax credits. The program provides for an
exchange of research and development income tax credits for cash equal to 65% of the value of
corporation tax credit available for exchange. Estimated amounts receivable under the program are
recorded as a reduction of research and development expenses. During the years ended December 31,
2007, 2008 and 2009, research and development expenses were offset by $0.8 million, $1.8 million
and $1.3 million, respectively, in connection with the program.
5. Property and equipment
Property and equipment consist of the following (dollar amounts in thousands):
| Estimated | ||||||||||||
| Useful | ||||||||||||
| Life | December 31, | |||||||||||
| (Years) | 2008 | 2009 | ||||||||||
Land |
— | $ | 5,273 | $ | 5,273 | |||||||
Buildings |
39-40 | 53,786 | 54,966 | |||||||||
Building improvements |
5-40 | 111,346 | 113,188 | |||||||||
Machinery and equipment |
3-15 | 70,633 | 72,958 | |||||||||
Furniture, fixtures and office equipment |
5-10 | 6,622 | 5,312 | |||||||||
Computer equipment and software |
3 | 14,818 | 15,840 | |||||||||
Leasehold improvements |
184 | 172 | ||||||||||
Construction in progress |
15,165 | 6,261 | ||||||||||
| 277,827 | 273,970 | |||||||||||
Less accumulated depreciation and amortization |
(51,391 | ) | (65,741 | ) | ||||||||
Property and equipment — net |
$ | 226,436 | $ | 208,229 | ||||||||
Leasehold improvements are amortized over four years which is the shorter of the term of the
lease or the service lives of the improvements. Depreciation and amortization expense related to
property and equipment for the years ended December 31, 2007, 2008 and 2009, and the cumulative
period from February 14, 1991 (date of inception) to December 31, 2009 was $8.5 million, $11.8
million, $18.2 million and $77.6 million, respectively. Capitalized interest during the years ended
December 31, 2007, 2008 and 2009 was $1.4 million, $2.5 million and $0.1 million, respectively.
In December 2007, the Company determined that machinery being built for commercial
manufacturing use would no longer be used for this purpose and had no other further alternative use
other than for research related to AFREZZA. Accordingly, the Company expensed to research and
development the $5.0 million carrying value of the machinery previously included in construction in
progress. Additionally, in November 2007, the Company initiated a plan to sell certain
manufacturing machines. A charge in the amount of $1.6 million is reflected in the research and
development expenses in the accompanying statement of operations for the year ended December 31,
2007 to write down the machines being held for sale to their estimated fair value of $1.6 million.
In December 2008, the Company determined that software previously purchased would no longer be
utilized, resulting in an impairment charge of $459,000.
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In December of 2009, the Company recognized a loss on disposal of approximately $12.8 million
in research and development expense related to the abandonment of first-generation inhaler specific
assets which would no longer be used as the Company pursued the commercialization of the
next-generation device.
6. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities are comprised of the following (in thousands):
| December 31, | ||||||||
| 2008 | 2009 | |||||||
Salary and related expenses |
$ | 12,452 | $ | 13,362 | ||||
Research and clinical trial costs |
13,438 | 3,169 | ||||||
Accrued interest |
204 | 2,065 | ||||||
Construction in progress |
3,327 | 203 | ||||||
Other |
8,421 | 3,535 | ||||||
Accrued expenses and other current liabilities |
$ | 37,842 | $ | 22,334 | ||||
7. Related-party loan arrangement
In October 2007, the Company entered into a $350.0 million loan arrangement with its principal
stockholder. Under the arrangement, the Company can borrow up to a total of $350.0 million. On
February 26, 2009, the promissory note underlying the loan arrangement was revised as a result of
the principal stockholder being licensed as a finance lender under the California Finance Lenders
Law. Accordingly, the lender was revised to The Mann Group LLC, an entity controlled by the
Company’s principal stockholder. Interest will accrue on each outstanding advance at a fixed rate
equal to the one-year LIBOR rate as reported by the Wall Street Journal on the date of such advance
plus 3% per annum and will be payable quarterly in arrears. Principal repayment is due on December
31, 2011. At any time after January 1, 2010, the principal stockholder can require the Company to
prepay up to $200.0 million in advances that have been outstanding for at least 12 months. If the
principal stockholder exercises this right, the Company will have until the earlier of 180 days
after the principal stockholder provides written notice or December 31, 2011 to prepay such
advances. The principal stockholder has agreed not to exercise his prepayment right if such
prepayment would require the use of existing working capital resources to repay the loan. In the event of
a default, all unpaid principal and interest either becomes immediately due and payable or may be
accelerated at the principal stockholder’s option, and the interest rate will increase to the
one-year LIBOR rate calculated on the date of the initial advance or in effect on the date of
default, whichever is greater, plus 5% per annum. Any borrowings under the loan arrangement will be
unsecured. The loan arrangement contains no financial covenants. There are no warrants associated
with the loan arrangement, nor are advances convertible into the Company’s common stock.
The amount outstanding under the arrangement was $30.0 million and $165.0 million at December
31, 2008 and 2009, respectively. As of December 31, 2009, the Company had accrued interest of $1.9
million related to the amount outstanding.
8. Senior convertible notes
On December 12, 2006, the Company completed an offering of $115.0 million aggregate principal
amount of 3.75% Senior Convertible Notes due 2013 (the “Notes”), including $15.0 million aggregate
principal amount of the Notes sold pursuant to the underwriters’ over-allotment option that was
exercised in full. The Notes are governed by the terms of an indenture dated as of November 1, 2006
and a First Supplemental Indenture, dated as of December 12, 2006. The Notes bear interest at the
rate of 3.75% per year on the principal amount of the Notes, payable in cash semi-annually in
arrears on June 15 and December 15 of each year, beginning June 15, 2007. The Company had accrued
interest of $192,000 and $192,000 related to the Notes for the years ended December 31, 2008 and
2009, respectively. The Notes are general, unsecured, senior obligations of the Company and
effectively rank junior in right of payment to all of the Company’s secured debt, to the extent of
the value of the assets securing such debt, and to the debt and all other liabilities of the
Company. The maturity date of the Notes is December 15,
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2013 and payment is due in full on that date for unconverted securities. Holders may convert, at any
time prior to the close of business on the business day immediately preceding the stated maturity
date, any outstanding Notes into shares of the Company’s common stock at an initial conversion rate
of 44.5002 shares per $1,000 principal amount of Notes, which is equal to a conversion price of
approximately $22.47 per share, subject to adjustment. Except in certain circumstances, if the
Company undergoes a fundamental change: (1) the Company will pay a make-whole premium on the Notes
converted in connection with a fundamental change by increasing the conversion rate on such Notes,
which amount, if any, will be based on the Company’s common stock price and the effective date of
the fundamental change, and (2) each holder of the Notes will have the option to require the
Company to repurchase all or any portion of such holder’s Notes at a repurchase price of 100% of
the principal amount of the Notes to be repurchased plus accrued and unpaid interest, if any.
The Company incurred approximately $3.7 million in debt issuance costs which are recorded as
an offset to the debt in the accompanying balance sheet. These costs are being amortized to
interest expense using the effective interest method over the term of the Notes.
9. Common and preferred stock
Private Placements — On August 5, 2005, the Company closed a $175.0 million private placement
of common stock and the concurrent issuance of warrants for the purchase of additional shares of
common stock to accredited investors including the Company’s principal stockholder who purchased
$87.3 million of the private placement. The Company sold 17,132,000 shares of common stock in the
private placement, together with warrants to purchase up to 3,426,000 shares of common stock at an
exercise price of $12.228 per share which became exercisable on February 1, 2006 and expire on
August 5, 2010. In connection with this private placement, the Company paid $4.5 million in
commissions to the placement agents and incurred $300,000 in other offering expenses which resulted
in net proceeds of approximately $170.2 million.
On October 2, 2007, the Company sold 15,940,489 shares of the Company’s common stock to its
principal stockholder at a price per share of $9.41 and 11,074,197 shares of common stock to other
investors at a price per share of $9.03. The sale of common stock resulted in aggregate net
proceeds to the Company of approximately $249.8 million after deducting offering expenses.
Public Equity Offering — On December 12, 2006, the Company closed the sale of 20,000,000
shares of its common stock at a public offering price of $17.42 per share and on December 19, 2006,
closed the sale of an additional 3,000,000 shares of its common stock at a public offering price of
$17.42 per share pursuant to an over-allotment option granted to the underwriters of the offering.
Approximately 5.8 million shares were sold to certain of the Company’s officers and directors,
including 5.75 million shares sold to the principal stockholder. In connection with this offering,
the Company paid approximately $15.0 million in underwriting fees and incurred approximately $1.1
million in other offering expenses which resulted in net proceeds of approximately $384.7 million.
On August 5, 2009, the Company closed the sale of 8,360,000 shares of its common stock,
including 960,000 shares sold pursuant to the full exercise of an over-allotment option previously
granted to the underwriters of the offering, at a public offering price of $7.35 per share. The
Company’s principal stockholder purchased 1,000,000 of these shares from the underwriters at a
price per share of $8.11. The sale of common stock resulted in aggregate net proceeds to the
Company of approximately $59.7 million after deducting offering expenses.
Common Stock — In May 2007, the Company’s stockholders approved an increase in the Company’s
authorized shares of common stock from 90,000,000 to 150,000,000. As of December 31, 2009,
113,025,291 shares of common stock are issued and outstanding.
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company had reserved shares of common stock for issuance as follows:
| December 31, | December 31, | |||||||
| 2008 | 2009 | |||||||
Exercise of common stock options |
5,591,101 | 6,403,498 | ||||||
Conversion of senior convertible notes into common stock |
5,117,523 | 5,117,523 | ||||||
Exercise of common stock warrants |
2,882,873 | 2,882,873 | ||||||
Vesting of restricted stock units |
5,947,408 | 3,419,533 | ||||||
| 19,538,905 | 17,823,427 | |||||||
Preferred Stock — The Company is authorized to issue 10,000,000 shares of preferred stock. As
of December 31, 2009, no shares of preferred stock are issued and outstanding.
Registration rights — In August 2007, the registration rights of the holders of 17,132,000
shares of common stock together with warrants to purchase up to 2,882,873 shares of common stock,
all of which were issued in the August 2005 private placement, expired. All of the warrants
remained outstanding as of December 31, 2009.
10. Stock award plans
As of December 31, 2009, the Company has three active stock-based compensation plans— the
2004 Equity Incentive Plan (the “Plan”), the 2004 Non-Employee Directors’ Stock Option Plan (the
“NED Plan”), and the 2004 Employee Stock Purchase Plan (the “ESPP”). The Plan provides for the
granting of stock awards including stock options and restricted stock units, to employees,
directors and consultants. The NED Plan provides for the automatic, non-discretionary grant of
options to the Company’s non-employee directors. Awards also remain outstanding at December 31,
2009 under the following inactive plans: the CTL Plan and the AlleCure Plan. There are also options
outstanding to the Company’s principal stockholder at December 31, 2009 that were not granted under
any plan; these options were granted during the year ended December 31, 2002, vested over four
years, and have an exercise price of $25.23 per share. The following table summarizes information
about the Company’s stock-based award plans as of December 31, 2009:
| Outstanding | Shares Available | |||||||||||
| Outstanding | Restricted | for | ||||||||||
| Options | Stock Units | Future Issuance | ||||||||||
2004 Equity Incentive Plan |
5,602,292 | 3,419,533 | 6,105,566 | |||||||||
2004 Non-Employee Directors’ Stock Option Plan |
537,500 | 294,500 | ||||||||||
CTL and AlleCure Plans |
22,735 | |||||||||||
Options outside of any plan granted to principal stockholder |
240,971 | |||||||||||
Total |
6,403,498 | 3,419,533 | 6,400,066 | |||||||||
The Company’s board of directors determines eligibility, vesting schedules and exercise prices
for stock awards granted under the Plan. The NED Plan provides for automatic, non-discretionary
grant of options to the Company’s non-employee directors. Options and other stock awards under the
Plan and the NED Plan expire not more than ten years from the date of the grant and are exercisable
upon vesting. Stock options generally vest over four years. Current stock option grants vest and
become exercisable at the rate of 25% after one year and ratably on a monthly basis over a period
of 36 months thereafter. Restricted stock units generally vest at a rate of 25% per year over four
years with consideration satisfied by service to the Company. Certain performance-based awards vest
upon achieving three pre-determined performance milestones which are expected to occur over periods
ranging from 27 months to 42 months from the date of grant. The Plan provides for full acceleration
of vesting if an employee is terminated within thirteen months of a change in control, as defined.
On February 6, 2008, the Compensation Committee approved a management proposal designed to
encourage employee retention. The proposal involved the issuance of restricted stock units to the
majority of employees and executive officers of the Company. A total of 1,678,674 restricted stock
units were granted under the Plan. These units fully vested on June 30, 2009. Stock compensation
expense associated with these grants was recorded on a straight line basis from February 6, 2008
through June 30, 2009 and was approximately $11.0 million.
On May 22, 2008, the Company’s stockholders approved an amendment to the Plan to increase the
number of shares of common stock available for issuance under the plan by 5,000,000 shares.
On July 9, 2008, the Company announced an Offer to Exchange Outstanding Options to Purchase
Common Stock (the “Offer”) under which the Company offered eligible employees the opportunity to
exchange up to an aggregate of 5,417,840 shares underlying their out-of-the money stock options, on
a grant by grant basis, for a reduced number
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of restricted stock units. The Offer expired on August 6, 2008. Pursuant to the Offer, the
Company accepted for exchange options to purchase an aggregate of 4,493,509 shares of the Company’s
common stock and issued restricted stock units covering an aggregate of 2,246,781 shares of the
Company’s common stock. For the restricted stock units issued pursuant to the offer, both the
remaining estimated unamortized stock compensation expense related to the exchanged options of
approximately $13.9 million and the estimated incremental stock compensation expense resulting from
the exchange of approximately $3.7 million is being amortized over the vesting periods of the
restricted stock units.
In March 2004, the Company’s board of directors approved the ESPP, which became effective upon
the closing of the Company’s initial public offering. Initially, the aggregate number of shares
that could be sold under the plan was 2,000,000 shares of common stock. On January 1 of each year,
for a period of ten years beginning January 1, 2005, the share reserve automatically increases by
the lesser of: 700,000 shares, 1% of the total number of shares of common stock outstanding on that
date, or an amount as may be determined by the board of directors. However, under no event can the
annual increase cause the total number of shares reserved under the ESPP to exceed 10% of the total
number of shares of capital stock outstanding on December 31 of the prior year. On January 1, 2007,
2008 and 2009 the ESPP share reserve was increased by 700,000, 700,000 and 700,000 shares,
respectively. In November 2006, the Company’s board of directors approved a decrease of 2.6 million
shares to the reserve in order to make additional shares available for the Company’s December 2006
offerings (see Note 1 — Description of Business and Basis of Presentation— Public Offerings). As
of December 31, 2009, 1,354,970 shares were available for issuance under the ESPP. For the years
ended December 31, 2007, 2008 and 2009 the Company sold 124,011, 349,317 and 322,518 shares,
respectively, of its common stock to employees participating in the ESPP.
In accordance with ASC 718, share-based payment transactions are recognized as compensation
cost based on the fair value of the instrument on the date of grant. The Company accounts for
non-employee stock-based compensation expense based on the estimated fair value of the options,
determined using the Black-Scholes option valuation model and amortizes such expense on a
straight-line basis. In November 2004, pursuant to assignment agreements with two consultants, the
Company issued 200 shares of its common stock under the Plan. The Company agreed to issue 99,800
additional shares upon the achievement of certain milestones specified in consulting agreements and
for the year ended December 31, 2004, the Company recorded approximately $1.1 million in
stock-based compensation expense related to these agreements. In November 2005, 39,800 of the
99,800 shares were issued to the consultants and the Company decreased stock-based compensation
expense by approximately $146,000 based on the fair market value of the shares when issued. In
September 2007, the next milestone was considered probable and the Company decreased stock
compensation expense by approximately $115,000 based on the fair market value of the shares. In
October 2007, the second milestone was met and 30,000 shares were issued. In December 2007, the
third milestone was considered probable of achievement and the Company recognized stock
compensation expense of approximately $238,000. In January 2008, the final milestone was met and
30,000 shares were issued. As of December 31, 2009, there were 313,191 options outstanding to
consultants.
During the years ended December 31, 2007, 2008 and 2009 the Company recorded stock-based
compensation expense related to its stock award plans and the ESPP of $17.6 million, $24.8 million
and $20.2 million respectively.
Total stock-based compensation expense/(benefit) recognized in the accompanying statements of
operations is as follows (in thousands):
| Year Ended December 31, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
Employee-related |
$ | 17,513 | $ | 24,716 | $ | 19,653 | ||||||
Consultant-related |
132 | 77 | 566 | |||||||||
Total |
$ | 17,645 | $ | 24,793 | $ | 20,219 | ||||||
Total stock-based compensation expense/(benefit) recognized in the accompanying statements of
operations is included in the following categories (in thousands):
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Year Ended December 31, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
Research and development |
$ | 9,749 | $ | 14,350 | $ | 12,115 | ||||||
General and administrative |
7,896 | 10,443 | 8,104 | |||||||||
Total |
$ | 17,645 | $ | 24,793 | $ | 20,219 | ||||||
Included in stock compensation expense is approximately $165,100 in expense related to the
modification of stock awards for two individuals during the year ended December 31, 2009. Under the
terms of the modification of stock awards, these individuals’ options that were granted during
their association with the Company will continue to vest over their respective modification
periods.
The Company uses the Black-Scholes option valuation model to estimate the grant date fair
value of employee stock options. The expected life of the option is estimated using the
“simplified” method as provided in SEC Staff Accounting Bulletin No. 107 (SAB No. 107). Under this
method, the expected life equals the arithmetic average of the vesting term and the original
contractual term of the options. The Company estimates volatility using the historical volatility
of its stock. The Company has selected risk-free interest rates based on U.S. Treasury Securities
with an equivalent expected term in effect on the date the options were granted. Additionally, the
Company uses historical data and management judgment to estimate stock option exercise behavior and
employee turnover rates to estimate the number of stock option awards that will eventually vest.
The Company calculated the fair value of employee stock options for the years ended December 31,
2008 and 2009 using the following assumptions:
| Year Ended December 31, | ||||||||
| 2008 | 2009 | |||||||
Risk-free interest rate |
2.64% — 3.69 | % | 2.16% — 3.07 | % | ||||
Expected lives |
5.6 — 6.1 years | 5.8 — 6.1 years | ||||||
Volatility |
55% — 77 | % | 78% — 80 | % | ||||
Dividends |
— | — | ||||||
The following table summarizes information about stock options outstanding:
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Grant | |||||||||||||||
| Number | Exercise | Date | Aggregate | |||||||||||||
| of | Price | Fair Value | Intrinsic | |||||||||||||
| Shares | per Share | per Share | Value ($000) | |||||||||||||
Outstanding at January 1, 2007 |
6,216,698 | 13.94 | ||||||||||||||
Granted |
1,639,845 | 10.48 | $ | 5.86 | ||||||||||||
Exercised |
(606,833 | ) | 8.11 | $ | 1,252 | |||||||||||
Forfeit |
(252,016 | ) | 14.11 | |||||||||||||
Expired |
(111,036 | ) | 12.66 | |||||||||||||
Outstanding at December 31, 2007 |
6,886,658 | 13.64 | ||||||||||||||
Granted |
3,903,370 | 3.43 | $ | 2.25 | ||||||||||||
Exercised |
— | 0.00 | ||||||||||||||
Forfeit |
(2,669,230 | ) | 12.56 | |||||||||||||
Expired |
(2,529,697 | ) | 13.86 | |||||||||||||
Outstanding at December 31, 2008 |
5,591,101 | 6.97 | $ | 1,292 | ||||||||||||
Granted |
1,156,400 | 7.41 | $ | 5.15 | ||||||||||||
Exercised |
(94,413 | ) | 4.06 | |||||||||||||
Forfeit |
(153,383 | ) | 3.67 | |||||||||||||
Expired |
(96,207 | ) | 10.43 | |||||||||||||
Outstanding at December 31, 2009 |
6,403,498 | 7.20 | $ | 20,422 | ||||||||||||
Vested or expected to vest at December 31, 2009 |
6,089,899 | 7.32 | $ | 19,201 | ||||||||||||
Exercisable at December 31, 2009 |
2,938,321 | 9.86 | $ | 6,931 | ||||||||||||
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the status of the Company’s nonvested stock options for the year ended December
31, 2009, is presented below:
| Weighted | ||||||||
| Average | ||||||||
| Number | Grant Date | |||||||
| of | Fair Value | |||||||
| Shares | per Share | |||||||
Nonvested at January 1, 2009 |
3,986,022 | $ | 2.64 | |||||
Granted |
1,156,400 | $ | 5.15 | |||||
Vested |
(1,523,862 | ) | $ | 3.05 | ||||
Forfeited |
(153,383 | ) | $ | 2.41 | ||||
Nonvested at December 31, 2009 |
3,465,177 | $ | 3.32 | |||||
Cash received from the exercise of options during the years ended December 31, 2007 and 2009 was
approximately $4.9 million and $383,000, respectively. There were no stock options exercised during
the year ended December 31, 2008. The weighted-average remaining contractual terms for options
outstanding, vested or expected to vest, and exercisable at December 31, 2009 was 8.9 years, 7.4
years and 5.9 years, respectively.
A summary of restricted stock units activity for the years ended December 31, 2007, 2008 and
2009 is presented below:
| Weighted | ||||||||
| Average | ||||||||
| Number | Grant Date | |||||||
| of | Fair Value | |||||||
| Shares | per Share | |||||||
Outstanding at January 1, 2007 |
776,653 | 16.26 | ||||||
Granted |
876,575 | 9.81 | ||||||
Vested |
(202,009 | ) | 15.63 | |||||
Forfeited |
(91,557 | ) | 13.54 | |||||
Outstanding at December 31, 2007 |
1,359,662 | 12.36 | ||||||
Granted |
5,135,000 | 6.63 | ||||||
Vested |
(328,449 | ) | 12.94 | |||||
Forfeited |
(218,805 | ) | 8.43 | |||||
Outstanding at December 31, 2008 |
5,947,408 | 7.51 | ||||||
Granted |
1,095,900 | 7.46 | ||||||
Vested |
(3,145,375 | ) | 7.56 | |||||
Forfeited |
(478,400 | ) | 5.33 | |||||
Outstanding at December 31, 2009 |
3,419,533 | 7.50 | ||||||
The total fair value of restricted stock units vested during the years ended December 31,
2007, 2008 and 2009 was $1.9 million, $1.2 million and $23.6 million, respectively. The
weighted-average remaining contractual terms for restricted stock units outstanding at December 31,
2009 was 8.8 years. As of December 31, 2009, there were 49,988 restricted stock units outstanding
to five consultants.
As of December 31, 2009, there was $12.1 million and $22.4 million of unrecognized
compensation cost related to options and restricted stock units, respectively, which is expected to
be recognized over the weighted average vesting period of 2.3 years.
11. Warrants
During 1995 and 1996, the Company issued warrants to purchase shares of common stock. The
warrants contain provisions for the adjustment of the exercise price and the number of shares
issuable upon the exercise of the warrant in the event the Company declares any stock dividends or
effects any stock split, reclassification or
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
consolidation of its common stock. The warrants also contain a provision that provides for an
adjustment to the exercise price and the number of shares issuable in the event that the Company
issues securities for a per share price less than a specified price. As of December 31, 2004,
warrants to purchase 131,628 shares of common stock were outstanding. During the second quarter
ended June 30, 2005, warrants to purchase 110,888 shares of common stock were exchanged for 24,210
shares of common stock resulting in stock-based compensation expense of $245,000 based on a fair
market value of the common stock of $10.12 per share. Warrants to purchase 8,304 shares of common
stock expired during 2005. The remaining warrants to purchase 12,459 shares of common stock at a
weighted average exercise price of $12.64 per share all expired unexercised on December 1, 2007.
In connection with the sale of common stock in the private placement which closed on August 5,
2005, the Company concurrently issued warrants to purchase up to 3,426,000 shares of common stock
at an exercise price of $12.228 per share. See also Note 9 — Common and Preferred Stock — Private
Placement. These warrants became exercisable on February 1, 2006 and expire in August 2010. During
the year ended December 31, 2006, approximately 543,000 warrants were exercised and net settled for
approximately 339,000 shares. As of December 31, 2009, warrants to purchase 2,882,873 shares of
common stock remained outstanding. As of December 31, 2009, all warrants were exercisable.
12. Commitments and contingencies
Operating Leases — The Company leases certain facilities and equipment under various
operating leases, which expire at various dates through 2013. Future minimum rental payments
required under operating leases are as follows at December 31, 2009 (in thousands):
| Year Ending December 31, | ||||
2010 |
$ | 798 | ||
2011 |
10 | |||
2012 |
4 | |||
After 2012 |
2 | |||
Total minimum lease payments |
$ | 814 | ||
Rent expense under all operating leases for the years ended December 31, 2007, 2008 and 2009
was approximately $1.5 million, $1.7 million and $2.1 million, respectively.
Capital Leases — The Company’s capital leases were not material for the years ended December
31, 2007, 2008 and 2009.
Supply Agreement — In November 2007, the Company entered into a long-term supply agreement
with Organon N.V. (“Organon”) pursuant to which Organon will manufacture and supply specified
quantities of recombinant human insulin. The initial term of this supply agreement will end on
December 31, 2012 and can be automatically extended for consecutive two-year terms under specified
circumstances. As of December 31, 2009, the Company has annual purchase commitments through the
remaining initial term aggregating to approximately $100 million. These purchases are expected to
be delivered from 2010 through 2012. If the Company terminates the supply agreement following
failure to obtain or maintain regulatory approval of AFREZZA or either party terminates the
agreement following the parties’ inability to agree after any regulatory authority mandated changes
to product specifications that relate specifically to the use of insulin in AFREZZA, the Company
will be required to pay Organon a specified termination fee if Organon is unable to sell certain
quantities of insulin to other parties.
Guarantees and Indemnifications — In the ordinary course of its business, the Company makes
certain indemnities, commitments and guarantees under which it may be required to make payments in
relation to certain transactions. The Company, as permitted under Delaware law and in accordance
with its Bylaws, indemnifies its officers and directors for certain events or occurrences, subject
to certain limits, while the officer or director is or was serving at the Company’s request in such
capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The
maximum amount of potential future indemnification is unlimited; however, the Company has a
director and officer insurance policy that may enable it to recover a portion of any future amounts
paid. The Company believes the fair value of these indemnification agreements is minimal. The
Company has not recorded any liability for these indemnities in the accompanying consolidated
balance sheets. However, the Company accrues for losses for any known contingent liability,
including those that may arise from indemnification provisions, when future payment is probable. No
such losses have been recorded to date.
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Litigation — The Company is involved in various legal proceedings and other matters. In
accordance with ASC 450 Contingencies, previously FASB Statement No. 5, Accounting for
Contingencies, the Company would record a provision for a liability when it is both probable that a
liability has been incurred and the amount of the loss can be reasonably estimated.
Licensing Arrangement — On October 12, 2006, the Company entered into an agreement with The
Technion Research and Development Foundation Ltd. (“TRDF”), an Israeli corporation affiliated with
the Technion-Israel Institute of Technology (the “Technion”) to license certain technology from
TRDF and to collaborate with TRDF in the further research in and the development and
commercialization of such technology. In exchange for the rights that the Company obtained under
this agreement, the Company agreed to pay to TRDF aggregate license fees of $3.0 million and to
issue to TRDF a total of 300,000 shares of the Company’s common stock. The license fees were to be
paid and the shares issued in three equal installments. The first installment occurred on October
18, 2006. The second installment was paid on December 3, 2007. The third installment was scheduled
to occur, subject to the accomplishment of certain milestones, on October 12, 2008. The Company had
also agreed to pay royalties to TRDF with respect to sales of certain products that contain or use
the licensed technology or are covered by patents included in the licensed technology or are
discovered through the use of the licensed technology. The Company agreed to pay up to $6.0 million
of the royalties in advance upon the receipt of specified regulatory approvals. The Company agreed
to pay to TRDF specified percentages of any lump-sum sub-license payments that the Company received
if it decided to sub-license the technology. The Company had also agreed to pay a total of $2.0
million to TRDF in three nearly equal installments to fund sponsored research to be conducted at
TRDF by a team led by a faculty member at Technion. The initial sponsored research payment was made
upon signing of the agreement. The second sponsored research payment occurred on December 3, 2007
and the third sponsored research payment was scheduled to occur, subject to the accomplishment of
certain milestones, on October 12, 2008. The Company had also agreed to retain the services of the
Technion faculty member as a consultant, for which the Company agreed to pay the consultant $60,000
per year and granted the individual an option to purchase 60,000 shares of the Company’s common
stock. Under the terms of the agreement, the Company issued 100,000 shares of common stock to TRDF
on October 12, 2006 and November 29, 2007, respectively. Additionally, $1.6 million in license fees
were paid on October 18, 2006 and December 3, 2007, respectively. In August of 2008, the Company
ended its agreement with TRDF and made no further payments for licensing fees in 2008.
13. Employee benefit plans
The Company administers a 401(k) Savings Retirement Plan (the “MannKind Retirement Plan”) for
its employees. For the years ended December 31, 2007, 2008 and 2009, the Company contributed
$821,000, $914,000 and $824,000 respectively, to the MannKind Retirement Plan.
14. Income taxes
Deferred income taxes reflect the tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting and income tax purposes. A valuation
allowance is established when uncertainty exists as to whether all or a portion of the net deferred
tax assets will be realized. Components of the net deferred tax asset as of December 31, 2008 and
2009 are approximately as follows (in thousands):
| December 31, | ||||||||
| 2008 | 2009 | |||||||
Deferred Tax Assets: |
||||||||
Net operating loss carryforwards |
$ | 424,497 | $ | 462,913 | ||||
Research and development credits |
37,415 | 44,597 | ||||||
Accrued expenses |
38,187 | 42,143 | ||||||
Non-qualified stock option expense |
21,546 | 20,024 | ||||||
Depreciation |
3,916 | 6,047 | ||||||
Total gross deferred tax assets |
525,561 | 575,724 | ||||||
Valuation allowance |
(525,561 | ) | (575,724 | ) | ||||
Net deferred tax assets |
$ | — | $ | — | ||||
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Table of Contents
MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s effective income tax rate differs from the statutory federal income tax rate as
follows for the years ended December 31, 2007, 2008 and 2009:
| December 31, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
Federal tax benefit rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State tax benefit, net of federal benefit |
— | — | — | |||||||||
Permanent items |
— | — | — | |||||||||
Intercompany transfer of intellectual property |
— | — | (18.0 | ) | ||||||||
Other |
— | — | — | |||||||||
Valuation allowance |
(35.0 | ) | (35.0 | ) | (17.0 | ) | ||||||
Effective income tax rate |
0.0 | % | 0.0 | % | 0.0 | % | ||||||
As required by ASC 740 Income Taxes (“ASC 740”), formerly FASB Statement No. 109, management
of the Company has evaluated the positive and negative evidence bearing upon the realizability of
its deferred tax assets. Management has concluded, in accordance with the applicable accounting
standards, that it is more likely than not that the Company may not realize the benefit of its
deferred tax assets. Accordingly, the net deferred tax assets have been fully reserved. Management
reevaluates the positive and negative evidence on an annual basis. During the years ended December
31, 2007, 2008 and 2009, the change in the valuation allowance was $135.4 million, $138.1 million
and $50.2 million, respectively, for income taxes.
At December 31, 2009, the Company had federal and state net operating loss carryforwards of
approximately $1.2 billion and $710.1 million available, respectively, to reduce future taxable
income and which will expire at various dates beginning in 2010 and 2012, respectively. As a result
of the Company’s initial public offering, an ownership change within the meaning of Internal
Revenue Code Section 382 occurred in August 2004. As a result, federal net operating loss and
credit carry forwards of approximately $216.0 million are subject to an annual use limitation of
approximately $13.0 million. The annual limitation is cumulative and therefore, if not fully
utilized in a year can be utilized in future years in addition to the Section 382 limitation for
those years. The federal net operating losses generated subsequent to the Company’s initial public
offering in August 2004 are currently not subject to any such limitation as there have been no
ownership changes since August 2004 within the meaning of Internal Revenue Code Section 382. At
December 31, 2009, the Company had research and development credits of $53.5 million that expire at
various dates through 2030.
The Company has evaluated the impact of ASC 740, previously FIN 48, on its
financial statements, which was effective beginning January 1, 2007. The evaluation of a tax
position in accordance with this guidance is a two-step process. The first step is recognition: The
enterprise determines whether it is more-likely-than-not that a tax position will be sustained upon
examination, including resolution of any related appeals or litigation processes, based on the
technical merits of the position. In evaluating whether a tax position has met the
more-likely-than-not recognition threshold, the enterprise should presume that the position will be
examined by the appropriate taxing authority that would have full knowledge of all relevant
information. The second step is measurement: A tax position that meets the more-likely-than-not
recognition threshold is measured to determine the amount of benefit to recognize in the financial
statements. The tax position is measured at the largest amount of benefit that is greater than 50
percent likely of being realized upon ultimate settlement. Tax positions that previously failed to
meet the more-likely-than-not recognition threshold should be recognized in the first subsequent
financial reporting period in which that threshold is met. Previously recognized tax positions that
no longer meet the more-likely-than-not recognition threshold should be derecognized in the first
subsequent financial reporting period in which that threshold is no longer met. The Company
believes that its income tax filing positions and deductions will be sustained on audit and does
not anticipate any adjustments that will result in a material change to its financial position.
Therefore, no reserves for uncertain income tax positions have been recorded. The cumulative
effect, if any, of applying ASC 740 is to be reported as an adjustment to the opening balance of
retained earnings in the year of adoption. The Company did not record a cumulative effect
adjustment related to the adoption of ASC 740. Tax years since 1993 remain subject to examination
by the major tax jurisdictions in which the Company is subject to tax.
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Table of Contents
MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
15. Related party transactions
The Company issued 8,550,446 shares of its common stock to its principal stockholder during
the year ended December 31, 2005 for proceeds of approximately $87.3 million. In connection with
this issuance, the board of directors approved the issuance of warrants to purchase 1,710,091
shares of the Company’s common stock at $12.228 per share, which expire on August 2, 2010. The
issuance of shares and warrants to the principal stockholder was on terms identical to the other
purchasers in the private placement, as approved by the Company’s board of directors.
During the year ended December 31, 2006 the principal stockholder purchased 5,750,000 shares
of common stock at $17.42 per share in the Company’s December 2006 equity offering on terms
identical to other purchasers resulting in proceeds of approximately $100.1 million to the Company.
In connection with the equity offering the Company paid $280,000 in filing fees related to the
principal stockholder’s filings made pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of
1976. During the year ended December 31, 2006, the Company borrowed $70.0 million from its
principal stockholder under the loan arrangement described in Note 7. On December 12, 2006, in
connection with the completion of their equity and convertible debt offerings, the Company paid
principal and interest of $70.0 million and $1.6 million, respectively, under the loan arrangement.
On October 2, 2007, the Company sold 15.9 million shares of the Company’s common stock to its
principal stockholder at a price per share of $9.41 and 11.1 million shares of common stock to
other investors at a price per share of $9.03. The sales of common stock resulted in aggregate net
proceeds to the Company of approximately $249.8 million after deducting offering expenses. Also, on
October 2, 2007, the Company entered into a loan arrangement with its principal stockholder to
borrow up to a total of $350.0 million. On February 26, 2009, the promissory note underlying the
loan arrangement was revised as a result of the principal stockholder being licensed as a finance
lender under the California Finance Lenders Law. Accordingly, the lender was revised to The Mann
Group LLC, an entity controlled by the Company’s principal stockholder. As of December 31, 2009,
the Company had borrowed $165.0 million under this agreement and had accrued interest of $1.9
million for the year ended December 31, 2009. See Note 7— Related-Party Loan Arrangement.
On August 5, 2009, the Company closed the sale of 8,360,000 shares of its common stock,
including 960,000 shares sold pursuant to the full exercise of an over-allotment option previously
granted to the underwriters of the offering, at a public offering price of $7.35 per share. The
Company’s principal stockholder purchased 1,000,000 of these shares from the underwriters at a
price per share of $8.11. The sale of common stock resulted in aggregate net proceeds to the
Company of approximately $59.7 million after deducting offering expenses.
Alfred E. Mann, who is the Company’s principal stockholder and chief executive officer, has
established the Alfred Mann Institute for Biomedical Development at the Technion (“AMI-Technion”)
to expedite the translation of intellectual property and technology of the Technion into commercial
medical products for the public benefit. Over a period of several years, Mr. Mann will establish a
$100 million endowment for AMI-Technion. Mr. Mann does not directly or indirectly have any interest
in TRDF (see Note 12 — Commitments and Contingencies — Licensing Arrangement).
In connection with certain meetings of the Company’s board of directors and on other occasions
when the Company’s business necessitated air travel for the Company’s principal stockholder and
other Company employees, the Company utilized the principal stockholder’s private aircraft, and the
Company paid the charter company that manages the aircraft on behalf of the Company’s majority
stockholder approximately $105,090, $130,000 and $136,800, respectively, for the years ended
December 31, 2007, 2008 and 2009 on the basis of the corresponding cost of commercial airfare.
These payments were approved by the audit committee of the board of directors.
The Company has entered into indemnification agreements with each of its directors and
executive officers, in addition to the indemnification provided for in its amended and restated
certificate of incorporation and amended and restated bylaws (see Note 12 — Commitments and
Contingencies — Guarantees and Indemnifications).
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
16. Selected quarterly financial data (unaudited)
The following unaudited selected quarterly financial data has been prepared on the same
basis as the audited information and includes all adjustments necessary to present fairly the
information set forth in the Company’s consolidated financial statements and notes herein. As a
development stage enterprise, the Company has experienced fluctuations in its quarterly results
related to the development of its lead product candidate, AFREZZA, and in its expansion of the
product candidate portfolio. The Company expects these fluctuations to continue in the future. Due
to these and other factors, the quarterly operating results are not indicative of the Company’s
future performance.
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
2008 |
||||||||||||||||
Net loss |
$ | (71,421 | ) | $ | (79,826 | ) | $ | (68,496 | ) | $ | (83,295 | ) | ||||
Net loss applicable to common stockholders |
$ | (71,421 | ) | $ | (79,826 | ) | $ | (68,496 | ) | $ | (83,295 | ) | ||||
Net loss per share applicable to common
stockholders — basic and diluted |
$ | (0.70 | ) | $ | (0.79 | ) | $ | (0.67 | ) | $ | (0.82 | ) | ||||
Weighted average common shares used to
compute basic and diluted net loss per
share applicable to common stockholders |
101,409 | 101,427 | 101,647 | 101,758 | ||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
2009 |
||||||||||||||||
Net loss |
$ | (59,412 | ) | $ | (55,604 | ) | $ | (45,555 | ) | $ | (59,533 | ) | ||||
Net loss applicable to common stockholders |
$ | (59,412 | ) | $ | (55,604 | ) | $ | (45,555 | ) | $ | (59,533 | ) | ||||
Net loss per share applicable to common
stockholders — basic and diluted |
$ | (0.58 | ) | $ | (0.54 | ) | $ | (0.42 | ) | $ | (0.53 | ) | ||||
Weighted average common shares used to
compute basic and diluted net loss per
share applicable to common stockholders |
102,030 | 102,322 | 108,779 | 112,860 | ||||||||||||
88