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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2006
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) |
(661) 775-5300
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
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
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in
Rule 12b-2 of the Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
As of April 27, 2006, there were 49,632,720 shares of the registrant’s common stock, $.01 par value
per share, outstanding.
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MANNKIND CORPORATION
Form 10-Q
For the Quarterly Period Ended March 31, 2006
Form 10-Q
For the Quarterly Period Ended March 31, 2006
TABLE OF CONTENTS
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MANNKIND CORPORATION AND SUBSIDIARY
(A Development Stage Company)
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
(In thousands except share data)
| March 31, 2006 | December 31, 2005 | |||||||
| (unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 45,889 | $ | 56,037 | ||||
Marketable securities |
56,700 | 89,597 | ||||||
State research and development credit exchange receivable — current |
1,044 | 1,194 | ||||||
Prepaid expenses and other current assets |
5,907 | 3,044 | ||||||
Total current assets |
109,540 | 149,872 | ||||||
Property and equipment — net |
80,289 | 76,183 | ||||||
State research and development credit exchange receivable — net of current portion |
1,875 | 2,031 | ||||||
Other assets |
287 | 285 | ||||||
Total |
$ | 191,991 | $ | 228,371 | ||||
Liabilities and Stockholders’ Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 4,008 | $ | 3,547 | ||||
Accrued expenses and other current liabilities |
20,249 | 17,818 | ||||||
Total current liabilities |
24,257 | 21,365 | ||||||
Other liabilities |
24 | 29 | ||||||
Total liabilities |
24,281 | 21,394 | ||||||
Commitments and contingencies |
||||||||
Stockholders’ equity: |
||||||||
Undesignated preferred stock, $0.01 par value — 10,000,000 shares authorized; no
shares issued or outstanding at March 31, 2006 and December 31, 2005 |
— | — | ||||||
Common stock, $0.01 par value — 90,000,000 shares authorized; 49,629,518 and
50,314,108 shares issued and outstanding at March 31, 2006 and December 31, 2005,
respectively |
496 | 503 | ||||||
Additional paid-in capital |
768,074 | 763,775 | ||||||
Deficit accumulated during the development stage |
(600,860 | ) | (557,301 | ) | ||||
Total stockholders’ equity |
167,710 | 206,977 | ||||||
Total |
$ | 191,991 | $ | 228,371 | ||||
See notes to financial statements.
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MANNKIND CORPORATION AND SUBSIDIARY
(A Development Stage Company)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share data)
| Cumulative period | ||||||||||||
| from February 14, | ||||||||||||
| 1991 (date of | ||||||||||||
| Three months ended | inception) to | |||||||||||
| March 31, | March 31, | |||||||||||
| 2006 | 2005 | 2006 | ||||||||||
Revenue |
$ | 100 | $ | — | $ | 2,958 | ||||||
Operating expenses: |
||||||||||||
Research and development |
35,950 | 18,696 | 334,350 | |||||||||
General and administrative |
9,138 | 3,951 | 107,113 | |||||||||
In-process research and development costs |
— | — | 19,726 | |||||||||
Goodwill impairment |
— | — | 151,428 | |||||||||
Total operating expenses |
45,088 | 22,647 | 612,617 | |||||||||
Loss from operations |
(44,988 | ) | (22,647 | ) | (609,659 | ) | ||||||
Other income (expense) |
50 | 14 | (1,842 | ) | ||||||||
Interest income |
1,380 | 472 | 10,658 | |||||||||
Loss before provision for income taxes |
(43,558 | ) | (22,161 | ) | (600,843 | ) | ||||||
Income taxes |
(1 | ) | (1 | ) | (17 | ) | ||||||
Net loss |
(43,559 | ) | (22,162 | ) | (600,860 | ) | ||||||
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 |
$ | (43,559 | ) | $ | (22,162 | ) | $ | (624,072 | ) | |||
Net loss per share applicable to common
stockholders — basic and diluted |
$ | (0.87 | ) | $ | (0.68 | ) | ||||||
Shares used to compute basic and diluted
net loss per share applicable to common
stockholders |
49,787 | 32,764 | ||||||||||
See notes to financial statements.
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MANNKIND CORPORATION AND SUBSIDIARY
(A Development Stage Company)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Cumulative | ||||||||||||
| period from | ||||||||||||
| February 14, | ||||||||||||
| 1991 (date of | ||||||||||||
| Three months ended | inception) to | |||||||||||
| March 31, | March 31, | |||||||||||
| 2006 | 2005 | 2006 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net loss |
$ | (43,559 | ) | $ | (22,162 | ) | $ | (600,860 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||||||
Depreciation and amortization |
2,000 | 1,811 | 32,637 | |||||||||
Stock-based compensation expense (benefit) |
3,711 | (685 | ) | 26,229 | ||||||||
Accrued interest on investments, net of amortization of premiums |
197 | — | 51 | |||||||||
Loss on sale and abandonment/disposal of property and equipment |
— | (2 | ) | 3,367 | ||||||||
In-process research and development |
— | — | 19,726 | |||||||||
Discount on stockholder notes below market rate |
— | — | 241 | |||||||||
Non-cash compensation expense of officer resulting from stockholder contribution |
— | — | 70 | |||||||||
Accrued interest expense on notes payable to stockholders |
— | — | 1,538 | |||||||||
Non-cash interest expense |
— | — | 3 | |||||||||
Accrued interest on notes |
— | — | (747 | ) | ||||||||
Goodwill impairment |
— | — | 151,428 | |||||||||
Loss on available-for-sale securities |
— | — | 229 | |||||||||
Changes in assets and liabilities: |
||||||||||||
State research and development credit exchange receivable |
306 | (366 | ) | (2,919 | ) | |||||||
Prepaid expenses and other current assets |
(2,863 | ) | 238 | (5,907 | ) | |||||||
Other assets |
(2 | ) | (142 | ) | (287 | ) | ||||||
Accounts payable |
461 | 1,618 | 4,008 | |||||||||
Accrued expenses and other current liabilities |
2,431 | (576 | ) | 20,249 | ||||||||
Other liabilities |
(5 | ) | (28 | ) | 22 | |||||||
Payment of deferred compensation |
— | — | — | |||||||||
Net cash used in operating activities |
(37,323 | ) | (20,294 | ) | (350,922 | ) | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Purchase of marketable securities |
(16,250 | ) | (66,900 | ) | (418,968 | ) | ||||||
Sales of marketable securities |
48,950 | 33,495 | 361,990 | |||||||||
Purchase of property and equipment |
(6,106 | ) | (3,393 | ) | (116,475 | ) | ||||||
Proceeds from sale of property and equipment |
— | 96 | 182 | |||||||||
Restricted cash |
— | (2 | ) | — | ||||||||
Net cash provided by (used in) investing activities |
26,594 | (36,704 | ) | (173,271 | ) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Issuance of common stock and warrants for cash |
581 | 100 | 493,832 | |||||||||
Collection of Series C convertible preferred stock subscriptions receivable |
— | — | 50,000 | |||||||||
Issuance of Series B convertible preferred stock for cash |
— | — | 15,000 | |||||||||
Cash received for common stock to be issued |
— | — | 3,900 | |||||||||
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| Cumulative | ||||||||||||
| period from | ||||||||||||
| February 14, | ||||||||||||
| 1991 (date of | ||||||||||||
| Three months ended | inception) to | |||||||||||
| March 31, | March 31, | |||||||||||
| 2006 | 2005 | 2006 | ||||||||||
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 | |||||||||
Principal payments on notes payable |
— | — | (1,667 | ) | ||||||||
Borrowings on notes payable |
— | — | 3,460 | |||||||||
Net cash provided by financing activities |
581 | 100 | 570,082 | |||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
(10,148 | ) | (56,898 | ) | 45,889 | |||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
56,037 | 78,987 | — | |||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 45,889 | $ | 22,089 | $ | 45,889 | ||||||
SUPPLEMENTAL CASH FLOWS DISCLOSURES: |
||||||||||||
Cash paid for income taxes |
$ | 1 | $ | 1 | $ | 17 | ||||||
Interest paid in cash |
— | — | 80 | |||||||||
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 | |||||||||
Notes receivable by stockholder issued to officers |
— | — | — | |||||||||
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 | ) | ||||||||
In connection with the Company’s initial public offering, all shares of Series B and Series C
convertible preferred stock, in the amount of $15,000,000 and $50,000,000, respectively,
automatically converted into common stock in August 2004.
See notes to financial statements.
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MANNKIND CORPORATION AND SUBSIDIARY
(A Development Stage Company)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of business and basis of presentation
The accompanying unaudited consolidated financial statements of MannKind Corporation (the
“Company”), have been prepared in accordance with generally accepted accounting principles in the
United States of America for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X of the Securities and Exchange Commission (the “SEC”).
Accordingly, they do not include all of the information and footnotes required by generally
accepted accounting principles in the United States of America for complete financial statements.
These statements should be read in conjunction with the consolidated financial statements and notes
thereto included in the Company’s latest audited annual financial statements. The audited
statements for the year ended December 31, 2005 are included in the annual report on Form 10-K for
the fiscal year ended December 31, 2005 filed with the SEC on March 16, 2006.
In the opinion of management, all adjustments, consisting only of normal, recurring adjustments
considered necessary for a fair presentation of the results of these interim periods have been
included. The results of operations for the three months ended March 31, 2006 may not be indicative
of the results that may be expected for the full year.
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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of expenses during the reporting
period. Actual results could differ from those estimates or assumptions. The more significant
estimates reflected in these financial statements involve accrued expenses, the valuation of
stock-based compensation and the determination of the provision for income taxes and corresponding
deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax
assets.
Business — MannKind Corporation is a biopharmaceutical company focused on the development and
commercialization of therapeutic products for diseases such as diabetes and cancer. The Company’s
lead investigational product candidate, the Technosphere Insulin System, is currently in Phase 3
clinical trials in the U.S. and Europe to study its safety and efficacy in the treatment of
diabetes. The Technosphere Insulin System consists of the Company’s proprietary dry-powder
Technosphere formulation of insulin that is inhaled deep into the lung using the Company’s MedTone
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 March 31, 2006 the Company has reported accumulated
net losses of $600.9 million, which include a goodwill impairment charge of $151.4 million, and
negative cash flow from operations of $350.9 million. It is costly to develop therapeutic products
and conduct clinical trials for these products. Based upon the Company’s current expectations,
management believes the Company’s existing capital resources will enable it to continue planned
operations into the third quarter of 2006. 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 its Technosphere
Insulin System and other product candidates and to support its other ongoing activities. If planned
operating results are not achieved or the Company is not successful in raising additional capital,
management believes that planned expenditures could be reduced or eliminated in a relatively short
period to continue activities, on a reduced basis, through the first quarter of 2007. Additionally,
the Company’s principal stockholder has given assurances that he will provide additional funding
for the Company’s operations, if necessary, through the first quarter of 2007.
Reclassifications — Certain reclassifications have been made to the prior years’ financial
statements to conform to the 2006 presentation.
Reverse Stock Split — On May 27, 2004, the Company’s board of directors approved a one-for-three
reverse stock split, which was effected on July 22, 2004. All common share and per common share
amounts in the consolidated financial statements and notes to financial statements have been
adjusted for all periods that are presented prior to July 22, 2004 to give effect to the reverse
stock split,
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including reclassifying an amount equal to the reduction in par value to additional paid-in
capital.
Segment Information — In accordance with Statement of Financial Accounting Standards (“SFAS”) 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.
2. Financings
On August 5, 2005, the Company completed 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. In connection with this private placement, the Company paid $4.5 million in commissions
to the placement agents and incurred $0.3 million in other offering expenses which resulted in net
proceeds of approximately $170.2 million.
3. Investment in securities
The following is a summary of the available-for-sale securities classified as current assets:
| As of | As of | |||||||||||||||
| March 31, 2006 | December 31, 2005 | |||||||||||||||
| (in thousands) | Cost basis | Fair value | Cost basis | Fair value | ||||||||||||
Auction rate municipal bonds |
$ | 52,800 | $ | 52,800 | $ | 89,597 | $ | 89,597 | ||||||||
Auction rate preferreds |
3,900 | 3,900 | — | — | ||||||||||||
| $ | 56,700 | $ | 56,700 | $ | 89,597 | $ | 89,597 | |||||||||
The Company’s policy is to maintain a highly liquid short-term investment portfolio. The
contractual maturities for auction rate municipal bonds at March 31, 2006 are between 22 and 40
years. Despite the long-term nature of their stated contractual maturities, the Company has the
ability to quickly liquidate these securities. Proceeds from the sale and maturities of
available-for-sale securities amounted to approximately $49.0 million and $33.5 million for the
three months ended March 31, 2006 and 2005, respectively. Gross realized gains and losses for
available-for-sale securities were insignificant for the three months ended March 31, 2006 and
2005. Gross realized gains and losses 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 as of the periods presented in the
table above were not material.
4. Accounting for stock-based compensation
On January 1, 2006, the Company adopted the provisions of SFAS No. 123R (“SFAS No. 123R”),
Share-based Payment: an Amendment of FASB Statements No. 123 and 95, which is a revision of SFAS
No. 123 (“SFAS No. 123”), Accounting for Stock-Based Compensation. Prior to January 1, 2006, the
Company accounted for employee stock options and the employee stock purchase plan using the
intrinsic value method in accordance with Accounting Principles Board (“APB”) Opinion No. 25 (“APB
No. 25”), Accounting for Stock Issued to Employees, and adopted the disclosure only alternative of
SFAS No. 123. SFAS No. 123R eliminated the intrinsic value method of accounting for stock options
which the Company followed until December 31, 2005. Further, SFAS No. 123R 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.
Upon adoption of SFAS No. 123R, the Company selected the modified prospective transition method
whereby unvested awards at the date of adoption as well as awards that are granted, modified, or
settled after the date of adoption will be measured and accounted for in accordance with SFAS No.
123R. Measurement and attribution of compensation cost for awards unvested as of January 1, 2006 is
based on the same estimate of the grant-date or modification-date fair value and the same
attribution method (straight-line) used previously under SFAS No. 123.
In the three months ended March 31, 2006, the adoption of SFAS No. 123R resulted in stock-based
compensation expense of $3.7 million which caused loss before provision for income taxes to
increase by $3.7 million and basic and diluted net loss per share applicable to common stockholders
to increase by $0.07 per share. The following table presents stock-based compensation expense
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included in operating expenses for the three months ended March 31, 2006 and the pro forma
stock-based compensation amounts that would have been included in the statements of operations for
three months ended March 31, 2005 had stock-based compensation expense been determined in
accordance with the fair value method prescribed by SFAS No. 123:
| Three months ended | ||||||||
| March 31, | ||||||||
| (in thousands, except per share data) | 2006 | 2005 | ||||||
Stock-based employee compensation expense
determined under the fair value based method for all
awards |
$ | 3,473 | $ | 3,271 | ||||
Fair value of discount on employee stock purchase plan |
98 | 70 | ||||||
Total stock-based employee compensation expense |
$ | 3,571 | $ | 3,341 | ||||
Net loss — as reported |
$ | (22,162 | ) | |||||
Add: Stock-based employee compensation expense
(benefit) included in reported net loss |
(720 | ) | ||||||
Deduct: Stock-based compensation expense determined
under fair value method |
(3,341 | ) | ||||||
Net loss — pro forma |
$ | (26,223 | ) | |||||
Net loss per common share (basic and diluted): |
||||||||
As reported |
$ | (0.68 | ) | |||||
Pro forma |
$ | (0.80 | ) | |||||
The fair value of each option is estimated on the grant date or modification date, if any, using
the Black-Scholes option valuation model. The variables used by the Company for the three months
ended March 31, 2006 and 2005 are disclosed in the following table. The risk-free rate for periods
within the contractual life of the option is based on the U.S. Treasury yield curve in effect at
the time of grant. The stock price volatility used is based on the historical volatility of the
stock of several of the Company’s peers. The expected term is calculated using the “simplified”
method, which is defined in Staff Accounting Bulletin No. 107, Topic 14: Share-based Payment, and
is equal to one-half of the sum of the weighted average time to vest and the option’s contractual
term.
| Three months ended | ||||||||
| March 31, | ||||||||
| 2006 | 2005 | |||||||
Risk-free interest rate |
4.59 | % | 3.43%-3.89 | % | ||||
Dividend yield |
0 | % | 0 | % | ||||
Volatility factor |
63 | % | 100 | % | ||||
Weighted average expected life |
6.08 years | 4.00 years | ||||||
Total stock-based compensation expense (benefit) recognized in the accompanying statements of
operations is as follows (in thousands):
| Three months ended | ||||||||
| March 31, | ||||||||
| 2006 | 2005 | |||||||
Employee-related |
$ | 3,571 | $ | (720 | ) | |||
Consultant-related |
140 | 35 | ||||||
Total |
$ | 3,711 | $ | (685 | ) | |||
Equity Incentive Plan
The Company’s 2004 Equity Incentive Plan (the “Plan”) provides for the granting of stock awards
including stock options and restricted stock units, to employees, directors and consultants.
The Company’s board of directors determines eligibility, vesting schedules and exercise prices
for stock awards granted under the Plan. Options and other stock awards under the 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
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one year and ratably on a monthly basis over a period of 36 months thereafter. Restricted stock
units generally vest over four years with consideration satisfied by service to the Company. 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 16, 2006, the Company granted new hire stock options to purchase 153,480 shares of
common stock at an exercise price of $16.13 per share and granted 247,554 restricted stock units.
Stock options 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 over
four years with consideration satisfied by service to the Company. The options were valued at
$10.03 per option share and restricted stock units were valued at $16.13 per share, which was the
fair market value of the common stock on the grant date. The compensation cost of the awards of
approximately $5.1 million is being expensed over the respective service periods of the awards.
As of March 31, 2006, 4,150,052 options and 405,736 restricted stock units were outstanding under
the Plan and an additional –206,346 shares of common stock were available for issuance under the
Plan. In February 2006, the Company’s board of directors approved an increase of 4.0 million shares
in the number of shares reserved under the Plan for future issuance subject to stockholder approval
at the annual meeting of stockholders in May 2006.
During 2004, the Company’s board of directors and stockholders also approved the 2004
Non-Employee Directors’ Stock Option Plan. The plan provides for the automatic, non-discretionary
grant of options to the Company’s non-employee directors. As of March 31, 2006, 267,500 options
were outstanding under the plan and an additional 532,500 shares of common stock were available for
issuance under the plan.
The Company has two other stock award plans: the 1991 Stock Option Plan (the “1991 Plan”) and
the 1999 Stock Plan (the “1999 Plan”). Both of these plans provide for the granting of stock
options to directors, employees and consultants. As of March 31, 2006, 73,084 options were
outstanding under the 1991 Plan and 170,695 options were outstanding under the 1999 Plan. There
were no additional shares available for issuance under the 1991 Plan or the 1999 Plan at March 31,
2006.
Prior to the merger of CTL and AlleCure into the Company, CTL had granted options to purchase
shares of its common stock under its 2000 Stock Option and Stock Plan (the “CTL Plan”). Similarly,
AlleCure had granted options to purchase shares of its common stock under its 2000 Stock Option and
Stock Plan (the “AlleCure Plan”). Pursuant to the plans of reorganization and agreements of merger
between the Company and each of CTL and AlleCure, the Company has assumed the obligation to issue
shares of the Company’s common stock, at the exchange ratio agreed to in the merger agreement, upon
the exercise of options granted under the CTL Plan and the AlleCure Plan. After the merger date, no
further options were granted under either the CTL Plan or AlleCure Plan. As of March 31, 2006 there
were an aggregate of 46,107 options outstanding under these plans.
During the year ended December 31, 2002, the Company’s board of directors granted 240,972
options at an exercise price of $25.23 per share to an employee who is the principal stockholder.
The options vest annually over four years. These options, which were not under any plan, were
outstanding at March 31, 2006 and are included in the tables below.
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Number | Exercise | Remaining | Aggregate | |||||||||||||
| of | Price Per | Contractual | Intrinsic | |||||||||||||
| Shares | Share | Term | Value ($000) | |||||||||||||
Outstanding at January 1, 2006 |
4,985,831 | $ | 12.40 | |||||||||||||
Granted |
153,480 | 16.13 | ||||||||||||||
Exercised |
(59,878 | ) | 9.41 | |||||||||||||
Forfeited |
(93,120 | ) | 12.79 | |||||||||||||
Expired |
(37,903 | ) | 19.97 | |||||||||||||
Outstanding at March 31, 2006 |
4,948,410 | 12.48 | 7.3 | $ | 39,389 | |||||||||||
Exercisable at March 31, 2006 |
1,990,923 | 11.82 | 5.1 | $ | 17,182 | |||||||||||
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A summary of restricted stock units activity under the plan as of March 31, 2006, and changes
during the three months then ended is presented below:
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Number | Average | Remaining | Aggregate | |||||||||||||
| of | Grant date | Contractual | Intrinsic | |||||||||||||
| Shares | Fair value | Term | Value ($000) | |||||||||||||
Outstanding at January 1, 2006 |
164,901 | $ | 11.00 | |||||||||||||
Granted |
247,554 | 16.13 | ||||||||||||||
Forfeited |
(6,719 | ) | 11.41 | |||||||||||||
Outstanding at March 31, 2006 |
405,736 | $ | 14.12 | 9.63 | $ | 8,293 | ||||||||||
Exercisable at March 31, 2006 |
— | — | — | — | ||||||||||||
The
weighted-average grant-date fair value of options granted during the
three months ended March 31, 2005 and 2006 was $9.77 and $10.03, respectively. The total intrinsic value of options
exercised during the three months ended March 31, 2005 and 2006
was approximately $81,000 and $0.5 million, respectively. The
total fair value of options vested during the three months ended
March 31, 2006 and 2005 was $1.9 million and $2.1 million, respectively. Cash received from the exercise
of options during the three months ended March 31, 2006 and 2005 was approximately $0.6 million and
$0.1 million, respectively.
A summary of the status of the Company’s nonvested shares, excluding restricted stock units, as of
March 31, 2006, and changes during the three months ended March 31, 2006, is presented below:
| Weighted | ||||||||
| Number | Average | |||||||
| of | Grant date | |||||||
| Shares | Fair value | |||||||
Nonvested at January 1, 2006 |
3,048,631 | $ | 13.06 | |||||
Granted |
153,480 | 10.03 | ||||||
Vested |
(151,504 | ) | 12.86 | |||||
Forfeited |
(93,120 | ) | 12.79 | |||||
Nonvested at March 31, 2006 |
2,957,487 | 12.74 | ||||||
A summary of the status of the Company’s restricted stock units, as of March 31, 2006, and changes
during the three months ended March 31, 2006, is presented below:
| Weighted | ||||||||
| Number | Average | |||||||
| of | Grant date | |||||||
| Shares | Fair value | |||||||
Nonvested at January 1, 2006 |
164,901 | $ | 11.00 | |||||
Granted |
247,554 | 16.13 | ||||||
Forfeited |
(6,719 | ) | 11.41 | |||||
Nonvested at March 31, 2006 |
405,736 | 14.12 | ||||||
As of March 31, 2006, there was $21.1 million and $4.8 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 2.9 years.
In March 2004, the Company’s board of directors approved the 2004 Employee Stock Purchase
Plan. The aggregate number of shares that may be sold under the plan is 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 purchase plan to exceed 10% of the total number of shares of capital stock
outstanding on December 31 of the prior year. On January 1, 2005 and 2006, the purchase plan share
reserve was
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increased by 327,562 and 503,141 shares, respectively. For the three months ended March 31, 2005
and 2006, the Company did not sell any shares of its common stock to employees participating in the
plan.
5. Net loss per common share
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.
Antidilutive securities, which consist of stock options, restricted stock units and warrants, that
are not included in the diluted net loss per share calculation consisted of an aggregate of
7,980,029 shares and 4,517,093 shares as of March 31, 2006 and 2005, respectively.
6. 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. At March 31, 2006, the estimated
amount receivable under the program was $2.9 million.
7. Property and equipment
Property and equipment consist of the following (dollar amounts in thousands):
| Estimated | ||||||||||||
| Useful | ||||||||||||
| Life | ||||||||||||
| (years) | March 31, 2006 | December 31, 2005 | ||||||||||
Land |
— | $ | 5,273 | $ | 5,273 | |||||||
Buildings |
39-40 | 9,566 | 9,566 | |||||||||
Building improvements |
5-40 | 41,012 | 39,543 | |||||||||
Machinery and equipment |
3-10 | 24,447 | 23,087 | |||||||||
Furniture, fixtures and office equipment |
5-10 | 2,886 | 2,573 | |||||||||
Computer equipment and software |
3 | 5,362 | 4,808 | |||||||||
Leasehold improvements |
5 | 5 | ||||||||||
Construction in progress |
12,580 | 10,298 | ||||||||||
Deposits on equipment |
6,529 | 6,411 | ||||||||||
| 107,660 | 101,564 | |||||||||||
Less accumulated depreciation and amortization |
(27,371 | ) | (25,381 | ) | ||||||||
Property and equipment — net |
$ | 80,289 | $ | 76,183 | ||||||||
8. Common and preferred stock
The Company is authorized to issue 90,000,000 shares of common stock, par value $0.01 per share,
and 10,000,000 shares of undesignated preferred stock, par value $0.01 per share, issuable in one
or more series designated by the Company’s board of directors. No other class of capital stock is
authorized. As of March 31, 2006 and December 31, 2005, 49,629,518 and 50,314,108 shares of common
stock, respectively, were issued and outstanding. No shares of preferred stock were issued and
outstanding at March 31, 2006 and December 31, 2005.
Registration rights — The holders of 17,132,000 shares of common stock
together with warrants to purchase up to 3,426,000 shares of common stock, all of which were issued
in the August 2005 private placement, have rights that require the Company to keep the registration
of the shares of common stock purchased in the private placement or underlying warrants
continuously effective until at least August 2007.
As of March 31, 2006 the holders of 916,715 shares of the Company’s common stock and the holders of
warrants to purchase 12,436 shares of the Company’s common stock have rights, subject to some
conditions, to require the Company to file registration
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statements covering their shares or to include their shares in registration statements that the Company may
file for itself or other stockholders.
9. Warrants
During 1995 and 1996, the Company issued warrants to purchase shares of common stock. The warrants
range in exercise price from $12.53 to $12.70 per share and expire at various dates through 2007.
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 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 March 31, 2006, warrants to purchase 12,436 shares of common stock at a
weighted average exercise price of $12.66 per share are outstanding and exercisable.
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 2 —Financings. These warrants became
exercisable on February 1, 2006 and expire in August 2010. In the three months ended March 31,
2006, warrants for 979 shares were exercised for approximately $12,000 and 98,441 shares were
issued upon the cashless warrant exercise of 254,528 warrant shares.
10. Commitments and contingencies
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.
Litigation — The Company is involved in various legal proceedings and other matters. In accordance
with SFAS 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.
In May 2005, the Company’s former Chief Medical Officer filed a complaint against the Company in
the California Superior Court, County of Los Angeles, Wayman Wendell Cheatham, M.D. v. MannKind
Corporation, Case No. BC333845. The complaint alleges causes of action for wrongful termination in
violation of public policy, breach of contract and retaliation, in connection with the Company’s
termination of Dr. Cheatham’s employment. In the complaint, Dr. Cheatham seeks compensatory,
punitive and exemplary damages in excess of $2.0 million as well as reimbursement of attorneys’
fees. In June 2005, the Company answered the complaint, generally denying each of Dr. Cheatham’s
allegations and asserting various defenses. The Company believes the allegations in the complaint
are without merit and is vigorously defending against them. The Company also filed a
cross-complaint against Dr. Cheatham, alleging claims for libel per se, trade libel, breach of
contract, breach of the implied covenant of good faith and fair dealing and breach of the duty of
loyalty. The libel claims allege that Dr. Cheatham made certain false and malicious statements
about the Company in a letter to the Food and Drug Administration (“FDA”) with regard to a request
by the Company to hold a meeting with the FDA. The remaining causes of action in the
cross-complaint arise out of the Company’s allegations that Dr. Cheatham had an undisclosed
consulting relationship with a Company competitor during his employment with the Company, in
violation of his agreement with the Company. In July 2005, Dr. Cheatham filed a demurrer, and a
motion to strike the Company’s cross-complaint under California’s anti-SLAPP statute. In September
2005, the California Superior Court overruled Dr. Cheatham’s demurrer and denied his motion to
strike the Company’s cross-complaint. Dr. Cheatham has appealed the Court’s ruling denying his
motion to strike. Discovery as to Dr. Cheatham’s claims against the Company is proceeding, and this
case is scheduled for trial to commence in October 2006. The Company believes that the ultimate
resolution of this matter will not have a material impact on the Company’s financial position or
results of operations.
In 2000, the Company issued 699,972 shares of common stock to three consultants in exchange for
notes receivable aggregating
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approximately $10.9 million. The fixed interest bearing notes were collateralized by the underlying common stock. The notes-for-
stock transactions were accounted for as in-substance stock option grants to non-employees. In
November 2004, the consultants informed the Company that they had entered into an agreement in
October 2001 with Alfred E. Mann, the Company’s chairman, chief executive officer and principal
stockholder, under which Mr. Mann would purchase a portion of the consultants’ common stock, and
that the Company was to apply the proceeds to the amounts owed under the consultants’ respective
notes. The consultants informed the Company that they believed both the Company and Mr. Mann were
in breach of the alleged agreement, and indicated their intent to seek alleged damages arising from
the Company’s failure to perform the alleged agreement. On October 19, 2005, the principal and
interest on the notes aggregating $14.6 million became due and payable and the Company pursued
collection. On November 21, 2005, the consultants filed a complaint against the Company in the
California Superior Court, County of Los Angeles, Rollins et al. v. MannKind et al, Case No.
BC343381. The complaint alleges causes of action for breach of the abovementioned agreement, among
other things. On January 19, 2006, the parties mediated and settled the case. Under the settlement,
the Company repurchased 620,697 shares from the consultants in full satisfaction of the notes.
These shares were tendered and cancelled on February 3, 2006. The Company also agreed to repurchase
the remaining 79,275 shares held by the consultants for $1.4 million in cash. The settlement was
reflected as a $1.4 million charge to general and administrative expense in the fourth quarter of
the year ended December 31, 2005 with a corresponding amount payable included in accrued expenses
and other current liabilities as of December 31 2005. On February 21, 2006, the Company received
and cancelled the 79,275 shares, and paid the purchase price of $1.4 million to the consultants.
The complaint has been dismissed in its entirety with prejudice.
In September and October 2005, the principal and interest totaling $1.6 million on notes issued in
exchange for approximately 78,000 shares of common stock to a former executive of the Company
became due and payable to the Company. On December 31, 2005, the 78,000 shares of common stock
issued in exchange for the notes receivable had a market value of approximately $878,000. The
Company pursued collection. On January 31, 2006, former executive tendered 143,949 shares as full
repayment of the notes in default and an additional note due in April 2006 issued in exchange for
approximately 32,000 shares of common stock. The 143,949 shares were valued at $2.6 million on
January 31, 2006 and represented principal and interest due through that date on all notes. The
Company received and cancelled these shares on January 31, 2006.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements, which involve risks and
uncertainties. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set forth below in Part
II, Item 1A Risk Factors and elsewhere in this quarterly report on Form 10-Q. The interim financial
statements and this Management’s Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the financial statements and notes for the year ended
December 31, 2005 and the related Management’s Discussion and Analysis of Financial Condition and
Results of Operations, both of which are contained in our annual report on Form 10-K filed pursuant
to Section 13 of the Securities Exchange Act of 1934. Readers are cautioned not to place undue
reliance on forward-looking statements. The forward-looking statements speak only as of the date on
which they are made, and we undertake no obligation to update such statements to reflect events
that occur or circumstances that exist after the date on which they are made.
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
investigational product candidate, the Technosphere Insulin System, is currently in Phase 3
clinical trials in the United States and Europe to study its safety and efficacy in the treatment
of diabetes. This therapy consists of a proprietary dry powder formulation of insulin that is
inhaled into the deep lung using our proprietary inhaler. We believe that the performance
characteristics, unique kinetics, convenience and ease of use of the Technosphere Insulin System
may have the potential to change the way diabetes is treated.
In particular, we have observed in our clinical trials to date that the Technosphere Insulin System
produces a profile of insulin levels in the bloodstream that approximates the insulin profile
normally seen in healthy individuals immediately following the beginning of a meal, but which is
absent in all patients with diabetes. As a result, we believe that our Technosphere Insulin System
will be beneficial not only for insulin-using diabetes patients but also for patients with type 2
diabetes who are currently using conventional therapies other than insulin. If further clinical
trials support our initial observations, we believe the Technosphere Insulin System has the
potential to be indicated for the treatment of type 2 diabetes after a patient has failed to
respond adequately to diet and exercise. The use of insulin early in the progression of diabetes
would represent a paradigm shift in the treatment of this disease.
To date, we have conducted multiple Phase 1 and Phase 2 clinical trials of our Technosphere Insulin
System in Europe and the United States, which have involved more than 800 individuals and over
60,000 patient-days of home use. In a Phase 2 clinical trial conducted in the United States, the
use of Technosphere Insulin at mealtimes significantly lowered blood glucose levels in patients
with type 2 diabetes who previously were experiencing inadequate control of their disease. Even in
patients with only mildly elevated blood glucose levels, we observed in this study that the typical
risks of frequent or severe hypoglycemia generally associated with insulin therapy appear not to be
associated with Technosphere Insulin, suggesting that our therapy may have a significant safety
advantage over other currently available insulin therapies. In a European Phase 2 dosage-tolerance
study, Technosphere Insulin was observed to improve glycemic control in a dose-dependent manner as
measured by decreases in HbA1c levels and by reductions in glucose excursions following a meal. In
addition, there was no indication of a negative effect on pulmonary function and no weight gain at
any dose of Technosphere Insulin over 12 weeks of treatment.
Currently, we are enrolling patients in three pivotal Phase 3 clinical trials, including a two-year
pulmonary safety study that will compare the pulmonary function of patients with type 1 or type 2
diabetes randomized to either Technosphere Insulin or standard diabetes care. Based on our
discussions with the FDA, we plan to accumulate two years of controlled safety data from patients
with type 1 diabetes as well as patients with type 2 diabetes before we file a new drug application
for the Technosphere Insulin System. We anticipate that our entire clinical trial program will
involve more than 3,200 patients. Larger populations and longer durations of exposure may be
necessary depending on the safety profile of our product.
Our Technosphere Insulin System 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. We are also developing additional Technosphere-based
products for the delivery of other drugs. We plan to initiate Phase 1 clinical trials of our
therapeutic cancer vaccine by the end of 2006.
We are a development stage enterprise and have incurred significant losses since our inception in
1991. As of March 31, 2006, we have incurred a cumulative net loss of $600.9 million. To date, we
have not generated any product revenues and have funded our operations primarily through the sale
of equity securities.
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We do not anticipate sales of any product prior to regulatory approval and commercialization of our
Technosphere Insulin System. 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 and
increasing expenditures and to incur additional operating losses for at least the next several
years as we:
| • | continue the clinical development and commercialization of our Technosphere Insulin System for the treatment of diabetes; | ||
| • | expand our manufacturing operations for our Technosphere Insulin System to meet our currently anticipated commercial production needs; | ||
| • | expand our other 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.
CLINICAL DEVELOPMENT ACTIVITIES
The Technosphere Insulin System
We are currently conducting a number of studies of the safety and efficacy of the Technosphere
Insulin System, including the following trials that are underway or planned for 2006:
Study 010
This ongoing trial is a three-year evaluation of the safety and tolerability of Technosphere
Insulin in patients with type 2 diabetes who have participated in study 008 or study 005. The
primary objective is to evaluate pulmonary function with secondary objectives to examine changes in
HbA1c levels, insulin antibodies, frequency of adverse events and quality of life.
Study 030
This is a two-year, prospective, multi-site study that incorporates two design strategies. The
first component is a randomized, open-label trial comparing pulmonary function in two groups of
patients with diabetes. One group of approximately 625 patients is being treated with Technosphere
Insulin in combination with other antidiabetic therapy and the other group of approximately 625
patients is being treated with existing oral and/or injectable therapies. The second component is a
comparison of pulmonary function in the patients with diabetes who are not treated with
Technosphere Insulin to a group of 125 subjects without any abnormalities in glucose control.
Enrollment for this study began in June 2005 and is expected to be completed later in 2006.
Study 014
This study compared the efficacy of mealtime use of Technosphere Insulin plus basal insulin to
mealtime use of rapid-acting, subcutaneous insulin plus basal insulin in approximately 240 patients
with type 2 diabetes who had a baseline HbA1c level greater than 7.0% and less than 11.5%. The
primary efficacy endpoint for this study was mean change in HbA1c levels from baseline to treatment
week 24. Enrollment was completed in July 2005 and the treatment period completed in February 2006.
Study 101
This trial compared mealtime use of Technosphere Insulin to mealtime use of rapid-acting,
subcutaneous insulin in approximately 90 patients with type 1 diabetes, who were evaluated over a
12-week period. The primary efficacy endpoint was the change in blood
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glucose levels following a standard meal. Enrollment was completed in July 2005 and treatment
completed in January 2006.
Study 009
This study will evaluate Technosphere Insulin to prandial insulin analog both used in combination
with basal insulin in approximately 500 patients with type 1 diabetes for a 12-month period.
Efficacy will be evaluated on the basis of changes in HbA1c levels as well as changes in blood
glucose levels after a standardized mixed meal. We began enrolling patients in this study in the
first quarter of 2006.
Study 102
This study will compare the efficacy of mealtime use of Technosphere Insulin together with basal
insulin to the twice-daily use of premixed insulin, a mixture of intermediate acting insulin and a
rapid-acting insulin analog, in a population of approximately 500 patients with type 2 diabetes.
Efficacy will be evaluated on the basis of changes in HbA1c levels as well as changes in blood
glucose levels after a standardized mixed meal. We began enrolling patients in this study in the
first quarter of 2006.
Study 103
This study will evaluate the efficacy of Technosphere Insulin alone and in combination with
metformin, an oral medication, in approximately 500 patients with type 2 diabetes who are not
achieving desired glucose control with a combination of metformin and sulphonylurea, another oral
medication. Efficacy will be evaluated on the basis of changes in HbA1c levels after 26 weeks of
treatment as well as changes in blood glucose levels after a standardized mixed meal. We plan to
begin enrolling patients in this study in the second quarter of 2006.
Special population studies
We have two ongoing studies: one examining the impact of asthma and the other examining the impact
of chronic smoking on the pharmacokinetics associated with Technosphere Insulin. We plan to use the
results of these studies to conduct safety studies in patients with asthma and in chronic smokers
that also have diabetes. We also plan to conduct a safety study in patients with both diabetes and
chronic obstructive pulmonary disease. Other special population studies include a trial that will
examine the elimination of Technosphere Insulin in patients with kidney disease and a trial that
will examine the effect of Technosphere Insulin in patients with liver disease.
Cancer immunotherapy program
We are also developing therapies for the treatment of solid tumor cancers. The lead product
candidate in this program, MKC1106, is intended for the treatment of several solid-tumor cancers,
including ovarian, colorectal, pancreatic, renal, breast and prostate carcinomas. We plan to
commence clinical trials for MKC1106 late in the fourth quarter of 2006.
Our cancer therapy 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 cancer. 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 found on the surface of
each cell as either normal or abnormal, and responding to them appropriately. Any substance capable
of triggering an immune response 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 sample antigens present in the body and present the epitopes associated with foreign
antigens to other cells of the immune system whose function is to destroy any cell that expresses
the same epitope; this 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 solid-tumor cancers. A patient 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. 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 a tumor.
We believe that our therapeutic approach addresses several deficiencies inherent in earlier
approaches to cancer immunotherapy,
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including:
| • | Specificity. We target cancer epitopes to which the immune system has not developed a tolerance, instead of targeting the dominant epitopes expressed by cancerous cells, many of which are tolerated by the immune system. We have developed technology designed to identify the non-tolerated epitopes on the cancer cell surface, and we have developed a method of modifying these epitopes that is designed to activate an immune response. Through this process, we believe that the body’s tolerance of the cancer cells can be broken, leading to the destruction of the cancer by the immune system. | ||
| • | Administration. In contrast to the conventional subcutaneous or intramuscular route of administration, our compounds are delivered directly into the patient’s lymph nodes, where studies have shown they will have the greatest impact. We believe that the direct delivery of our compounds will bring local high concentrations of the active components of our compounds into contact with high concentrations of the cells needed to generate a potent cell-mediated immune response. | ||
| • | Selectivity, potency and duration of response. We deliver our therapeutic compounds in a manner that we believe primes the immune system to respond to cancer cells expressing specific epitopes, in much the same way that a chronic infection evokes a progressively increased immune response to invading bacteria. Our administrative regimen is designed to boost the immune response over the course of a treatment cycle so that it becomes increasingly potent and long acting. |
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses consist mainly of costs associated with the clinical trials
of our product candidates which 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, 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.
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 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 the Technosphere Insulin System through Phase 3 clinical trials and
regulatory filings. We plan to commercialize our lead product as a treatment for diabetes. 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 the Technosphere Insulin System, we are unable to
estimate with any certainty the costs we will incur in the continued development of our product
candidates for commercialization. The costs required to complete the development of our
Technosphere Insulin System will be largely dependent on the scope of our clinical trials, the cost
and efficiency of our manufacturing process and discussions with the FDA on its requirements. We
anticipate that our research and development expenses, particularly for the Technosphere Insulin
System, will increase significantly with the continuation of existing clinical trials, the
initiation of new trials, the resulting manufacturing costs associated with producing clinical
trial materials, and the expansion, qualification and validation of our commercial manufacturing
processes and facilities. Additionally, we expect non-cash stock-based compensation expense
resulting from the adoption of SFAS No. 123R, Share-based Payment: an Amendment of FASB Statement
123 and 95, effective as of January 1, 2006, to increase in the future. See Critical Accounting
Policies below and Note 4 — Accounting for Stock-Based Compensation in the notes to our financial
statements.
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
business insurance and professional services costs.
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We expect general and administrative expenses other than non-cash stock-based compensation expense
to increase slightly in the future as a result of increased headcount, public company compliance
and establishment of investor relations and marketing programs. We expect overall general and
administrative expenses to increase significantly as a result of the adoption of SFAS No. 123R. See
Critical Accounting Policies below and Note 4 — Accounting for Stock-Based Compensation in the
notes to our financial statements.
CRITICAL ACCOUNTING POLICIES
Other than the adoption of SFAS No. 123R, there have been no material changes to our critical
accounting policies as described in Item 7 to our annual report on Form 10-K for the year ended
December 31, 2005.
Stock-based Compensation
Prior to January 1, 2006, we accounted for employee stock options and the employee stock purchase
plan using the intrinsic value method in accordance with APB No. 25 and adopted the disclosure only
alternative of SFAS No. 123. Upon adoption of SFAS No. 123R, we selected the modified prospective
transition method whereby we recognized share-based employee costs from the beginning of 2006 as if
the fair value accounting method had been used to account for all employee awards granted,
modified, or settled after January 1, 2006 and to any awards that were not fully vested as of
January 1, 2006. The measurement and attribution of compensation cost for awards that are unvested
as of January 1, 2006 are based on the same estimate of the grant-date and the same attribution
method used previously under SFAS No. 123. Including the effects
of adoption of SFAS No. 123R, we recognized stock-based compensation expense of $3.7 million for the three months ended March 31, 2006. We
expect expensing of stock-based compensation will continue to have an impact on our statement of
operations. As of March 31, 2006, there was $21.1 million and $4.8 million of unrecognized
compensation cost related to options and restricted stock units, respectively, granted by the
Company which is expected to be recognized over the weighted average vesting period of 2.9 years.
RESULTS OF OPERATIONS
The discussion and analysis of our financial condition and results of operations for the three
months ended March 31, 2006 and 2005 are based upon our consolidated interim financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United
States of America. The preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amount of assets, liabilities, revenues and
expenses, and as a result, actual condition or results may differ from our estimates under
different assumptions or conditions.
Revenues
During the three months ended March 31, 2006, we recognized $0.1 million in revenue under a license
agreement. There were no revenues recorded for the three months ended March 31, 2005. We do not
anticipate sales of any product prior to regulatory approval and commercialization of our
Technosphere Insulin System.
Research and Development Expense
The following table provides a comparison of the research and development expense categories for
the three months ended March 31, 2006 and 2005 (dollars in thousands):
| Three months ended | ||||||||||||||||
| March 31, | ||||||||||||||||
| 2006 | 2005 | $ Change | % Change | |||||||||||||
Clinical |
$ | 18,670 | $ | 8,828 | $ | 9,842 | 111 | % | ||||||||
Manufacturing |
9,223 | 5,248 | 3,975 | 76 | % | |||||||||||
Research |
6,418 | 4,587 | 1,831 | 40 | % | |||||||||||
Stock-based compensation expense |
1,639 | 33 | 1,606 | 4,866 | % | |||||||||||
Research and development expenses |
$ | 35,950 | $ | 18,696 | $ | 17,254 | 92 | % | ||||||||
The increase in research and development expenses for the three months ended March 31, 2006, as
compared to the same period in the
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prior year was primarily due to ongoing expenses related to the clinical development of our
Technosphere Insulin System. The expansion of our Phase 3 clinical trial program for our
Technosphere Insulin System and the continuation of other preclinical studies increased our
clinical research expenditures in 2006 as compared to the same period in 2005. This also resulted
in increased Technosphere Insulin manufacturing costs to supply clinical trial materials. We also
continue to expand our qualification and validation of our manufacturing system. Additionally,
research activities related to toxicology studies for our Technosphere Insulin System, expanding
our proprietary Technosphere platform technology, developing additional applications for the
pulmonary delivery of other drugs and the discovery and development of programs primarily focused
on cancer therapies resulted in increased research expenditures. We anticipate that our research
and development expenses associated with our Technosphere Insulin System, expanding our
Technosphere platform technology and the pursuit of cancer therapies will continue to increase in
2006. Specifically, we anticipate increased expenses related to the continuation of
existing and initiation of new clinical trials, and the resulting manufacturing costs associated
with producing clinical trial materials.
The increase in stock-based compensation expense for the three months ended March 31, 2006 compared
to the three months ended March 31, 2005 primarily resulted from the adoption of SFAS No. 123R
which 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. As described in the Critical Accounting
Policies above, we have adopted SFAS No. 123R as of the effective date of January 1, 2006. In
connection with our adoption, we expect non-cash stock-based compensation expense to increase
significantly in the future. See Note 4 — Accounting for Stock-Based Compensation in the footnotes
to our financial statements.
General and Administrative Expense
The following table provides a comparison of the general and administrative expense categories for
the three months ended March 31, 2006 and 2005 (dollars in thousands):
| Three months ended | ||||||||||||||||
| March 31, | ||||||||||||||||
| 2006 | 2005 | $ Change | % Change | |||||||||||||
Salaries, employee related and other general expenses |
$ | 7,066 | $ | 4,669 | $ | 2,397 | 51 | % | ||||||||
Stock-based compensation expense |
2,072 | (718 | ) | 2,790 | 389 | % | ||||||||||
General and administrative expenses |
$ | 9,138 | $ | 3,951 | $ | 5,187 | 131 | % | ||||||||
General and administrative expenses for the three months ended March 31, 2006 increased as compared
to the same period in the prior year. Increased administrative services resulted in increased
headcount, compensation adjustments and other employee related expenses. Additionally, litigation,
public company compliance (including the Sarbanes-Oxley Act) and our establishment of a marketing
function in 2005 increased both professional fees and consulting expenses. Stock-based compensation
expense also increased for the three months ended March 31, 2006 compared to the three months ended
March 31, 2005 upon the adoption of SFAS No. 123R. We expect general and administrative expenses
other than non-cash stock-based compensation expense to increase slightly in the future as a result
of increased headcount, public company compliance and establishment of investor relations and
marketing programs. We expect overall general and administrative expenses to increase significantly
as a result of the adoption of SFAS 123R. See Critical Accounting Policies above and Note 4 —
Accounting for Stock-Based Compensation in the footnotes to our financial statements.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through the sale of equity securities. We do not anticipate
sales of any product prior to regulatory approval and commercialization of our Technosphere Insulin
System. We currently rely on cash resources to maintain adequate working capital levels. At March
31, 2006, we had $102.6 million in cash, cash equivalents and marketable securities as compared to
$145.6 million as of December 31, 2005. Although we believe our existing cash resources will be
sufficient to fund our anticipated cash requirements into the third quarter of 2006, we will
require significant additional financing in the future to fund our operations. If adequate funds
are not available, we may be required to delay, reduce or eliminate expenditures for certain of our
programs, including our Technosphere Insulin System development activities. Because the majority of
our anticipated expenses in the near term can be reduced or eliminated in a relatively short
period, we believe that if we are unable to obtain additional capital we can continue activities,
on a reduced basis, through the first quarter of 2007. Additionally, our principal stockholder has
given assurances that he will provide additional funding for our operations, if necessary, through
the first quarter of 2007.
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During the three months ended March 31, 2006, we used $37.3 million of cash for our operations. We
had a net loss of $43.6 million for the three months ended March 31, 2006, of which $5.7 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 our Technosphere Insulin System.
Investing activities provided $26.6 million of cash during the three months ended March 31, 2006.
Cash provided by investing activities was from net sales of marketable securities of $32.7 million
offset by $6.1 million used to purchase machinery and equipment to expand our manufacturing
operations and quality systems in support of our expansion of clinical trials for Technosphere
Insulin System. We expect to make significant purchases of equipment in the foreseeable future.
Our financing activities provided cash of $0.6 million for the three months ended March 31, 2006.
Cash from financing activities was primarily from the exercise of stock options and warrants.
We intend to use our capital resources to continue the development of our Technosphere Insulin
System 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 solid-tumor cancers. We anticipate that we will expend 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 preliminary discussions with a number of pharmaceutical companies concerning a
potential strategic business collaboration with us. To date, we have neither concluded these
discussions nor reached an agreement concerning such a collaboration. 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 and reimbursements for a portion of the costs
associated with the development, manufacture and commercialization of our Technosphere Insulin
System. 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 equity financing or entering a business collaboration, we may be required to reduce
expenses through the delay, reduction or curtailment of our projects, including our Technosphere
Insulin System development activities, or further reduction of costs for facilities and
administration.
Off-Balance Sheet Arrangements
As of March 31, 2006, we did not have any off-balance sheet arrangements.
Contractual Obligations
There have been no material changes to our contractual obligations disclosed in Item 7 to our
annual report on Form 10-K for the year ended December 31, 2005 other than those in the ordinary
course of our business, such as contracts related to the continuation of existing clinical trials,
the initiation of new trials and the expansion, qualification and validation of our commercial
manufacturing processes and facilities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have not used derivative financial instruments. However, we are exposed to market risk related
to changes in interest rates. Our current policy is 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. Our cash is deposited in and invested through highly rated
financial institutions in
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North America. Our short-term investments are subject to interest rate risk and will fall in value
if market interest rates increase. If market interest rates were to increase immediately and
uniformly by ten percent from levels at March 31, 2006, we estimate that the fair value of our
investment portfolio would decline by an immaterial amount.
ITEM 4. 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 Securities Exchange Act of 1934, as
amended, or Securities Exchange Act, is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission’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(b) of the Securities Exchange Act) as of March 31, 2006. 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.
There has been no change in our internal control over financial reporting during the fiscal quarter
ended March 31, 2006 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 2000, we issued 699,972 shares of common stock to three consultants in exchange for notes
receivable aggregating approximately $10.9 million. The fixed interest bearing notes were
collateralized by the underlying common stock. The notes-for-stock transactions were accounted for
as in-substance stock option grants to non-employees. In November 2004, the consultants informed us
that they had entered into an agreement in October 2001 with Mr. Mann, our Chairman, Chief
Executive Officer and principal stockholder, under which Mr. Mann would purchase a portion of the
consultants’ common stock, and that MannKind was to apply the proceeds to the amounts owed under
the consultants’ respective notes. The consultants informed us that they believed both we and Mr.
Mann were in breach of the alleged agreement, and indicated their intent to seek alleged damages
arising from our failure to perform the alleged agreement. On October 19, 2005, the principal and
interest on the notes aggregating $14.6 million became due and payable and we pursued collection.
On November 21, 2005, the consultants filed a complaint against us in the California Superior
Court, County of Los Angeles, Rollins et al. v. MannKind et al, Case No. BC343381. The complaint
alleges causes of action for breach of the abovementioned agreement, among other things. On January
19, 2006, the parties mediated and settled the case. Under the settlement, MannKind repurchased
620,697 shares from the consultants in full satisfaction of the notes. MannKind also agreed to
repurchase the remaining 79,275 shares held by the consultants for $1.4 million. The complaint has
been dismissed in its entirety with prejudice.
ITEM 1A. RISK FACTORS
You should consider carefully the following information about the risks described below, together
with the other information contained in this quarterly report on
Form 10-Q, 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 quarterly report. Additional risks and uncertainties that we are
unaware of may also become important factors that affect us. There have been no material changes to the risk factors
described in Item 1A to our annual report on Form 10-K for the year
ended December 31, 2005. 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 have a history of operating losses, we expect to continue to incur losses, and we may never
become profitable.
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We are a development stage company with no commercial products. All of our product candidates are
still being developed, and all but our Technosphere Insulin System are still in 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
anticipate that our Technosphere Insulin System will not be commercially available for several
years, if at all.
We have never been profitable, and, as of March 31, 2006, we had an accumulated deficit of $600.9
million. 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. This accumulated deficit may
increase significantly as we expand 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. Our ability to achieve and sustain profitability
depends upon obtaining regulatory approvals for and successfully commercializing our Technosphere
Insulin System, 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 products and conduct clinical trials for these products.
Although we currently are focusing on our Technosphere Insulin System as our lead product
candidate, we may in the future conduct clinical trials for a number of additional product
candidates. Our future revenues may not be sufficient to support the expense of these activities.
Based upon our current expectations, we believe that our existing capital resources will enable us
to continue planned operations into the third quarter of 2006. 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 expect that we will
need to raise additional capital, either through the sale of equity and/or debt securities, a
strategic business collaboration or the establishment of other funding facilities, in order to
continue the development and commercialization of our Technosphere Insulin System and other product
candidates and to support our other ongoing activities. 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 our Technosphere Insulin System or our other product candidates; | |
| • | 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; and | |
| • | the costs of discontinuing projects and technologies or decommissioning existing facilities, if we undertake those activities. |
We have raised capital in the past primarily through the sale of equity securities. We may in the
future pursue the sale of equity and/or debt securities, or the establishment of other funding
facilities. Issuances of debt or additional equity could impact your rights as a holder of our
common stock, may dilute your ownership percentage and 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.
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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. We cannot offer assurances, however, that any strategic collaborations, sales
of securities or sale or license 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, licensing arrangements, sales of securities 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 our Technosphere Insulin System development activities, or further reduction of costs for
facilities and administration.
We depend heavily on the successful development and commercialization of our lead product
candidate, the Technosphere Insulin System, which is still under development, and our other product
candidates, which are in preclinical development.
To date, we have not completed the development of any products through to commercialization. Only
our Technosphere Insulin System is currently undergoing clinical trials, while our other product
candidates are in research 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 our Technosphere Insulin System.
We have expended significant time, money and effort in the development of our lead product
candidate, the Technosphere Insulin System, which has not yet received regulatory approval and
which may never be commercialized. Before we can market and sell our Technosphere Insulin System,
we will need to advance our Technosphere Insulin System through Phase 3 clinical trials and
demonstrate in these trials that our Technosphere Insulin System is safe and effective. We
initiated two pivotal Phase 3 clinical trials this past quarter with the last pivotal Phase 3 trial
scheduled to begin shortly. Also, we currently anticipate conducting several special population
studies which will require additional time and substantial expenditure of resources. We must also
receive the necessary approvals from the FDA and similar foreign regulatory agencies before this
product can be marketed in the United States or elsewhere. Even if we were to receive regulatory
approval, we ultimately may be unable to gain market acceptance of our Technosphere Insulin System
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 our
Technosphere Insulin System, 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 areas. 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 our Technosphere Insulin System, 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 our Technosphere Insulin System 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.
If we do not achieve our projected development 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
compared to our estimates — in many cases for reasons beyond our control —
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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; | ||
| • | 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 our Technosphere Insulin System; | ||
| • | 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 sale or license of our assets on a timely basis, we may be required to reduce
expenses by delaying, reducing or curtailing our Technosphere Insulin System 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.
We initially are focusing on the development of the Technosphere Insulin System for the treatment
of diabetes, and we face intense competition in this area. In January 2006, the FDA and the
European Commission approved Exubera, developed by Pfizer, Inc. in collaboration with Nektar
Therapeutics, for the treatment of adults with type 1 and type 2 diabetes. Eli Lilly and Company,
in collaboration with Alkermes, Inc., initiated a Phase 3 clinical trial in July 2005, required for
registration of their inhaled insulin system. Novo Nordisk A.S. has announced their intention to
re-initiate Phase 3 clinical trials of their pulmonary insulin product. In addition, 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.
The rapid rate of scientific discoveries and technological changes could result in one or more of
our products becoming obsolete or noncompetitive. Our competitors may develop or introduce new
products that render our technology and our Technosphere Insulin System less competitive,
uneconomical or obsolete. Pfizer, the first to commercialize a pulmonary insulin system, will have
an advantage in being able to gain reputation and market share as well as set parameters for the
pulmonary insulin market such as pricing. Our future success will depend not only on our ability to
develop our products but to improve them and to 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 our Technosphere Insulin System,
we may not be able to execute on our business model.
We are currently evaluating potential collaborations with respect to our Technosphere Insulin
System. If we are not able to enter into a collaboration on terms that are favorable to us, we
could be required to undertake and fund product development, clinical trials, manufacturing and
marketing activities solely at our own expense. We currently estimate that the cost to continue the
development of
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the Technosphere Insulin System over the next 12 months would be up to $200 million. However, this
estimate may change based on how the program proceeds. Failure to enter into a collaboration with
respect to our Technosphere Insulin System could substantially increase our requirements for
capital, which might not be available on favorable terms, if at all. Alternatively, we would have
to substantially reduce our development efforts, which would delay or otherwise impede the
commercialization of our Technosphere Insulin System.
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 and if our third-party collaborators do not perform
satisfactorily or if our collaborations fail, development or commercialization of our Technosphere
Insulin System may be delayed and our business could be harmed.
We currently rely on clinical research organizations and hospitals to conduct, supervise or monitor
some or all aspects of clinical trials involving our Technosphere Insulin System. Further, we may
also enter into license agreements, partnerships or other collaborative arrangements to support
financing, development and marketing of our Technosphere Insulin System. 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 our Technosphere Insulin
System 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.
Testing of our Technosphere Insulin System or another product candidate may not yield successful
results, and even if it does, we may still be unable to commercialize that product candidate.
Our research and development programs are designed to test the safety and efficacy of our
Technosphere Insulin System and our other product candidates through extensive preclinical 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 our Technosphere Insulin System or
any of our other product candidates, including the following:
| • | safety and efficacy results obtained in our preclinical 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. |
We have initiated a pivotal Phase 3 safety study of our Technosphere Insulin System to evaluate
pulmonary function over a period of two years. Our Technosphere Insulin System is intended for
multiple uses per day. Due to the size and timeframe over which existing and planned clinical
trials are conducted, the results of clinical trials, including our existing Phase 3 trials, may
not be indicative of the effects of the use of our Technosphere Insulin System over longer terms.
If long-term use of our Technosphere Insulin System results in adverse health effects or reduced
efficacy or both, the FDA or other regulatory agencies may terminate our ability to market and sell
our Technosphere Insulin System, may narrow the approved indications for use or otherwise require
restrictive product labeling or
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marketing, or may require further clinical trials, which may be time-consuming and expensive, and
may not produce favorable results.
As a result of any of these events, the FDA, other regulatory authorities, any collaborator or we
may suspend or terminate clinical trials or marketing of our Technosphere Insulin System 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 an early-stage development company to a company
that commercializes therapeutics, our operations would suffer.
We are reaching a critical juncture in our development, transitioning from an early-stage
development company to one with multiple Phase 3 clinical trials. Phase 3 development of the
Technosphere Insulin System is far more complex than the earlier phases. Overall, we plan to
support a significant number of studies in the near term. We have not previously implemented the
range of studies contemplated for our Phase 3 clinical program. Moreover, as a company, we have no
previous experience in the Phase 3-through-new drug application, or NDA, stage of product
development.
We require a well-structured plan to make this transition. In the past year, we have added a
significant number of new executive personnel, particularly in clinical development, regulatory and
manufacturing production, including personnel with significant Phase 3-to-commercialization
experience. We have aligned our management structure to accommodate the increasing complexity of
our operations, and we are implementing the following measures, among others, to accommodate our
transition, complete development of our Technosphere Insulin System and successfully implement our
commercialization strategy for our Technosphere Insulin System:
| • | expand our manufacturing capabilities; | ||
| • | develop comprehensive and detailed commercialization, clinical development and regulatory plans; and | ||
| • | implement standard operating procedures, including those for protocol development. |
If we are unable to accomplish these measures in a timely manner, we would be at considerable risk of failing to:
| • | complete our Phase 3 clinical trial program in a deliberate fashion, on time and within budget; and | ||
| • | develop through our Phase 3 trials the key clinical data needed to obtain regulatory approval and compete successfully in the marketplace. |
If our suppliers fail to deliver materials and services needed for the production of our
Technosphere Insulin System 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 our Technosphere Insulin System to be commercially viable, we need access to sufficient,
reliable and affordable supplies of insulin, our MedTone inhaler, the related cartridges and other
materials. We currently have a long-term supply agreement with Diosynth B.V., an independent
supplier of insulin and a subsidiary of Akzo Nobel, which is currently our sole supplier for
insulin. We are aware of at least five other suppliers of bulk insulin but to date we have not
entered into a commercial relationship with any of the five. Currently we obtain our Technosphere
pre-cursor raw material from Degussa AG, a major chemical manufacturer with facilities in Europe
and North America. We utilize our in-house chemical manufacturing plant as a back up facility.
Degussa AG has the capacity to supply our current clinical and future commercial requirements. We
entered into a long-term supply agreement with Vaupell, Inc., the supplier of our MedTone inhaler
and cartridges. We must rely on our suppliers to comply with relevant regulatory and other legal
requirements, including the production of insulin in accordance with current drug Good
Manufacturing Practices, or cGMP, and the production of MedTone inhaler and related cartridges in
accordance with device Quality System Regulations, or 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 our Technosphere Insulin System may be delayed. Any such events
would delay the submission of our Technosphere Insulin System for regulatory approval or market
introduction and subsequent sales and, if so, our business and results of operations will be harmed
and the market price of our common stock may decline.
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We have never manufactured our Technosphere Insulin System or any other product candidate 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 currently obtain our Technosphere pre-cursor raw material primarily from Degussa AG. We use our
Danbury, Connecticut facility to formulate Technosphere Insulin, fill plastic cartridges with
Technosphere Insulin and blister package the cartridges for our clinical trials. We presently
intend to increase our formulation, fill and finishing capabilities at Danbury in order to
accommodate our activities through initial commercialization. This expansion will involve a number
of third-party suppliers of equipment and materials as well as engineering and construction
services. Our suppliers may not deliver all of the required equipment, materials and services in a
timely manner or at reasonable prices. If we encounter difficulties in our relationships with these
suppliers, or if a supplier becomes unable to provide us with goods or services at the agreed-upon
price, our facilities expansion could be delayed or its costs increased.
We have never manufactured our Technosphere Insulin System or any other product candidate in
commercial quantities. As our product candidates move through the regulatory process, we will need
to either develop the capability of manufacturing on a commercial scale or engage third-party
manufacturers with this capability, and we cannot offer assurances that we will be able to do
either successfully. 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 and assurance and shortages of qualified personnel, as well as
compliance with strictly enforced federal, state and foreign regulations. In addition, before we
would be able to produce commercial quantities of Technosphere Insulin at our Danbury facility, it
would have to undergo a pre-approval inspection by the FDA. The expansion process and preparation
for the FDA’s pre-approval inspection for commercial production at the Danbury facility could take
an additional six months or longer. If we use a third-party supplier to formulate Technosphere
Insulin or produce raw material, the transition could also require significant start-up time to
qualify and implement the manufacturing process. If we engage a third-party manufacturer, our
third-party manufacturer may not perform as agreed or may terminate its agreement with us.
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 we were unable to promptly find one or more replacement
manufacturers capable of production at a substantially equivalent cost, in substantially equivalent
volume and 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 CBZ-lysine, which 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 initiated the final stages of the soil cleanup plan which we
estimate will cost $1.5 to $2.0 million to complete by the end of 2007. 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. In the event that any cleanup costs are imposed on us and we are unable to collect the
full amount of these costs and expenses from the seller or the party responsible for the
contamination, we may
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be required to pay these costs and 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.
A broad base of physicians and specialists treat patients with diabetes. A large sales force will
be required in order to educate and support these physicians and specialists. Therefore, we plan to
enter into collaborations with one or more pharmaceutical companies to sell, market and distribute
our Technosphere Insulin System, 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 and we estimate that
establishing a specialty sales force would cost more than $35 million. Because of our size, we
would be at a disadvantage to our potential competitors, all of which either are or have
collaborated with large pharmaceutical companies that have substantially more resources than we do.
As a result, we 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. In addition, our competitors would
have a greater ability to devote research resources toward expansion of the indications for their
products. 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 payors and the healthcare community, we may be unable to generate significant revenue,
if any.
Technosphere Insulin System and our other product candidates are new and unproven. Even if any of
our product candidates obtain regulatory approvals, it may not gain market acceptance among
physicians, patients, third-party payors 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 our Technosphere Insulin System and our other product candidates
will depend on many factors, including:
| • | the claims for which FDA approval can be obtained, including superiority claims; | ||
| • | the perceived advantages and disadvantages of competitive products; | ||
| • | the willingness and ability of patients and the healthcare community to adopt new technologies; | ||
| • | the ability to manufacture the product in sufficient quantities with acceptable quality and at an acceptable cost; | ||
| • | the perception of patients and the healthcare community, including third-party payors, regarding the safety, efficacy and benefits of the product compared to those of competing products or therapies; | ||
| • | the convenience and ease of administration of the product relative to existing treatment methods; | ||
| • | the pricing and reimbursement of the product relative to existing 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. 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 payors 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 payors do not reimburse customers for our products, our products might not be used
or purchased, which would adversely affect our revenues.
Our future revenues and potential for profitability may be affected by the continuing efforts of
governments and third-party payors 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
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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 payors 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 our Technosphere Insulin System 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 payors, such as
governmental and private insurance plans. Third-party payors are increasingly challenging the
prices charged for medical products and services. In addition, because each third-party payor
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 payor 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 our Technosphere Insulin System 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 $5 million. We believe these limits are reasonable to cover us
from potential damages arising from current and previous clinical trials of our Technosphere
Insulin System. In addition, we carry local policies per trial in each country in which we conduct
clinical trials that requires us to carry coverage based on local statutory requirements. We intend
to obtain product liability coverage for commercial sales in the future if our Technosphere Insulin
System 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, we may not have sufficient financial resources to complete development or
commercialization of any of our product candidates and, if so, 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 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
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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 also serving as the Chairman and Co-Chief
Executive Officer of Advanced Bionics Corporation, a wholly owned subsidiary of Boston Scientific
Corporation. Mr. Mann 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.
We have been sued by our former Chief Medical Officer. As a result of this litigation, we may incur
material costs and suffer other consequences, which may adversely affect us.
In May 2005, Dr. Cheatham filed a complaint against us in the California Superior Court. The
complaint alleges causes of action for wrongful termination in violation of public policy, breach
of contract and retaliation in connection with the termination of Dr. Cheatham’s employment. In the
complaint, Dr. Cheatham seeks compensatory, punitive and exemplary damages in excess of $2.0
million as well as reimbursement of attorneys’ fees. In June 2005, we answered the complaint and
also filed a cross-complaint against Dr. Cheatham, alleging claims for libel per se, trade libel,
breach of contract, breach of the implied covenant of good faith and fair dealing and breach of the
duty of loyalty. In July 2005, Dr. Cheatham filed a demurrer, and a motion to strike our
cross-complaint under California’s anti-SLAPP statute. In September 2005, the California Superior
Court overruled Dr. Cheatham’s demurrer and denied his motion to strike the Company’s
cross-complaint. Dr. Cheatham has appealed the Court’s ruling denying his motion to strike.
Discovery as to Dr. Cheatham’s claims against us is proceeding, and this case is scheduled for
trial to commence in October 2006.
The litigation will result in costs and divert management’s attention and resources, any of which
could adversely affect our business, results of operations or financial position. We are also
concerned that, despite the findings by an independent counsel following an investigation and
despite the endorsement of the independent counsel’s report by our board of directors, investors
could give undue weight to Dr. Cheatham’s allegations, resulting in damage to our reputation, or
the FDA could begin an investigation, either of which could adversely affect the trading price of
our common stock. To date, we have not been notified of any investigation by the FDA. If we are not
successful in this litigation, we could be forced to make a significant settlement or judgment
payment to Dr. Cheatham, which could adversely affect our business, results of operations or
financial position.
Our facilities that are located in Southern California may be affected by natural disasters.
Our headquarters and some of our research and development activities are located in Southern
California, where they are subject to an enhanced risk of natural and other disasters such as power
and telecommunications failures, mudslides, fires and earthquakes. A 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.
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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, management’s assessment of our
internal controls over financial reporting. Our management has concluded, and our independent
registered public accounting firm has attested, that our internal control over financial reporting
was effective as of December 31, 2005. There has been no change in our internal control over
financial reporting during the fiscal quarter ended March 31, 2006 that has materially affected, or
is reasonably likely to materially effect, our internal control 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 error 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.
RISKS RELATED TO REGULATORY APPROVALS
Our product candidates must undergo rigorous preclinical 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 our Technosphere Insulin System, 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 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 expect, based on our discussions with the FDA and on our understanding
of the interactions between the FDA and other pharmaceutical companies developing inhaled insulin
delivery systems, that we will need safety data covering at least two years from patients treated
with our Technosphere Insulin System and that we must complete a two-year carcinogenicity study of
Technosphere Insulin in rodents to obtain approval, among other requirements. We cannot be certain
when or under what conditions we will undertake further clinical trials. The clinical trials of our
product candidates may not be completed on schedule, the FDA or foreign regulatory agencies may
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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 our Technosphere Insulin System. 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 our Technosphere Insulin System, 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 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 may impact the development and registration of our
Technosphere Insulin System in many ways, including: the approval of Exubera may increase the
difficulty of enrolling patients in our clinical trials; Exubera may be viewed as standard of care
by the FDA and used as a reference for the safety/efficacy evaluations of our Technosphere Insulin
System; and the approval standards set for Exubera may be applied to other products that follow
including our Technosphere Insulin System. The FDA has advised us that it will regulate our
Technosphere Insulin System as a “combination product” because of the complex nature of the system
that includes the combination of a new drug (Technosphere Insulin) and a new medical device (the
MedTone inhaler used to administer the insulin). The FDA indicated that the review of a future drug
marketing application for our Technosphere Insulin System will involve three separate review groups
of the FDA: (1) the Metabolic and Endocrine Drug Products Division; (2) the Pulmonary Drug Products
Division; and (3) the Center for Devices and Radiological Health within the FDA that reviews
medical devices. We currently understand that the Metabolic and Endocrine Drug Products Division
will be the lead group and will obtain consulting reviews from the other two FDA groups. The FDA
has not made an official final decision in this regard, however, and we can make no assurances at
this time about what impact FDA review by multiple groups will have on the review and approval of
our product or whether we are correct in our understanding of how the Technosphere Insulin System
will be reviewed and approved.
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
our Technosphere Insulin System as a combination product therapy may lengthen the product
development and regulatory approval process, increase our development costs and delay or prevent
the commercialization of our Technosphere Insulin System.
We are developing our Technosphere Insulin System as a new treatment for diabetes utilizing unique,
proprietary components. As a combination product, any changes to either the MedTone inhaler, the
Technosphere material or the insulin, 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 could require us to undertake additional clinical trials and other
studies, which could significantly delay the development and commercialization of our Technosphere
Insulin System. Our product candidates that are currently in development for the treatment of
cancer also face similar obstacles and costs.
We currently expect that our inhaler will be reviewed for approval as part of the NDA for our
Technosphere Insulin System. No assurances exist that we will not be required to obtain separate
device clearances or approval for use of our inhaler with our Technosphere Insulin System. This may
result in our being subject to medical device review user fees and to other device requirements to
market our inhaler and may result in significant delays in commercialization. Even if the device
component is approved as part of our NDA for the Technosphere Insulin System, numerous device
regulatory requirements still apply to the device part of the drug-device combination.
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.
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We will not be able to commercialize our Technosphere Insulin System and other product candidates
until we have obtained
regulatory approval. We have 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.
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.
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. Regulatory authorities may limit the segments of the diabetes
population to which we or others may market our Technosphere Insulin System or limit the target
population for our other product candidates. Based on currently available clinical studies, we
believe that our Technosphere Insulin System 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 and other advantages, if any, of the Technosphere Insulin System have clinical significance
or can be confirmed in head-to-head clinical trials against appropriate approved comparator insulin
drug products. Such comparative clinical trials are required to make these types of superiority
claims in labeling or advertising. These aforementioned observations and others may therefore not
be capable of substantiation in comparative clinical trials prior to our NDA submission, if at all,
or otherwise may not be suitable for inclusion in product labeling or advertising and, as a result,
our Technosphere Insulin System may not have competitive advantages when compared to other insulin
products.
The manufacture, marketing and sale of these 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 the product occur following approval. In response to questions that have been
raised about the safety of certain approved prescription products, including the lack of adequate
warnings, the FDA and Congress are currently considering new regulatory and legislative approaches
to advertising, monitoring and assessing the safety of marketed drugs, including legislation
providing the FDA with authority to mandate labeling changes for approved pharmaceutical products,
particularly those related to safety. We also cannot be sure that the current Congressional and FDA
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.
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Our insulin supplier does not yet supply human recombinant insulin for an FDA-approved product and
will likely be subject to an FDA preapproval inspection before the agency will approve a future
marketing application for our Technosphere Insulin System.
Our insulin supplier sells its product outside of the US,
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 our
Technosphere Insulin System. We also depend on suppliers for other materials that comprise our
Technosphere Insulin System, including our MedTone inhaler and cartridges. All of our device
suppliers must comply with relevant regulatory requirements including QSR. It also is likely that
major suppliers will be subject to FDA preapproval inspections before the agency will approve a
future marketing application for our Technosphere Insulin System. At the present time our insulin
supplier is certified to the ISO9001:2000 Standard. There can be no assurance, however, that if the
FDA were to conduct a preapproval inspection of our insulin supplier or other 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.
Any regulatory approvals that we receive for our product candidates may also be subject to
limitations on the indicated uses for which the product candidate may be marketed or contain
requirements for potentially costly post-marketing follow-up clinical trials.
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.
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 our product 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 the approval of our Technosphere Insulin System. As well, the public perception of our
products 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 product.
For example, in August 2004, an analyst reported that the United Kingdom Committee on the Safety of
Medicines had expressed concern that a European application for approval of a drug for the
treatment of diabetes was not licensable at the time. Earlier in 2004, sanofi-aventis, on behalf of
Pfizer and Nektar, filed for regulatory approval in Europe of Exubera. Although the identity of the
drug was not disclosed in the analyst’s report, the news nonetheless triggered temporary but sharp
declines in the market prices of Nektar’s common stock as well as our common stock.
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, know-how 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 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
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proceedings such as
oppositions in foreign jurisdictions or re-examinations in the US. 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 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. 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.
Interference proceedings brought by the US Patent and Trademark Office, or 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 third party may claim that we are using inventions covered by such third party’s patents and may
go to court to stop us from engaging in our normal operations and activities. These 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.
Although we own a number of domestic and foreign patents and patent applications relating to our
Technosphere Insulin System and cancer vaccine products under development, we have identified
certain third-party patents that a court may interpret to restrict our
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freedom to operate (that is,
to cover our products) in the areas of Technosphere formulations, pulmonary insulin delivery and
the treatment of cancer. Specifically, we have identified certain third-party patents having claims
relating to chemical compositions of
matter and pulmonary insulin delivery that may trigger an allegation of infringement upon the
commercial manufacture and sale of our Technosphere Insulin System. We have also identified
third-party patents disclosing methods of use and compositions of matter related to DNA-based
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 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.
Patent litigation is costly and time-consuming. Among other things, such 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. Although patent and intellectual property disputes in the pharmaceutical area have often
been settled for licensing or similar arrangements, associated costs may be substantial and could
include ongoing royalties. 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 those products in any
jurisdiction, including the United States. 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 stock market, particularly in recent years, has experienced significant volatility particularly
with respect to pharmaceutical and biotechnology stocks. 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; | ||
| • | announcements by us or our competitors concerning their clinical trial results, acquisitions, strategic alliances, technological innovations and newly approved commercial products; | ||
| • | the availability of critical materials used in developing and manufacturing our Technosphere Insulin System or other product |
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| candidates; |
| • | developments concerning our patents, proprietary rights and potential infringement claims; | ||
| • | developments in our litigation with our former Chief Medical Officer; | ||
| • | the expense and time associated with, and the extent of our ultimate success in, securing regulatory approvals; | ||
| • | changes in securities analysts’ estimates of our financial and operating performance; | ||
| • | sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders; and | ||
| • | discussion of our Technosphere Insulin System, 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 National 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.
Mr. Mann has been our primary source of financing to date. At March 31, 2006, Mr. Mann beneficially
owned approximately 49.2% of our outstanding shares of capital stock. Members of Mr. Mann’s family
beneficially owned at least an additional 2.0% 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 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 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, 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,
four of his children and Dr. Joseph Schulman, the director of AMF. The AEMFBE is a membership
foundation consisting of five members, including Mr. Mann and the same four 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.
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The future sale of our common stock could negatively affect our stock price.
As of March 31, 2006, we had approximately 49.6 million shares of common stock outstanding.
Substantially all of these shares 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. 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, 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.
Our amended and restated certificate of incorporation and bylaws include anti-takeover 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, because we are incorporated in Delaware, 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
| Exhibit | ||
| Number | Exhibit Description | |
3.1(1)
|
Restated Certificate of Incorporation. | |
3.2(1)
|
Amended and Restated Bylaws. | |
4.1(1)
|
Form of common stock certificate. | |
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) |
| (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. |
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SIGNATURE
Pursuant to the requirements 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.
| Dated: May 5, 2006 | MannKind Corporation | |||||
| By: | /s/ Richard L. Anderson | |||||
| Richard L. Anderson | ||||||
| Corporate Vice President and Chief Financial Officer | ||||||
| (Principal Financial and Accounting Officer) | ||||||
41
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULES 13a-14(a) AND 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Alfred E. Mann, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MannKind Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: May 5, 2006 |
||||
| /s/ Alfred E. Mann | ||||
| Alfred E. Mann Chief Executive Officer (Principal Executive Officer) |
42
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULES 13a-14(a) AND 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Richard L. Anderson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MannKind Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: May 5, 2006 |
||||
| /s/ Richard L. Anderson | ||||
| Richard L. Anderson Chief Financial Officer (Principal Financial Officer) |
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EXHIBIT 32
CERTIFICATIONS OF
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)
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)
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code
(18 U.S.C. §1350), Alfred E. Mann, Chief Executive Officer of MannKind Corporation (the “Company”),
and Richard L. Anderson, Chief Financial Officer of the Company, each hereby certifies that, to the
best of his knowledge:
1. The Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2006 (the
“Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended; and
2. The information contained in the Quarterly Report fairly presents, in all material
respects, the financial condition and results of operations of the Company for the period covered
by the Report.
In Witness Whereof, the undersigned have set their hands hereto as of the 5th day of May 2006.
/s/ Alfred E.Mann
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/s/ Richard L.Anderson | |||||
Alfred E. Mann
Chief Executive Officer |
Richard L. Anderson
Chief Financial Officer |
A signed original of these certifications has been provided to MannKind Corporation and will be
retained by MannKind Corporation and furnished to the Securities and Exchange Commission or its
staff upon request.
These certifications are being furnished solely to accompany this Quarterly Report on Form 10-Q
pursuant to 18 U.S.C. Section 1350, and shall not be deemed filed for purposes of Section 18 of the
Securities Exchange Act of 1934 into any filing of MannKind Corporation, whether made before or
after the date hereof, regardless of any general incorporation language in such filing.
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