Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2007
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 Exchange 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 May 7, 2007, there were 73,418,614 shares of the registrant’s common stock, $.01 par value
per share, outstanding.
MANNKIND CORPORATION
Form 10-Q
For the Quarterly Period Ended March 31, 2007
TABLE OF CONTENTS
Form 10-Q
For the Quarterly Period Ended March 31, 2007
TABLE OF CONTENTS
EXHIBIT
31.1 |
||
EXHIBIT
31.2 |
||
EXHIBIT
32 |
2
Table of Contents
PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except share data)
(In thousands except share data)
| March 31, 2007 | December 31, 2006 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 262,753 | $ | 319,555 | ||||
Marketable securities |
102,824 | 116,924 | ||||||
State research and development credit exchange |
3,918 | 2,418 | ||||||
Prepaid expenses and other current assets |
13,714 | 10,650 | ||||||
Total current assets |
383,209 | 449,547 | ||||||
Property and equipment — net |
98,622 | 88,328 | ||||||
State research and development credit exchange receivable — net of
current portion |
375 | 1,500 | ||||||
Other assets |
361 | 362 | ||||||
Total |
$ | 482,567 | $ | 539,737 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 10,123 | $ | 10,715 | ||||
Accrued expenses and other current liabilities |
45,730 | 34,244 | ||||||
Total current liabilities |
55,853 | 44,959 | ||||||
Senior convertible notes |
111,406 | 111,267 | ||||||
Other liabilities |
24 | 24 | ||||||
Total liabilities |
167,283 | 156,250 | ||||||
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, 2007 and
December 31, 2006 |
— | — | ||||||
Common stock, $0.01 par value — 90,000,000 shares authorized;
73,407,583 and 73,360,154 shares issued and outstanding at March 31,
2007 and December 31, 2006, respectively |
734 | 734 | ||||||
Additional paid-in capital |
1,175,540 | 1,170,602 | ||||||
Deficit accumulated during the development stage |
(860,990 | ) | (787,849 | ) | ||||
Total stockholders’ equity |
315,284 | 383,487 | ||||||
Total |
$ | 482,567 | $ | 539,737 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
(Unaudited)
(In thousands, except per share data)
| Cumulative | ||||||||||||
| Period from | ||||||||||||
| February 14, | ||||||||||||
| 1991 (Date of | ||||||||||||
| Three months ended | Inception) to | |||||||||||
| March 31, | March 31, | |||||||||||
| 2007 | 2006 | 2007 | ||||||||||
Revenue |
$ | 10 | $ | 100 | $ | 2,968 | ||||||
Operating expenses: |
||||||||||||
Research and development |
63,788 | 35,950 | 553,984 | |||||||||
General and administrative |
13,550 | 9,138 | 153,526 | |||||||||
In-process research and development costs |
— | — | 19,726 | |||||||||
Goodwill impairment |
— | — | 151,428 | |||||||||
Total operating expenses |
77,338 | 45,088 | 878,664 | |||||||||
Loss from operations |
(77,328 | ) | (44,988 | ) | (875,696 | ) | ||||||
Other income |
52 | 50 | (1,632 | ) | ||||||||
Interest expense on note payable to principal
stockholder |
— | — | (1,511 | ) | ||||||||
Interest expense on senior convertible notes |
(1,145 | ) | — | (1,367 | ) | |||||||
Interest income |
5,280 | 1,380 | 19,237 | |||||||||
Loss before provision for income taxes |
(73,141 | ) | (43,558 | ) | (860,969 | ) | ||||||
Income taxes |
— | (1 | ) | (21 | ) | |||||||
Net loss |
(73,141 | ) | (43,559 | ) | (860,990 | ) | ||||||
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 |
$ | (73,141 | ) | $ | (43,559 | ) | $ | (884,202 | ) | |||
Net loss per share applicable to common
stockholders — basic and diluted |
$ | (1.00 | ) | $ | (0.87 | ) | ||||||
Shares used to compute basic and diluted net
loss per share applicable to common
stockholders |
73,388 | 49,787 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
Table of Contents
MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
(Unaudited)
(In thousands)
| Cumulative | ||||||||||||
| Period from | ||||||||||||
| February 14, | ||||||||||||
| 1991 (Date of | ||||||||||||
| Three months ended | Inception) to | |||||||||||
| March 31, | March 31, | |||||||||||
| 2007 | 2006 | 2007 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net loss |
$ | (73,141 | ) | $ | (43,559 | ) | $ | (860,990 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||||||
Depreciation and amortization |
2,170 | 2,000 | 41,324 | |||||||||
Stock-based compensation expense |
4,549 | 3,711 | 41,734 | |||||||||
Stock expense for shares issued pursuant to research agreement |
— | — | 2,074 | |||||||||
Loss on sale and abandonment/disposal of property and equipment |
— | — | 3,446 | |||||||||
Accrued interest on investments, net of amortization of premiums |
— | 197 | 58 | |||||||||
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 receivable |
— | — | (747 | ) | ||||||||
Goodwill impairment |
— | — | 151,428 | |||||||||
Loss on available-for-sale securities |
— | — | 229 | |||||||||
Changes in assets and liabilities: |
||||||||||||
State research and development credit exchange receivable |
(375 | ) | 306 | (4,293 | ) | |||||||
Prepaid expenses and other current assets |
(3,064 | ) | (2,863 | ) | (13,714 | ) | ||||||
Other assets |
1 | (2 | ) | (361 | ) | |||||||
Accounts payable |
(592 | ) | 461 | 10,123 | ||||||||
Accrued expenses and other current liabilities |
5,635 | 2,431 | 39,879 | |||||||||
Other liabilities |
— | (5 | ) | 22 | ||||||||
Net cash used in operating activities |
(64,817 | ) | (37,323 | ) | (568,210 | ) | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Purchase of marketable securities |
(3,450 | ) | (16,250 | ) | (560,599 | ) | ||||||
Sales of marketable securities |
17,550 | 48,950 | 457,490 | |||||||||
Purchase of property and equipment |
(6,474 | ) | (6,106 | ) | (137,616 | ) | ||||||
Proceeds from sale of property and equipment |
— | — | 214 | |||||||||
Net cash provided by (used in) investing activities |
7,626 | 26,594 | (240,511 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Issuance of common stock and warrants |
429 | 581 | 884,337 | |||||||||
Collection of Series C convertible preferred stock subscriptions receivable |
— | — | 50,000 | |||||||||
Issuance of Series B convertible preferred stock for cash |
— | — | 15,000 | |||||||||
5
Table of Contents
MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
| Cumulative | ||||||||||||
| Period from | ||||||||||||
| February 14, | ||||||||||||
| 1991 (Date of | ||||||||||||
| Three months ended | Inception) to | |||||||||||
| March 31, | March 31, | |||||||||||
| 2007 | 2006 | 2007 | ||||||||||
Cash received for common stock to be issued |
— | — | 3,900 | |||||||||
Repurchase of common stock |
— | — | (1,028 | ) | ||||||||
Put shares sold to majority stockholder |
— | — | 623 | |||||||||
Borrowings under lines of credit |
— | — | 4,220 | |||||||||
Proceeds from notes receivables |
— | — | 1,742 | |||||||||
Borrowings on notes payable from principal stockholder |
— | — | 70,000 | |||||||||
Principal payments on notes payable to principal stockholder |
— | — | (70,000 | ) | ||||||||
Borrowings on notes payable |
— | — | 3,460 | |||||||||
Principal payments on notes payable |
— | — | (1,667 | ) | ||||||||
Proceeds from senior convertible notes |
— | — | 111,267 | |||||||||
Payment of employment taxes related to vested restricted stock units |
(40 | ) | — | (380 | ) | |||||||
Net cash provided by financing activities |
389 | 581 | 1,071,474 | |||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
$ | (56,802 | ) | $ | (10,148 | ) | $ | 262,753 | ||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
319,555 | 56,037 | — | |||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 262,753 | $ | 45,889 | $ | 262,753 | ||||||
SUPPLEMENTAL CASH FLOWS DISCLOSURES: |
||||||||||||
Cash paid for income taxes |
$ | — | $ | 1 | $ | 21 | ||||||
Interest paid in cash |
— | — | 1,695 | |||||||||
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 | ) | ||||||||
Noncash construction in progress |
5,851 | — | 5,851 | |||||||||
In connection with the Company’s initial public offering, all shares of Series B and Series C
convertible preferred stock, in the amount of $15.0 million and $50.0 million, respectively,
automatically converted into common stock in August 2004.
The accompanying notes are an integral part of these consolidated financial statements.
6
Table of Contents
MANNKIND CORPORATION AND SUBSIDIARY
(A Development Stage Company)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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, 2006 are included in the Company’s annual report on Form
10-K for the fiscal year ended December 31, 2006 filed with the SEC on March 16, 2007 (the “Annual
Report”).
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, 2007 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., Europe and Latin America to study its safety and efficacy in the
treatment of diabetes. The Technosphere Insulin System consists of the Company’s proprietary
Technosphere particles onto which insulin molecules are loaded. These loaded particles are then
aerosolized and inhaled deep into the lung using the Company’s 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, 2007 the Company has reported accumulated
net losses of $861.0 million, which include a goodwill impairment charge of $151.4 million, and
negative cash flow from operations of $568.2 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 second quarter of 2008. 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.
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.
Recently
Issued Accounting Standards — In February 2007, the Accounting Standards Board (“FASB”)
issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which
permits entities to choose to measure many financial instruments and certain other items at fair
value. SFAS No. 159 also includes an amendment to SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities which applies to all entities with available-for-sale and trading
securities. This Statement is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007. The Company is assessing the impact of SFAS No. 159 and has not
determined whether it will have a material impact on its results of operations or financial
position.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. The Statement defines
fair value, establishes a framework for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value measurements, and does not require any new fair
value measurements. This Statement applies under other accounting pronouncements that require or
permit fair value measurements. The Statement is effective for the fiscal years beginning after
November 15, 2007. The Company is assessing SFAS No. 157 and has not determined the impact the
adoption of SFAS No. 157 will have on its results of operations or financial position.
7
Table of Contents
2. Investment in securities
The following is a summary of the available-for-sale securities classified as current assets (in
thousands).
| March 31, | December 31, | |||||||||||||||
| 2007 | 2006 | |||||||||||||||
| Cost Basis | Fair Value | Cost Basis | Fair Value | |||||||||||||
Auction rate municipal bonds |
$ | 102,824 | $ | 102,824 | $ | 116,924 | $ | 116,924 | ||||||||
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, 2007 are between 21 and 39
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 of available-for-sale
securities amounted to approximately $17.6 million and $49.0 million for the three months ended
March 31, 2007 and 2006, respectively. Gross realized gains and losses for available-for-sale
securities were insignificant. 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 for all
periods presented in the table above were not material.
3. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities are comprised of the following (in thousands):
| March 31, | December 31, | |||||||
| 2007 | 2006 | |||||||
Salary and related expenses |
$ | 9,053 | $ | 7,255 | ||||
Research and clinical trial costs |
21,036 | 18,707 | ||||||
Accrued interest |
1,306 | 228 | ||||||
Other |
14,335 | 8,054 | ||||||
Accrued expenses and other current liabilities |
$ | 45,730 | $ | 34,244 | ||||
4. Accounting for stock-based compensation
As of March 31, 2007, the Company has three active stock-based compensation plans — the 2004 Equity
Incentive Plan (the “Plan”), the 2004 Non-Employee Directors’ Stock Option Plan (the “NED Plan”),
and the 2004 Employee Stock Purchase Plan (the “ESPP”). The Plan provides for the granting of stock
awards including stock options and restricted stock units, to employees, directors and consultants.
The NED Plan provides for the automatic, non-discretionary grant of options to the Company’s
non-employee directors. Options also remain outstanding at March 31, 2007 under the following
inactive plans: the 1991 Stock Option Plan, the 1999 Stock Plan, the CTL ImmunoTherapies Corp. 2000
Stock Option and Stock Plan, and the Allecure Corp. 2000 Stock Option and Stock Plan. There are
also options outstanding to our principal stockholder at March 31, 2007 that were not granted under
any plan; these options were granted during the year ended December 31, 2002, vested over four
years, and have an exercise price of $25.23 per share. The following table summarizes information
about our stock-based award plans as of March 31, 2007:
| Outstanding | Shares Available | |||||||||||
| Outstanding | Restricted | for | ||||||||||
| Options | Stock Units | Future Issuance | ||||||||||
2004 Equity Incentive Plan |
5,476,844 | 799,294 | 2,239,441 | |||||||||
2004 Non-Employee Directors’ Stock Option Plan |
337,500 | 462,500 | ||||||||||
1991 Stock Option Plan |
22,220 | |||||||||||
1999 Stock Plan |
122,715 | |||||||||||
CTL and Allecure Plans |
44,275 | |||||||||||
Options outside of any plan granted to principal stockholder |
240,972 | |||||||||||
Total |
6,244,526 | 799,294 | 2,701,941 | |||||||||
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 and the NED
Plan expire not more than ten years from the date of the grant and are exercisable upon vesting.
Stock options generally vest over four years. Current stock option grants vest and become
exercisable at the rate of 25% after one year and ratably on a monthly basis over a period of 36
months thereafter. Restricted stock units generally vest over four years with consideration
satisfied by service to the Company. Certain performance-based awards vest upon achieving three
pre-determined performance milestones which are expected to occur over a period of 42 months. The
Plan provides for full acceleration of vesting if an employee is terminated within thirteen months
of a change in control, as defined.
8
Table of Contents
In March 2004, the Company’s board of directors approved the ESPP, which became effective upon the
closing of the Company’s initial public offering. Initially, the aggregate number of shares that
could be sold under the ESPP was 2,000,000 shares of common stock. On January 1 of each year, for a
period of ten years beginning January 1, 2005, the share reserve automatically increases by the
lesser of: 700,000 shares, 1% of the total number of shares of common stock outstanding on that
date, or an amount as may be determined by the board of directors. However, under no event can the
annual increase cause the total number of shares reserved under the 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, 2006 and 2007, the ESPP share reserve was increased by 503,141 and 700,000 shares,
respectively. During the three months ended March 31, 2007 and 2006, the Company did not sell any
shares of its common stock to employees participating in the ESPP.
Upon
adoption of SFAS No. 123R, Share-based Payment: an Amendment
of FASB Statement 123 and 95 (“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. The Company
continues to account for non-employee stock-based compensation expense based on the estimated fair
value of the options, determined using the Black-Scholes option valuation model, in accordance with
EITF No. 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services, and amortizes such expense on a straight-line basis. As of March 31, 2007, there
were 400,880 options outstanding to all consultants.
Total stock-based compensation expense recognized in the accompanying statements of operations is
as follows (in thousands):
| Three months ended March 31, |
||||||||
| 2007 | 2006 | |||||||
Employee-related |
$ | 3,712 | $ | 3,571 | ||||
Consultant-related |
837 | 140 | ||||||
Total |
$ | 4,549 | $ | 3,711 | ||||
Included in consultant related stock compensation expense above is approximately $0.8 million
in expense related to the modification of stock awards for one former employee who became a
consultant during the quarter ended March 31, 2007. Under the terms of the consulting agreement,
the former employee’s options that were granted during the employee’s employment will continue to
vest over the eighteen-month consulting period. Due to the nature of the consulting agreement, one
hundred percent of the incremental expense related to the award modifications was expensed during
the quarter ended March 31, 2007.
Total stock-based compensation expense recognized in the accompanying statements of operations is
included in the following categories (in thousands):
| Three months ended March 31, |
||||||||
| 2007 | 2006 | |||||||
Research and development |
$ | 2,198 | $ | 1,639 | ||||
General and administrative |
2,351 | 2,072 | ||||||
Total |
$ | 4,549 | $ | 3,711 | ||||
The Company uses the Black-Scholes option valuation model to estimate the grant date
fair value of employee stock options. Upon adoption of SFAS No. 123R, the expected life of the
option is estimated using the “simplified” method as provided in SEC Staff Accounting Bulletin No.
107 (SAB No. 107). Under this method, the expected life equals the arithmetic average of the
vesting term and the original contractual term of the options. The Company also estimates
volatility as provided in SAB 107. Under this method, volatility is estimated based on the
historical volatility of similar entities whose share prices are publicly available. The Company
has selected risk-free interest rates based on U.S. Treasury securities with an equivalent expected
term in effect on the date the options were granted. Additionally, the Company uses historical
data and management judgment to estimate stock option exercise behavior and employee turnover rates
to estimate the number of stock option awards that will eventually vest. The following table
summarizes the assumptions the Company used to estimate the fair value of each stock option at the
grant date or modification date, if any, using the Black-Scholes option valuation model:
| Three months ended March 31, |
||||||||
| 2007 | 2006 | |||||||
Risk-free interest rate |
4.7% | 4.6% | ||||||
Expected lives |
6.08 years | 6.08 years | ||||||
Volatility |
57% | 63% | ||||||
Dividends |
— | — | ||||||
9
Table of Contents
The following table summarizes information about stock options outstanding:
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Number | Exercise | Remaining | Aggregate | |||||||||||||
| of | Price | Contractual | Intrinsic | |||||||||||||
| Shares | per Share | Term (Yrs.) | Value ($000) | |||||||||||||
Outstanding at January 1, 2007 |
6,216,698 | $ | 13.94 | |||||||||||||
Granted |
125,320 | 17.19 | ||||||||||||||
Exercised |
(42,801 | ) | 10.04 | $ | 273 | |||||||||||
Forfeited |
(35,861 | ) | 14.53 | |||||||||||||
Expired |
(18,830 | ) | 15.90 | |||||||||||||
Outstanding at March 31, 2007 |
6,244,526 | 14.02 | 7.2 | $ | 1,744 | |||||||||||
Vested or expected to vest at March 31, 2007 |
5,751,208 | 13.93 | 7.1 | $ | 2,152 | |||||||||||
Exercisable at March 31, 2007 |
2,873,639 | 12.73 | 5.6 | $ | 4,523 | |||||||||||
The weighted-average grant date fair value of options granted during the three months ended March
31, 2007 and 2006 was $10.08 and $10.03, respectively. The aggregate intrinsic value of options
exercised during the three months ended March 31, 2007 and 2006 was $0.3 million and $0.5 million.
Cash received from the exercise of options during the three months ended March 31, 2007 and 2006
was approximately $0.4 million and $0.6 million, respectively. The total fair value of options
vested during the three months ended March 31, 2007 and 2006 was $1.6 million and $1.9 million.
A summary of restricted stock units activity for the three months ended March 31, 2007 is presented
below:
| Weighted | ||||||||
| Average | ||||||||
| Number | Grant Date | |||||||
| of | Fair Value | |||||||
| Shares | per Share | |||||||
Outstanding at January 1, 2007 |
776,653 | |||||||
Granted |
39,260 | $ | 17.19 | |||||
Vested |
(7,258 | ) | ||||||
Forfeited |
(9,361 | ) | ||||||
Outstanding at March 31, 2007 |
799,294 | |||||||
The total fair value of restricted stock units vested during the three months ended March 31,
2007 was $0.1 million. No restricted stock units vested during the three months ended March 31,
2006. The weighted-average remaining contractual term for restricted stock units outstanding at
March 31, 2007 was 9.0 years. As of March 31, 2007, there were 11,975 restricted stock units
outstanding to one consultant.
A summary of the status of the Company’s nonvested shares, excluding restricted stock units,
for the three months ended March 31, 2007, is presented below:
| Weighted | ||||||||
| Average | ||||||||
| Number | Grant Date | |||||||
| of | Fair Value | |||||||
| Shares | per Share | |||||||
Nonvested at January 1, 2007 |
3,462,549 | $ | 12.96 | |||||
Granted |
125,320 | 10.08 | ||||||
Vested |
(181,121 | ) | 9.07 | |||||
Forfeited |
(35,861 | ) | 9.52 | |||||
Nonvested at March 31, 2007 |
3,370,887 | 9.73 | ||||||
10
Table of Contents
As of March 31, 2007, there was $25.8 million and $10.8 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 2.5 years.
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, warrants, and
shares that could be issued upon conversion of the senior convertible notes, that are not included
in the diluted net loss per share calculation consisted of an aggregate of 15,056,675 shares and
7,980,029 shares as of March 31, 2007 and 2006, 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, 2007, the estimated
amount receivable under the program was $4.3 million.
7. Property and equipment
Property and equipment consist of the following (dollar amounts in thousands):
| Estimated | ||||||||||||
| Useful | ||||||||||||
| Life | March 31, | December 31, | ||||||||||
| (Years) | 2007 | 2006 | ||||||||||
Land |
— | $ | 5,273 | $ | 5,273 | |||||||
Buildings |
39-40 | 9,566 | 9,566 | |||||||||
Building improvements |
5-40 | 44,131 | 44,041 | |||||||||
Machinery and equipment |
3-10 | 27,357 | 26,623 | |||||||||
Furniture, fixtures and office equipment |
5-10 | 2,993 | 2,923 | |||||||||
Computer equipment and software |
3 | 6,077 | 5,878 | |||||||||
Leasehold improvements |
115 | 103 | ||||||||||
Construction in progress |
30,585 | 20,164 | ||||||||||
Deposits on equipment |
7,702 | 6,903 | ||||||||||
| 133,799 | 121,474 | |||||||||||
Less accumulated depreciation and amortization |
(35,177 | ) | (33,146 | ) | ||||||||
Property and equipment — net |
$ | 98,622 | $ | 88,328 | ||||||||
Leasehold improvements are amortized over the shorter of the term of the lease or the service
lives of the improvements. Depreciation and amortization expense for the three months ended March
31, 2007 and 2006, and the cumulative period from February 14, 1991 (date of inception) to March
31, 2007 was $2.1 million, $2.0 million and $41.2 million, respectively. Capitalized interest
during the three months ended March 31, 2007 was $0.2 million.
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, 2007 and December 31, 2006, 73,407,583 and 73,360,154 shares of common
stock, respectively, were issued and outstanding. No shares of preferred stock were issued and
outstanding at March 31, 2007 and December 31, 2006. On February 22, 2007, the board of directors
of the Company adopted a resolution, subject to stockholder approval, to amend the Company’s
certificate of incorporation to permit the issuance of up to 150,000,000 shares of common stock.
The Company intends to present this resolution for stockholder approval at the Company’s annual
stockholders’ meeting scheduled for May 24, 2007.
11
Table of Contents
Registration rights — As of March 31, 2007, the holders of 17,132,000 shares of common stock
together with warrants to purchase up to 2,882,873 shares of common stock, all of which were issued
in the August 2005 private placement, 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, 2007 the holders of 916,715 shares of the Company’s common stock and the holders of
warrants to purchase 12,459 shares of the Company’s common stock have rights, subject to some
conditions, to require the Company to file registration statements covering their shares or to
include their shares in registration statements that the Company may file for itself or other
stockholders.
9. Warrants
In connection with the sale of common stock in the private placement which closed in August 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. These warrants became exercisable in February 2006 and expire
in August 2010. During the three months ended March 31, 2007, no warrants were exercised. During
the year ended December 31, 2006, warrants to purchase 543,000 shares were exercised and net
settled for approximately 339,000 shares. As of March 31, 2007, warrants to purchase approximately
2,883,000 shares of common stock remained outstanding. In connection with the sale of common stock
in the public offering that closed on December 6, 2006, two holders of outstanding warrants to
purchase a total of 1,710,091 shares of common stock agreed to amend the terms of their warrants to
provide that such warrants would not be exercisable from December 6, 2006 until the date on which
the Company has at least 100,000,000 shares of its common stock duly and validly authorized.
During 1995 and 1996, the Company issued warrants to purchase shares of common stock. As of March
31, 2007, the remaining warrants to purchase 12,459 shares of common stock at a weighted average
exercise price of $12.64 per share were outstanding and exercisable, and expire in December 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.
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 intends to vigorously defend 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 alleged 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 arose 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
12
Table of Contents
violation of his agreement with the Company. In July 2005, Dr. Cheatham filed a demurrer and 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. In November 2005, Dr. Cheatham appealed the Court’s ruling denying his
motion to strike. In December 2006, the Court of Appeal affirmed in part and reversed in part the
Superior Court’s order denying Dr. Cheatham’s motion to strike. Subsequently, Dr. Cheatham filed a
notice of dismissal of the retaliation cause of action, and the Company filed a notice of dismissal
of the remaining claims under its cross-complaint. In April 2007, Dr. Cheatham through his counsel
advised the Company that Dr. Cheatham intended to file a new lawsuit against the Company alleging
that the Company had refused to enter into a contract with Dr. Cheatham’s current employer because
of the pending litigation and claiming that such refusal was wrongful and legally actionable. On
April 16, 2007, the Company filed a complaint for declaratory relief in the Circuit Court of Howard
County, Maryland seeking a declaration from the Maryland court that the Company had not engaged in
wrongful or legally actionable conduct, that Dr. Cheatham had suffered no damages and that the
Company could in the future choose not to enter into a contract or otherwise conduct business with
Dr. Cheatham’s employer simply because of the pending
litigation with Dr. Cheatham. Dr. Cheatham, who had not filed the new lawsuit as of the date of this report, has
until May 23, 2007 to answer the Company’s complaint. The trial in the California Superior Court commenced on April 30, 2007 and as
of the date of this report was continuing. 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.
Licensing Arrangement — On October 12, 2006, the Company entered into an agreement with The
Technion Research and Development Foundation Ltd. (“TRDF”), an Israeli corporation affiliated with
the Technion-Israel Institute of Technology (the “Technion”) to license certain technology from
TRDF and to collaborate with TRDF in the further research in and the development and
commercialization of such technology. In exchange for the rights that the Company obtained under
this agreement, the Company agreed to pay to TRDF aggregate license fees of $3.0 million and to
issue to TRDF a total of 300,000 shares of the Company’s common stock. The license fees will be
paid and the shares issued in three equal installments, the first of which occurred on October 18,
2006 and the second and third installments to occur, subject to the accomplishment of certain
milestones, on October 12, 2007 and October 12, 2008. The Company has also agreed to pay royalties
to TRDF with respect to sales of certain products that contain or use the licensed technology or are covered by patents included in the
licensed technology or are discovered through the use of the licensed technology. The Company
agreed to pay up to $6.0 million of the royalties in advance upon the receipt of specified
regulatory approvals. The Company agreed to pay to TRDF specified percentages of any lump-sum
sub-license payments that the Company receives if it decides to sub-license the technology. The
Company has also agreed to pay a total of $2.0 million to TRDF in three nearly equal installments
to fund sponsored research to be conducted at TRDF by a team led by a faculty member at the
Technion. The initial sponsored research payment was made upon signing of the agreement, and the
second and third sponsored research payments will occur, subject to the accomplishment of certain
milestones, on October 12, 2007 and October 12, 2008. The Company also agreed to retain the
services of the Technion faculty member as a consultant, for which the Company agrees to pay the
consultant $60,000 per year and granted the individual an option to purchase 60,000 shares of the
Company’s common stock. Under the terms of the agreement, the Company issued 100,000 shares of
common stock to TRDF on October 12, 2006 and paid $1.6 million in license fees on October 18, 2006.
11. Related-Party Loan Arrangement
On August 2, 2006 the Company entered into a $150.0 million loan arrangement with its principal
stockholder. Under this arrangement, the Company can borrow in one or more advances at any time
through August 2, 2007 that the Company’s cash balance falls below its projected cash requirements
for the subsequent three month period, provided that each advance be no less than $50.0 million.
Principal repayment is due and payable one year from the date of each advance. The Company borrowed
$50.0 million under the loan arrangement on August 2, 2006 and $20.0 million on November 27, 2006.
On December 12, 2006, the Company paid off the total borrowings of $70.0 million following the
completion of concurrent offerings of convertible notes and common stock. Interest accrues on each
outstanding advance at a fixed rate equal to the one year LIBOR rate in effect on the day of such
advance plus 3% per annum and is payable quarterly in arrears. The loan is unsecured and contains
no financial covenants. There are no warrants associated with the loan nor is the loan convertible
into the Company’s stock. In the event of a default, all unpaid principal and interest becomes
immediately due and payable and the interest rate increases to one year LIBOR calculated on the
date of the initial advance or in effect on the date of default, whichever is greater, plus 5% per
annum. Upon the closing of certain financing events, including equity and debt financings or
strategic transactions with third parties, in which the Company receives cash proceeds of at least
$100.0 million, the Company is required to repay all or a portion of the principal and accrued and
unpaid interest under the note equal to the difference between the Company’s cash balance
immediately following the financing event and its projected cash requirements for the six month
period following the financing event. On October 30, 2006, the loan arrangement was modified to
provide that at no time shall the total principal amount borrowed exceed $150.0 million and that
each advance be no less than $10.0 million. Any principal repaid can be re-borrowed by the Company
subject to the limitations above. There were no borrowings under this arrangement during the
quarter ending March 31, 2007 and no balance outstanding or accrued interest related to this
borrowing as of March 31, 2007.
13
Table of Contents
12. Senior convertible notes
On December 12, 2006, the Company completed an offering of $115.0 million aggregate principal
amount of 3.75% Senior Convertible Notes due 2013 (the “Notes”), including $15.0 million aggregate
principal amount of the Notes sold pursuant to the underwriters’ over-allotment option that was
exercised in full. The Notes are governed by the terms of an indenture dated as of November 1, 2006
and a First Supplemental Indenture, dated as of December 12, 2006. The Notes bear interest at the
rate of 3.75% per year on the principal amount of the Notes, payable in cash semi-annually in
arrears on June 15 and December 15 of each year, beginning June 15, 2007. As of March 31, 2007 and
December 31, 2006, the Company had accrued interest of $1.3 million and $0.2 million related to the
Notes. The Notes are general, unsecured, senior obligations of the Company and effectively rank
junior in right of payment to all of the Company’s secured debt, to the extent of the value of the
assets securing such debt, and to the debt and all other liabilities of the Company’s subsidiaries.
The maturity date of the Notes is December 15, 2013 and payment is due in full on that date for
unconverted securities. Holders may convert, at any time prior to the close of business on the
business day immediately preceding the stated maturity date, any outstanding Notes into shares of
the Company’s common stock at an initial conversion rate of 44.5002 shares per $1,000 principal
amount of Notes, which is equal to a conversion price of approximately $22.47 per share, subject to
adjustment. Except in certain circumstances, if the Company undergoes a fundamental change: (1) the
Company will pay a make-whole premium on the Notes converted in connection with a fundamental
change by increasing the conversion rate on such Notes, which amount, if any, will be based on the
Company’s common stock price and the effective date of the fundamental change, and (2) each holder
of the Notes will have the option to require the Company to repurchase all or any portion of such
holder’s Notes at a repurchase price of 100% of the principal amount of the Notes to be repurchased
plus accrued and unpaid interest, if any.
The Company incurred approximately $3.7 million in issuance costs which are recorded as an offset
to the Notes in the accompanying balance sheet. These costs and are being amortized to interest
expense using the effective interest method over the term of the Notes. Amortized interest expense
during the three months ended March 31, 2007 was $0.1 million
13. Income taxes
As
discussed in Note 16 to the consolidated financial statements on
Form 10-K for the fiscal year ended December 31, 2006,
Management has concluded, in accordance with applicable accounting
standards, that it is more likely than not that the Company may not
realize the benefit of its deferred tax assets. Accordingly, net
deferred tax assets have been fully reserved.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting and
disclosure for uncertainty in tax positions, as defined. FIN 48 seeks to reduce the diversity in
practice associated with certain aspects of the recognition and measurement related to accounting
for income taxes. The Company is subject to the provisions of FIN 48 as of January 1, 2007. The Company
believes that its income tax filing positions and deductions will be sustained on audit and does
not anticipate any adjustments that will result in a material change to its financial position.
Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48.
The cumulative effect, if any, of applying FIN 48 is to be reported as an adjustment to the opening
balance of retained earnings in the year of adoption. The Company did not record a cumulative
effect adjustment related to the adoption of FIN 48. Tax years
since 1992 remain subject to examination by the major tax
jurisdictions in which the Company is subject to tax.
14
Table of Contents
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 (this “Quarterly
Report”). 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, 2006 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 for the fiscal year ended December 31, 2006 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, Europe and Latin America to study its safety and efficacy in
the treatment of diabetes. This dry powder therapy consists of our proprietary Technosphere
particles onto which insulin molecules are loaded. These loaded particles are then aerosolized and
inhaled into the deep lung using our proprietary MedTone 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 patients with diabetes. Specifically, Technosphere Insulin is rapidly absorbed into the
bloodstream following inhalation, reaching peak levels within 12 to 14 minutes. As a result of this
rapid onset of action, most of the glucose-lowering activity of Technosphere Insulin occurs within
the first three hours of administration — which is generally when glucose becomes available from a
meal — instead of the much longer duration of action observed when insulin is injected
subcutaneously. We believe that the relatively short duration of action of Technosphere Insulin
reduces the need for patients to snack between meals in order to manage ongoing blood glucose
excursions. In our clinical trials, we have observed that patients using Technosphere Insulin have
achieved significant reductions in post-meal glucose excursions and significant improvements in
overall glucose control, as measured by decreases in glycosylated hemoglobin, or HbA1c, levels,
without the weight gain typically associated with insulin therapy.
In our clinical trials to date, we have observed no difference in pulmonary function between
patients treated with Technosphere Insulin and patients treated with standard diabetes care.
However, the longest study that we have completed so far is a six-month trial. In September 2006,
we completed patient enrollment in a pivotal, two-year, Phase 3, safety study of the Technosphere
Insulin System that will compare the pulmonary function of diabetes patients randomized to either
Technosphere Insulin or standard diabetes care. We are continuing to enroll patients in three other
major Phase 3 clinical trials, two of which are pivotal efficacy trials. Based on our discussions
with the Food and Drug Administration, or FDA, we plan to accumulate two years of controlled safety
data before we file a new drug application for the Technosphere Insulin System. We anticipate that
our entire clinical trial program, including several special population studies, will involve more
than 4,500 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. In addition to these products, we are developing
therapies for the treatment of solid tumor cancers. We initiated Phase 1 clinical trials of a
therapeutic cancer vaccine in January 2007.
We are a development stage enterprise and have incurred significant losses since our inception in
1991. As of March 31, 2007, we have reported accumulated net losses of $861.0 million. To date, we
have not generated any product revenues and 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 do not have the required approvals to market any of our
product candidates, and we may not receive any approvals. We may
15
Table of Contents
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.
RECENT DEVELOPMENTS
In May 2007, we initiated a clinical trial in healthy individuals for a second Technosphere
product, MKC-253. This trial is being conducted in Europe. MKC-253 is a formulation of GLP-1
delivered on Technosphere particles that we are evaluating for safety, tolerability, and
pharmacokinetics. GLP-1 is a hormone secreted in the small intestine and colon in response to food
intake. GLP-1 in healthy individuals is known to stimulate insulin secretion and slow gastric
emptying. Patients with type 2 diabetes often exhibit a lower level of GLP-1 secretion.
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 the majority of research and development costs as we incur them.
Clinical development timelines, likelihood of success and total costs vary widely. We are
focused primarily on advancing 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 Statement of Financial Accounting Standards (“SFAS”) No. 123R,
Share-based Payment: an Amendment of FASB Statement 123 and 95 (“SFAS No. 123R”), effective as of
January 1, 2006, to increase in the future. See 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
16
Table of Contents
administrative expenses include business insurance and professional services costs.
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 as a result of the adoption of SFAS No. 123R. See
Note 4 — Accounting for Stock-Based Compensation in the notes to our financial statements.
CRITICAL ACCOUNTING POLICIES
We must
make significant management judgments when determining our provision
for income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax assets. Due
to our history of operating losses we have established a valuation allowance against all of our net deferred tax asset balances.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting and
disclosure for uncertainty in tax positions, as defined. FIN 48 seeks to reduce the diversity in
practice associated with certain aspects of the recognition and measurement related to accounting
for income taxes. We are subject to the provisions of FIN 48 as of January 1, 2007. We believe that our
income tax filing positions and deductions will be sustained on audit and do not anticipate any
adjustments that will result in a material change to our financial
position. Therefore, no reserves for uncertain income tax positions
have been recorded pursuant to FIN 48. The cumulative effect, if
any, of applying FIN 48 is to be reported as an adjustment to
the opening balance of retained earnings in the year of adoption. Our
adoption of FIN 48 did not result in a cumulative effect
adjustment to retained earnings. Tax years since 1992 remain subject
to examination by the major tax jurisdictions in which the Company is
subject to tax.
There have been no material changes to our critical accounting policies as described in Item 7 of
our Annual Report.
RESULTS OF OPERATIONS
Three months ended March 31, 2007 and 2006
Revenues
During the three months ended March 31, 2007 and 2006, we recognized $0.01 million and $0.1
million in revenue, respectively, under a license agreement. We do not anticipate sales of any
product prior to regulatory approval and commercialization of our Technosphere Insulin System.
Research and Development Expenses
The following table provides a comparison of the research and development expense categories
for the three months ended March 31, 2007 and 2006 (dollars in thousands):
| Three months ended | ||||||||||||||||
| March 31, | % | |||||||||||||||
| 2007 | 2006 | $ Change | Change | |||||||||||||
Clinical |
$ | 32,001 | $ | 18,670 | $ | 13,331 | 71 | % | ||||||||
Manufacturing |
21,614 | 9,223 | 12,391 | 134 | % | |||||||||||
Research |
7,975 | 6,418 | 1,557 | 24 | % | |||||||||||
Stock-based compensation expense |
2,198 | 1,639 | 559 | 34 | % | |||||||||||
Research and development expenses |
$ | 63,788 | $ | 35,950 | $ | 27,838 | 77 | % | ||||||||
The increase in research and development expenses for the three months ended March 31, 2007,
as compared to the same period in the prior year was primarily due to increased costs associated
with the expanded clinical development of our Technosphere Insulin System and the continuation of
other preclinical studies, increased manufacturing costs, increased salaries and related expenses
driven by higher headcount, increased costs related to consulting services and technology
agreements, and increased stock-based compensation expense. We anticipate that our research and
development expenses associated with Technosphere Insulin System, expansion of our Technosphere
platform technology and the pursuit of cancer therapies will increase significantly in 2007.
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.
General and Administrative Expenses
The following table provides a comparison of the general and administrative expense categories
for the three months ended March 31, 2007 and 2006 (dollars in thousands):
17
Table of Contents
| Three months ended | ||||||||||||||||
| March 31, | % | |||||||||||||||
| 2007 | 2006 | $ Change | Change | |||||||||||||
Salaries, employee related and
other general expenses |
$ | 11,199 | $ | 7,066 | $ | 4,133 | 58 | % | ||||||||
Stock-based compensation expense |
2,351 | 2,072 | 279 | 13 | % | |||||||||||
General and administrative expenses |
$ | 13,550 | $ | 9,138 | $ | 4,412 | 48 | % | ||||||||
General and administrative expenses for the three months ended March 31, 2007 increased as
compared to the same period in the prior year due to increased salaries, employee related and other
general expenses resulting from increased headcount and administrative services. We expect general
and administrative expenses, other than non-cash stock-based compensation expense, to increase in
the future.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through the sale of equity securities. In December
2006, we issued and sold 23,000,000 shares of our common stock at a price of $17.42 per share in an
underwritten public offering. The resulting aggregate net proceeds to us from this common stock
offering were approximately $384.7 million after expenses. In December 2006, we also sold $115.0 million aggregate principal amount of 3.75% Senior Convertible Notes due 2013. The resulting
aggregate net proceeds to us from this note offering was approximately $111.3 million after
expenses.
In August 2006, we entered into a $150.0 million loan arrangement with our principal
stockholder, which was amended on October 30, 2006. Under this arrangement, we can borrow funds in
one or more advances at any time through August 2, 2007 should our cash balance fall below its
projected cash requirements for the subsequent three months, provided that each advance be no less
than $10.0 million and provided that at no time shall the total principal amount borrowed exceed
$150.0 million. Principal repayment is due and payable one year from the date of each advance. As
of March 31, 2007, there are no amounts borrowed and outstanding under this loan arrangement with
our principal stockholder. We expect to extend this arrangement beyond August 2, 2007.
During the three months ended March 31, 2007, we used $64.8 million of cash for our operations
compared to using $37.3 million for our operations in the three months ended March 31, 2006. We had
a net loss of $73.1 million for the three months ended March 31, 2007, of which $6.7 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.
We
generated $7.6 million of cash from investing activities during the three months ended
March 31, 2007, compared to generating $26.6 million for the three months ended March 31, 2006.
Cash generated in investing activities for the three months ended March 31, 2007 was primarily from
net sales of marketable securities of $14.1 million. In addition, $6.5 million was 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 $0.4 million for the three months ended March 31, 2007
compared to $0.6 million for the same period in 2006. Cash from financing activities in the first
three months of 2007 and 2006, respectively, was primarily from the exercise of stock options.
As of March 31, 2007, we had $365.6 million in cash, cash equivalents and marketable
securities. Although we believe our existing capital resources, which
includes the $150.0 million loan agreement with our principal
stockholder, will be sufficient to fund our
anticipated cash requirements into the second quarter of 2008, 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.
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.
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
18
Table of Contents
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, 2007, 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 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. In April
2007, we entered into a $114.0 million contractual arrangement with our general contractor related
to the expansion of the manufacturing facility in Danbury.
Recent
Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, which permits entities to choose to measure many financial instruments and
certain other items at fair value. SFAS No. 159 also includes an amendment to SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities which applies to all entities with
available-for-sale and trading securities. This Statement is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007. We are assessing the impact of SFAS
No. 159 and have not determined whether it will have a material impact on our results of operations
or financial position.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. The Statement defines
fair value, establishes a framework for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value measurements, and does not require any new fair
value measurements. This Statement applies under other accounting pronouncements that require or
permit fair value measurements. The Statement is effective for the fiscal years beginning after
November 15, 2007. We are assessing SFAS No. 157 and have not determined the impact the adoption of
SFAS No. 157 will have on our results of operations or financial position.
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 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, 2007, 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 the 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, 2007. 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, 2007 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
19
Table of Contents
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31,
2006, in May 2005, our former Chief Medical Officer, Wayman Wendell Cheatham, M.D., filed a
complaint against us 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 our 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,
generally denying each of Dr. Cheatham’s allegations and asserting various defenses. We believe the
allegations in the complaint are without merit and we are vigorously defending against them. We
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 us in a letter to the FDA with regard to a request by us to hold a meeting with
the FDA. The remaining causes of action in the cross-complaint arise out of our allegations that
Dr. Cheatham had an undisclosed consulting relationship with a competitor during his employment
with us, in violation of our agreement. In July 2005, Dr. Cheatham filed a demurrer and 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 our
cross-complaint. In November 2005, Dr. Cheatham appealed the Court’s ruling denying his motion to
strike. In July 2006, we filed a motion for summary judgment, or in the alternative, for summary
adjudication, requesting dismissal before trial of Dr. Cheatham’s claims against us. In October
2006, the Superior Court denied the motion. In December 2006, the Court of Appeal affirmed in part
and reversed in part the Superior Court’s order denying Dr. Cheatham’s motion to strike.
Subsequently, Dr. Cheatham filed a notice of dismissal of the retaliation cause of action, and we
filed a notice of dismissal of the remaining claims under our cross-complaint. In April 2007, Dr.
Cheatham through his counsel advised us that Dr. Cheatham intended to file a new lawsuit against us
alleging that we had refused to enter into a contract with Dr. Cheatham’s current employer because
of the pending litigation and claiming that such refusal was wrongful and legally actionable. On
April 16, 2007, we filed a complaint for declaratory relief in the Circuit Court of Howard County,
Mary land seeking a declaration from the Maryland court that we had not engaged in wrongful or
legally actionable conduct, that Dr. Cheatham had suffered no damages and that we could in the
future choose not to enter into a contract or otherwise conduct business with Dr. Cheatham’s
employer simply because of the pending litigation with Dr. Cheatham. Dr. Cheatham who had not filed
the new lawsuit as of the date of this report has until May 23, 2007 to answer our complaint. The
trial in the California Superior Court commenced on April 30, 2007 and as of the date of this
report was continuing. We believe that the ultimate resolution of this matter will not have a
material impact on our financial position or results of operations.
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 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. The risk factors set forth below
with an asterisk (*) next to the title contain changes to the description of the risk factors
associated with our business as previously disclosed in Item 1A to our annual report on Form 10-K
for the fiscal year ended December 31, 2006. 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. *
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, 2007, we had an accumulated deficit of $861.0
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.
20
Table of Contents
If we fail to raise additional capital, our financial condition and business would suffer. *
It is costly to develop therapeutic product candidates and conduct clinical trials for these
product candidates. Although we are currently focusing on our Technosphere Insulin System as our
lead product candidate, we have begun to conduct clinical trials for additional product candidates.
Our future revenues may not be sufficient to support the expense of these activities.
On December 12, 2006, we closed the sale of 20,000,000 shares of our common stock at a public
offering price of $17.42 per share and on December 19, 2006, closed the sale of an additional
3,000,000 shares of our common stock at a public offering price of $17.42 per share pursuant to an
over-allotment option granted to the underwriters of the offering. The resulting aggregate net
proceeds to us from this common stock offering was approximately $384.7 million after expenses. On
December 12, 2006, we also sold $115.0 million aggregate principal amount of 3.75% Senior
Convertible Notes due 2013, including an additional $15.0 million aggregate principal amount of the
notes sold to cover over-allotments. The resulting aggregate net proceeds to us from this note
offering was approximately $111.3 million after expenses.
In August 2006, we entered into a $150.0 million loan arrangement with our principal stockholder,
which was amended on October 30, 2006. Under this arrangement, we can borrow funds in one or more
advances at any time through August 2, 2007 should our cash balance fall below its projected cash
requirements for the subsequent three months, provided that each advance be no less than $10.0
million and provided that at no time shall the total principal amount borrowed exceed $150.0
million. Principal repayment is due and payable one year from the date of each advance. As of March
31, 2007, there are no amounts borrowed and outstanding under this loan arrangement with our
principal stockholder.
Based upon our current expectations, we believe that our existing capital resources, including the
net proceeds from our sale of common stock and senior convertible notes in December 2006 and the
loan agreement with our principal stockholder, will enable us to continue planned operations into
the second quarter of 2008. However, we cannot assure you that our plans will not change or that
changed circumstances will not result in the depletion of our capital resources more rapidly than
we currently anticipate. Accordingly, we plan to raise additional capital, either through the sale
of equity and/or debt securities, 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 and most
currently through the sale of equity and debt securities. We may in the future pursue the sale of
additional equity and/or debt securities, or the establishment of other funding facilities.
Issuances of additional debt or equity securities or the conversion of any of our currently
outstanding convertible debt securities into shares of our common stock could impact your rights as
a holder of our common stock and may dilute your ownership percentage. Moreover, the establishment
of other funding facilities may impose restrictions on our operations. These restrictions could
include limitations on additional borrowing and specific restrictions on the use of our assets, as
well as prohibitions on our ability to create liens, pay dividends, redeem our stock or make
investments.
We also
may seek to raise additional capital by pursuing opportunities for
the licensing or sale of
certain intellectual property and other assets, including our Technosphere technology platform. We
cannot offer assurances, however, that any strategic collaborations, sales of securities or sales
or licenses of assets will be available to us on a timely basis or on acceptable terms, if at all.
We may be required
21
Table of Contents
to enter into relationships with third parties to develop or commercialize products or technologies
that we otherwise would have sought to develop independently, and any such relationships may not be
on terms as commercially favorable to us as might otherwise be the case.
In the event that sufficient additional funds are not obtained through strategic collaboration
opportunities, sales of securities, licensing arrangements and/or asset sales on a timely basis, we
may be required to reduce expenses through the delay, reduction or curtailment of our projects,
including 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 in clinical development, and our other
product candidates, which are in early clinical or preclinical
development. *
development. *
To date, we have not completed the development of any product candidates through to
commercialization. Our Technosphere Insulin System is currently undergoing clinical trials, while
our other product candidates are generally in early clinical or preclinical development. We
anticipate that in the near term, our ability to generate revenues will depend solely on the
successful development and commercialization of 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 complete Phase 3 clinical trials and demonstrate in these trials that our
Technosphere Insulin System is safe and effective. We have initiated all of our pivotal Phase 3
clinical trials as well as several special population studies for our Technosphere Insulin System,
all of 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 candidate 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 indications. All of these product candidates will require additional
research and development and significant preclinical, clinical and other testing prior to seeking
regulatory approval to market them. Accordingly, these product candidates will not be commercially
available for a number of years, if at all.
A significant portion of the research that we are conducting involves new and unproven compounds
and technologies, including 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, 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; |
22
Table of Contents
| • | 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 license or sale of certain of our assets on a timely basis, we may be
required to reduce expenses by delaying, reducing or curtailing our 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 our 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. Exubera has been
launched in Germany, Ireland, the United Kingdom and, to a limited extent, the United States.
Pfizer has announced that it will begin a direct-to-consumer marketing campaign in the second half
of 2007. In July 2005, Eli Lilly and Company, in collaboration with Alkermes, Inc., initiated a
pivotal Phase 3 safety trial of their AIR inhaled insulin system, which completed patient
enrollment in June 2006. We believe Lilly plans to submit a New Drug Application, or NDA, for the
AIR inhaled insulin system in 2009. In September 2006, Novo Nordisk A.S. began recruiting patients
for a two-year Phase 3 safety trial of their AERx inhaled insulin system, after previously
suspending clinical trials of the AERx 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 product candidates 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 an inhaled insulin
system, will have an advantage in being able to gain reputation and market share as well as set
parameters for the inhaled insulin market such as pricing and reimbursement strategies. Our future
success will depend not only on our ability to develop our product candidates 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 capital
required to continue the development of our Technosphere Insulin System over the next 12 months
would be in the range of $300 to $400 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,
23
Table of Contents
manufacturing and commercializing our other product candidates includes evaluating the potential
for collaborating with pharmaceutical and biotechnology companies at some point in the drug
development process and for these collaborators to undertake the advanced clinical development and
commercialization of our product candidates. It may be difficult for us to find third parties that
are willing to enter into collaborations on economic terms that are favorable to us, or at all.
Failure to enter into a collaboration with respect to any other product candidate could
substantially increase our requirements for capital and force us to substantially reduce our
development effort.
If we enter into collaborative agreements with respect to our Technosphere Insulin System 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 the
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 nonclinical and
clinical testing. We may experience numerous unforeseen events during, or as a result of, the
testing process that could delay or prevent commercialization of our Technosphere Insulin System or
any of our other product candidates, including the following:
| • | safety and efficacy results obtained in our nonclinical and initial clinical testing may be inconclusive or may not be predictive of results obtained in later-stage clinical trials or following long-term use, and we may as a result be forced to stop developing product candidates that we currently believe are important to our future; | ||
| • | the data collected from clinical trials of our product candidates may not be sufficient to support FDA or other regulatory approval; | ||
| • | after reviewing test results, we or any potential collaborators may abandon projects that we previously believed were promising; and | ||
| • | our product candidates may not produce the desired effects or may result in adverse health effects or other characteristics that preclude regulatory approval or limit their commercial use if approved. |
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 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.
24
Table of Contents
We are at a critical juncture in our development, having transitioned from an early-stage
development company to one with multiple Phase 3 clinical trials. Phase 3 development of our
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-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., now Organon
Biosciences N.V., an independent supplier of insulin and a subsidiary of Akzo Nobel, which is
currently our sole supplier for insulin. On March 11, 2007, Akzo Nobel received an offer for the
purchase of Organon Biosciences N.V. from Schering-Plough Corporation. The transaction is expected
to be completed in the second half of 2007. 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. We believe 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.
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 precursor 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
25
Table of Contents
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 approximately $1.5 to $3.0 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 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, including primary care physicians, internists and endocrinologists,
treat patients with diabetes. A large sales force will be required in order to educate and support
these physicians. Therefore, we plan to enter into collaborations with one or more pharmaceutical
companies to market, distribute and sell 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.
26
Table of Contents
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 payers 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 payers and the healthcare community. Failure to achieve market
acceptance would limit our ability to generate revenue and would adversely affect our results of
operations.
The degree of market acceptance of 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; | ||
| • | perceived advantages and disadvantages of competitive products; | ||
| • | willingness and ability of patients and the healthcare community to adopt new technologies; | ||
| • | ability to manufacture the product in sufficient quantities with acceptable quality and at an acceptable cost; | ||
| • | perception of patients and the healthcare community, including third-party payers, regarding the safety, efficacy and benefits of the product compared to those of competing products or therapies; | ||
| • | convenience and ease of administration of the product relative to existing treatment methods; | ||
| • | pricing and reimbursement of the product relative to 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 as compared to other treatments. Even if the clinical safety and
efficacy of our product candidates is established, physicians may elect not to recommend these
product candidates for a variety of factors, including the reimbursement policies of government and
third-party payers and the effectiveness of our competitors in marketing their therapies. Because
of these and other factors, any product that we may develop may not gain market acceptance, which
would materially harm our business, financial condition and results of operations.
If third-party payers do not reimburse 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 payers to contain or reduce the costs of healthcare through various
means. For example, in certain foreign markets the pricing of prescription pharmaceuticals is
subject to governmental control. In the United States, there has been, and we expect that there
will continue to be, a number of federal and state proposals to implement similar governmental
controls. We cannot be certain what legislative proposals will be adopted or what actions federal,
state or private payers for healthcare goods and services may take in response to any healthcare
reform proposals or legislation. Such reforms may make it difficult to complete the development and
testing of 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 payers, such as
governmental and private insurance plans. Third-party payers are increasingly challenging the
prices charged for medical products and services. In addition, because each third-party payer
individually approves reimbursement, obtaining these approvals is a time-consuming and costly
process. We would be required to provide scientific and clinical support for the use of any product
to each third-party payer separately with no assurance that approval would be obtained. This
process could delay the market acceptance of any product and could have a negative effect on our
future revenues and operating results. Even if we succeed in bringing one or more products to
market, we cannot be certain that any such products would be
27
Table of Contents
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 $10 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 require 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 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
28
Table of Contents
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 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 our cross-complaint. In November 2005, Dr. Cheatham appealed the Court’s ruling
denying his motion to strike. In July 2006, we filed a motion for summary judgment , or in the
alternative, for summary adjudication, requesting dismissal before trial of Dr, Cheatham’s claims
against us. In October 2006, the Superior Court denied the motion. In December 2006, the Court of
Appeal affirmed in part and reversed in part the Superior Court’s order denying Dr. Cheatham’s
motion to strike. Subsequently, Dr. Cheatham filed a notice of dismissal of the retaliation cause
of action, and we filed a notice of dismissal of the remaining claims under the cross–complaint.
In April 2007, Dr. Cheatham through his counsel advised us that Dr. Cheatham intended to file a new
lawsuit against us alleging that we refused to enter into a contract with Dr. Cheatham’s current
employer because of the pending litigation and claiming that such refusal was wrongful and legally
actionable. On April 16, 2007, we filed a complaint for declaratory relief in the Circuit Court of
Howard County, Mary land seeking a declaration from the Maryland court that we had not engaged in
wrongful or legally actionable conduct, that Dr. Cheatham had suffered no damages and that we could
in the future choose not to enter into a contract or otherwise conduct business with Dr. Cheatham’s
employer simply because of the pending litigation with Dr. Cheatham. Dr. Cheatham who had not filed
the new lawsuit as of the date of this report has until May 23, 2007 to answer our complaint. The
trial in the California Superior Court commenced on April 30, 2007 and as of the date of this
report was continuing.
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 man-made or natural
disasters.
Our headquarters and some of our research and development activities are located in Southern
California, where they are subject to a risk of man-made disasters such as terrorism and an
enhanced risk of natural and other disasters such as power and telecommunications failures,
mudslides, fires and earthquakes. An act of terrorism, fire, earthquake or other catastrophic loss
that causes significant damage to our facilities or interruption of our business could harm our
business. We do not carry insurance to cover losses caused by earthquakes, and the insurance
coverage that we carry for fire damage and for business interruption may be insufficient to
compensate us for any losses that we may incur.
If our internal controls over financial reporting are not considered effective, our business and
stock price could be adversely affected. *
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our
internal controls over financial reporting as of the end of each fiscal year, and to include a
management report assessing the effectiveness of our internal controls over financial reporting in
our annual report on Form 10-K for that fiscal year. Section 404 also requires our independent
registered public accounting firm to attest to, and report on, management’s assessment of our
internal controls over financial reporting.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect
that our internal controls over financial reporting will prevent all 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.
29
Table of Contents
RISKS RELATED TO REGULATORY APPROVALS
Our product candidates must undergo rigorous nonclinical and clinical testing and we must obtain
regulatory approvals, which could be costly and time-consuming and subject us to unanticipated
delays or prevent us from marketing any
products. *
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 and the regulation of comparable foreign regulatory
authorities are wide-ranging and govern, among other things:
| • | product design, development, manufacture and testing; | ||
| • | product labeling; | ||
| • | product storage and shipping; | ||
| • | pre-market clearance or approval; | ||
| • | advertising and promotion; and | ||
| • | product sales and distribution. |
Clinical testing can be costly and take many years, and the outcome is uncertain and susceptible to
varying interpretations. 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, we expect, among other requirements, that we will need safety data covering at least two
years from patients treated with our Technosphere Insulin System and that we must complete an
additional six-month carcinogenicity study of Technosphere Insulin in rodents in order to obtain
approval. 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 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. For example, even if we meet the statistical
criteria for non-inferiority with respect to the primary endpoint in a pivotal clinical study
(Study 102) of our Technosphere Insulin System, the FDA may deem the results uninterpretable
because of issues related to the open-label, non-inferiority design of the study. 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
30
Table of Contents
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 our 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 our 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.
We will not be able to commercialize our Technosphere Insulin System or any 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 our 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.
31
Table of Contents
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 U.S. 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 FDA and U.S. Congressional initiatives pertaining to ensuring the safety of marketed drugs
or other developments pertaining to the pharmaceutical industry will not adversely affect our
operations.
We also are required to register our establishments and list our products with the FDA and certain
state agencies. We and any third-party manufacturers or suppliers must continually adhere to
federal regulations setting forth requirements, known as cGMP (for drugs) and QSR (for medical
devices), and their foreign equivalents, which are enforced by the FDA and other national
regulatory bodies through their facilities inspection programs. If our facilities, or the
facilities of our manufacturers or suppliers, cannot pass a preapproval plant inspection, the FDA
will not approve the marketing of our product candidates. In complying with cGMP and foreign
regulatory requirements, we and any of our potential third-party manufacturers or suppliers will be
obligated to expend time, money and effort in production, record-keeping and quality control to
ensure that our products meet applicable specifications and other requirements. QSR requirements
also impose extensive testing, control and documentation requirements. State regulatory agencies
and the regulatory agencies of other countries have similar requirements. In addition, we will be
required to comply with regulatory requirements of the FDA, state regulatory agencies and the
regulatory agencies of other countries concerning the reporting of adverse events and device
malfunctions, corrections and removals (e.g., recalls), promotion and advertising and general
prohibitions against the manufacture and distribution of adulterated and misbranded devices.
Failure to comply with these regulatory requirements could result in civil fines, product seizures,
injunctions and/or criminal prosecution of responsible individuals and us. Any such actions would
have a material adverse effect on our business and results of operations.
Our insulin supplier does not yet supply human recombinant insulin for an FDA-approved product and
will 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 United States. However, we can make no
assurances that our insulin supplier will be acceptable to the FDA. If we were required to find a
new or additional supplier of insulin, we would be required to evaluate the new supplier’s ability
to provide insulin that meets our specifications and quality requirements, which would require
significant time and expense and could delay the manufacturing and future commercialization of 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 lead product candidate 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 lead product candidates might be adversely affected, which could harm our
business and results of operations and cause the market price of our common stock to decline, even
if the concern relates to another company’s products or product candidates.
There are also a number of clinical trials being conducted by other pharmaceutical companies
involving compounds similar to, or competitive with, our other product candidates. Adverse results
reported by these other companies in their clinical trials could delay or prevent us from obtaining
regulatory approval or negatively impact public perception of our product candidates, which could
harm our
32
Table of Contents
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 alternative technologies.
Moreover, the issuance of a patent is not conclusive as to its validity or enforceability and it is
uncertain how much protection, if any, will be afforded by our patents. A third party may challenge
the validity or enforceability of a patent after its issuance by various proceedings such as
oppositions in foreign jurisdictions or re-examinations in the United States. If we attempt to
enforce our patents, they may be challenged in court where they could be held invalid,
unenforceable, or have their breadth narrowed to an extent that would destroy their value.
We also rely on unpatented technology, trade secrets, know-how and confidentiality agreements. We
require our officers, employees, consultants and advisors to execute proprietary information and
invention and assignment agreements upon commencement of their relationships with us. We also
execute confidentiality agreements with outside collaborators. There can be no assurance, however,
that these agreements will provide meaningful protection for our inventions, trade secrets,
know-how or other proprietary information in the event of unauthorized use or disclosure of such
information. If any trade secret, know-how or other technology not protected by a patent were to be
disclosed to or independently developed by a competitor, our business, results of operations and
financial condition could be adversely affected.
If we become involved in lawsuits to protect or enforce our patents or the patents of our
collaborators or licensors, we would be required to devote substantial time and resources to
prosecute or defend such proceedings.
Competitors may infringe our patents or the patents of our collaborators or licensors. To counter
infringement or unauthorized use, we may be required to file infringement claims, which can be
expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a
patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using
the technology at issue on the grounds that our patents do not cover its technology. A court may
also decide to award us a royalty from an infringing party instead of issuing an injunction against
the infringing activity. An adverse determination of any litigation or defense proceedings could
put one or more of our patents at risk of being invalidated or interpreted narrowly and could put
our patent applications at risk of not issuing.
Interference proceedings brought by the U.S. 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
33
Table of Contents
courts must determine the scope of coverage afforded by a patent and the courts do not always
arrive at uniform conclusions.
A patent owner may claim that we are making, using, selling or offering for sale an invention
covered by the owner’s patents and may go to court to stop us from engaging in such activities.
Such litigation is not uncommon in our industry. For example, in August 2006, Novo Nordisk filed a
lawsuit against Pfizer claiming that Pfizer’s product Exubera infringes certain patents owned by
Novo Nordisk that cover inhaled insulin treatment for diabetes. In its lawsuit, Novo Nordisk is
seeking compensatory damages and permanent injunctive relief. Novo Nordisk had also filed a motion
for a preliminary injunction, and while it was not granted, it could have substantially impacted
Pfizer’s ability to commercialize Exubera while the lawsuit is in progress had it been granted.
Patent lawsuits can be expensive and would consume time and other resources. There is a risk that a
court would decide that we are infringing a third party’s patents and would order us to stop the
activities covered by the patents, including the commercialization of our products. In addition,
there is a risk that we would have to pay the other party damages for having violated the other
party’s patents (which damages may be increased, as well as attorneys’ fees ordered paid, if
infringement is found to be willful), or that we will be required to obtain a license from the
other party in order to continue to commercialize the affected products, or to design our products
in a manner that does not infringe a valid patent. We may not prevail in any legal action, and a
required license under the patent may not be available on acceptable terms or at all, requiring
cessation of activities that were found to infringe a valid patent. We also may not be able to
develop a non-infringing product design on commercially reasonable terms, or at all.
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 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.
In addition, patent litigation may divert the attention of key personnel and we may not have
sufficient resources to bring these actions to a successful conclusion. At the same time, some of
our competitors may be able to sustain the costs of complex patent litigation more effectively than
we can because they have substantially greater resources. An adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent us from
manufacturing and selling our products or result in substantial monetary damages, which would
adversely affect our business and results of operations and cause the market price of our common
stock to decline.
We may not obtain trademark registrations for our potential trade names.
We have not selected trade names for some of our products and product candidates; therefore, we
have not filed trademark registrations for our potential trade names for those products in all
jurisdictions, nor can we assure that we will be granted registration of those potential trade
names for which we have filed. Although we intend to defend any opposition to our trademark
registrations, no assurance can be given that any of our trademarks will be registered in the
United States or elsewhere or that the use of any of our trademarks will confer a competitive
advantage in the marketplace. Furthermore, even if we are successful in our trademark
registrations, the FDA has its own process for drug nomenclature and its own views concerning
appropriate proprietary names. It also has the power, even after granting market approval, to
request a company to reconsider the name for a product because of evidence of confusion in the
marketplace. We cannot assure you that the FDA or any other regulatory authority will approve of
any of our trademarks or will not request reconsideration of one of our trademarks at some time in
the future.
34
Table of Contents
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, and this trend may continue. The
volatility of pharmaceutical and biotechnology stocks often does not relate to the operating
performance of the companies represented by the stock. Our business and the market price of our
common stock may be influenced by a large variety of factors, including:
| • | the progress and results of our clinical trials; | ||
| • | 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 candidates; | ||
| • | developments or disputes concerning our patents or proprietary rights; | ||
| • | 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; | ||
| • | general market conditions and fluctuations for emerging growth and pharmaceutical market sectors; | ||
| • | sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders; | ||
| • | 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; and | ||
| • | general economic, political or stock market conditions. |
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 Global 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, 2007, Mr. Mann beneficially
owned approximately 41.1% of our outstanding shares of capital stock. We believe members of Mr.
Mann’s family beneficially owned at least an additional 1.4% 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
35
Table of Contents
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 U.S. 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 at the Technion-Israel Institute of Technology, and that may serve as funding
organizations for any other charities that he may establish. The AEMMRO is a membership foundation
consisting of six members, including Mr. Mann, his wife, three of his children and Dr. Joseph
Schulman, the chief scientist of the AEMFBE. The AEMFBE is a membership foundation consisting of
five members, including Mr. Mann, his wife, and the same three of his children. Although we
understand that the members of AEMMRO and AEMFBE have been advised of Mr. Mann’s objectives for
these foundations, once Mr. Mann’s shares of our capital stock become the property of the
foundations, we cannot assure you as to how those shares will be distributed or how they will be
voted.
The future sale of our common stock or the conversion of our senior convertible notes into common
stock could negatively affect our stock price. *
As of March 31, 2007, we had approximately 73.4 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. Likewise the issuance of additional shares of our
common stock upon the conversion of some or all of our senior convertible notes could adversely
affect the trading price of our common stock. In addition, the existence of these notes may
encourage short selling of our common stock by market participants. Furthermore, if we were to
include in a company-initiated registration statement shares held by our stockholders pursuant to
the exercise of their registrations rights, the sale of those shares could impair our ability to
raise needed capital by depressing the price at which we could sell our common stock.
In addition, we will need to raise substantial additional capital in the future to fund our
operations. If we raise additional funds by issuing equity securities or additional convertible
debt, the market price of our common stock may decline and our existing stockholders may experience
significant dilution.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition
of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our
stockholders to replace or remove our current management.
We are incorporated in Delaware. Certain anti-takeover provisions under Delaware law and in our
certificate of incorporation and amended and restated bylaws, as currently in effect, may make a
change of control of our company more difficult, even if a change in control would be beneficial to
our stockholders. Our anti-takeover provisions include provisions such as a prohibition on
stockholder actions by written consent, the authority of our board of directors to issue preferred
stock without stockholder approval, and supermajority voting requirements for specified actions. In
addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law,
which generally prohibits stockholders owning 15% or more of our outstanding voting stock from
merging or combining with us in certain circumstances. These provisions may delay or prevent an
acquisition of us, even if the acquisition may be considered beneficial by some of our
stockholders. In addition, they may frustrate or prevent any attempts by our stockholders to
replace or remove our current management by making it more difficult for stockholders to replace
members of our board of directors, which is responsible for appointing the members of our
management.
Because we do not expect to pay dividends in the foreseeable future, you must rely on stock
appreciation for any return on your investment.
We have paid no cash dividends on any of our capital stock to date, and we currently intend to
retain our future earnings, if any, to fund the development and growth of our business. As a
result, we do not expect to pay any cash dividends in the foreseeable future, and payment of cash
dividends, if any, will also depend on our financial condition, results of operations, capital
requirements and other factors and will be at the discretion of our board of directors.
Furthermore, we may in the future become subject to contractual restrictions on, or prohibitions
against, the payment of dividends. Accordingly, the success of your investment in our common stock
will likely depend entirely upon any future appreciation. There is no guarantee that our common
stock will appreciate in value after the offering or even maintain the price at which you purchased
your shares, and you may not realize a return on your investment in our common stock.
36
Table of Contents
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no sales of equity securities by us that were not registered under the Securities
Act of 1933, as amended, during the first quarter of 2007.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On April 4, 2007, MannKind Corporation entered into a contractor agreement with Torcon, Inc.
related to the expansion of our manufacturing facility in Danbury, Connecticut. The sum of the
cost of work and the contractor’s fee is guaranteed by the contractor not to exceed $114.0 million.
ITEM 6. EXHIBITS
| Exhibit | ||
| Number | Description of Document | |
3.1(1)
|
Restated Certificate of Incorporation | |
3.2(1)
|
Amended and Restated Bylaws. | |
31.1
|
Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a) or 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) or 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) or 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. |
37
Table of Contents
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Dated: May 10, 2007 | MANNKIND CORPORATION |
|||
| By: | /s/ Richard L. Anderson | |||
| Richard L. Anderson | ||||
| Corporate Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | ||||
38
Exhibit 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, Alfred E. Mann, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the three months ended March 31, 2007 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 fiscal 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 the 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 10, 2007 | /s/ Alfred E. Mann | |||
| Alfred E. Mann | ||||
| Chief Executive Officer (Principal Executive Officer) |
||||
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a) OR 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 for the three months ended March 31, 2007 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 fiscal 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 the 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 10, 2007 | /s/ Richard L. Anderson | |||
| Richard L. Anderson | ||||
| Chief Financial Officer (Principal Financial Officer) |
||||
EXHIBIT 32
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
RULE 13a-14(b) OR 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
RULE 13a-14(b) OR 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)
In connection with the filing of the quarterly report of MannKind Corporation (the “Company”) on
Form 10-Q for the quarterly period ended March 31, 2007, as filed with the Securities and Exchange
Commission on or about the date hereof to which this certification is attached as Exhibit 32 (the
“Report”) and 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 Report fully complies with the requirements of Section 13(a) or Section 15(d) of the
Exchange Act; and
2. The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Date: May 10, 2007
In witness whereof, the undersigned have set their hands hereto as of the 10th day of
May, 2007.
/s/ Alfred E. Mann
|
/s/ Richard L. Anderson | |
Alfred E. Mann
|
Richard L. Anderson | |
Chief Executive Officer
|
Chief Financial Officer |
This certification is 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, as amended or the Securities Act of 1933, as amended, into any
filing of the Company, whether made before or after the date hereof, regardless of any general
incorporation language contained in such filing.