Filed
pursuant to Rule 424(b)(3)
under the Securities Act of 1933 in connection with
under the Securities Act of 1933 in connection with
Registration
Statement No. 333-133786
PROSPECTUS
12,167,047
Shares
Common
Stock
This
prospectus relates to the resale of up to 12,167,047 shares of our common
stock that we may issue to Kingsbridge Capital Limited (“Kingsbridge”) pursuant
to a Common Stock Purchase Agreement, dated April 17, 2006, between Kingsbridge
and ourselves and a Class C Investor Warrant we issued to Kingsbridge on that
date. We are not selling any securities under this prospectus and will not
receive any of the proceeds from the sale of shares by the selling
stockholder.
The
selling stockholder may sell the shares of common stock described in this
prospectus in a number of different ways and at varying prices. We provide
more
information about how the selling stockholder may sell its shares of common
stock in the section titled “Plan of Distribution” on page 21. We will not be
paying any underwriting discounts or commissions in this offering. We will
pay
the expenses incurred in registering the shares, including legal and accounting
fees.
Our
common stock is quoted on The Nasdaq National Market under the symbol “DSCO.”
The last reported sale price for our common stock on April 27, 2006 was $2.78
per share.
Investing
in our common stock involves significant risks. See “Risk Factors” beginning on
Page 7.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this prospectus
is
truthful or complete. Any representation to the contrary is a criminal
offense.
The
date
of this prospectus is May 12, 2006.
TABLE
OF CONTENTS
Page
|
ABOUT
THIS PROSPECTUS
|
1
|
|
ABOUT
DISCOVERY
|
1
|
|
RECENT
DEVELOPMENTS
|
1
|
|
EQUITY
FINANCING WITH KINGSBRIDGE CAPITAL
|
3
|
|
RISK
FACTORS
|
7
|
|
FORWARD-LOOKING
STATEMENTS
|
19
|
|
USE
OF PROCEEDS
|
20
|
|
SELLING
STOCKHOLDER
|
20
|
|
PLAN
OF DISTRIBUTION
|
21
|
|
DESCRIPTION
OF COMMON STOCK
|
23
|
|
EXPERTS
|
25
|
|
LEGAL
MATTERS
|
25
|
|
INTERESTS
OF NAMED EXPERTS AND COUNSEL
|
25
|
|
WHERE
YOU CAN FIND MORE INFORMATION
|
25
|
|
INFORMATION
INCORPORATED BY REFERENCE
|
26
|
This
prospectus is part of a registration statement we filed with the Securities
and
Exchange Commission. You should rely only on the information we have provided
or
incorporated by reference in this prospectus or any prospectus supplement.
We
have not authorized anyone to provide you with additional or different
information. We are not making an offer of these securities in any state where
the offer is not permitted. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of the
prospectus.
ABOUT
THIS PROSPECTUS
The
following summary highlights information contained in this prospectus or
incorporated by reference. While we have included what we believe to be the
most
important information about us and this offering, the following summary may
not
contain all the information that may be important to you. You should read this
entire prospectus carefully, including the risks of investing discussed under
“Risk Factors” beginning on page 7, and the information to which we refer you
and the information incorporated into this prospectus by reference, for a
complete understanding of our business and this offering. Unless the context
requires otherwise, in this prospectus the terms “Discovery,” “we,” “us” and
“our” refer to Discovery Laboratories, Inc., a Delaware corporation, and its
consolidated subsidiaries. References to “selling stockholder” refers to the
stockholder listed herein under the heading “Selling Stockholder” on page 20,
who may sell shares from time to time as described in this
prospectus.
ABOUT
DISCOVERY
We
are a
biotechnology company developing our proprietary surfactant technology as
Surfactant Replacement Therapies (SRT) for respiratory diseases. Surfactants
are
produced naturally in the lungs and are essential for breathing. Our technology
produces a precision-engineered surfactant that is designed to closely mimic
the
essential properties of natural human lung surfactant. We believe that through
this SRT technology, pulmonary surfactants have the potential, for the first
time, to be developed into a series of respiratory therapies for patients in
the
Neonatal Intensive Care Unit (NICU), critical care unit and other hospital
settings, where there are few or no approved therapies available.
Our
lead
product, SurfaxinÒ
(lucinactant), for the prevention of Respiratory Distress Syndrome (RDS) in
premature infants, has received two Approvable Letters from the U.S. Food and
Drug Administration (FDA) and is under review for approval in Europe by the
European Medicines Evaluation Agency (EMEA).
Our
SRT
pipeline is initially focused on the most significant respiratory conditions
prevalent in the NICU. In addition to Surfaxin for RDS, Surfaxin is also being
developed for the prevention and treatment of Bronchopulmonary Dysplasia (BPD,
also known as Chronic Lung Disease) in premature infants. We are also preparing
to conduct multiple Phase 2 pilot studies with Aerosurf™, our proprietary
aerosolized SRT administered through nasal continuous positive airway pressure
(nCPAP), for the treatment of neonatal respiratory failures.
To
address the various respiratory conditions affecting pediatric, young adult
and
adult patients in the critical care and other hospital settings, we recently
concluded a Phase 2 clinical trial to treat Acute Respiratory Distress Syndrome
(ARDS) in adults, and are also researching and developing aerosol SRT to address
Acute Lung Injury (ALI) prophylaxis, chronic obstructive pulmonary disease
(COPD), cystic fibrosis, asthma and other debilitating respiratory
conditions.
RECENT
DEVELOPMENTS
Recent
events, described below, are expected to significantly delay the U.S. regulatory
approval process for Surfaxin for the prevention of RDS in premature infants.
This delay does not arise out of any issues related to the clinical data from
our multinational SELECT Study, which demonstrates that Surfaxin was
significantly more effective in the prevention of RDS and also improved survival
(continuing through at least one year of life) and other outcomes versus
comparator surfactants.
In
February 2006, the Medicines and Health Products Regulatory Agency conducted
an
on-site inspection of our manufacturing facility on behalf of the EMEA. An
on-site inspection is required as part of the EMEA regulatory approval process.
We responded in writing to all of the EMEA inspectional observations in March
2006. Since the timeline set forth in the EMEA guidelines for providing further
comments has expired, we believe that the EMEA site inspection process has
been
completed. Nevertheless, the EMEA can initiate a re-inspection of our
manufacturing facility at any time.
1
In
April
2006, we received from the FDA a second Approvable Letter related to our NDA
for
Surfaxin for the prevention of RDS in premature infants. The letter contained
additional questions primarily related to Chemistry, Manufacturing and Control
(CMC) areas and product labeling. We are currently analyzing the second
Approvable Letter and preparing a comprehensive information package for the
FDA
addressing some of the issues in the second Approvable Letter. Once we have
completed our analysis, we will request a meeting with the FDA and submit the
comprehensive information package. Upon receipt of our request, procedurally
the
FDA must respond within 14 days and the meeting must occur within 75 days of
the
written request. At the meeting, we will seek to clarify the issues identified
by the FDA in the second Approvable Letter. Thereafter, we will submit our
formal response to the second Approvable Letter. At that time, the FDA will
advise us of the time frame in which it will complete its review and advise
us
if it will accept our response to the second Approvable Letter as a complete
response.
In
December 2005, we purchased from Laureate Pharma, Inc., our contract
manufacturer, its contract manufacturing operations and facility located in
Totowa, NJ. This facility is our only validated clinical facility in which
we
produce clinical grade material of our drug substance for use in our ongoing
clinical studies. The FDA concluded a three-week site re-inspection of our
manufacturing facility on April 7, 2006. The focus of the FDA re-inspection
centered on corrective actions implemented in response to the inspectional
observations on Form 483 issued in January 2005, as well as ongoing
manufacturing and quality control operations, systems and controls. Upon
conclusion of the on-site inspection, the FDA issued a Form 483 containing
inspectional observations related predominantly to the clarification of written
procedures, documentation and preventive maintenance. We have submitted our
response to the observations. One item noted on the site inspection Form 483
relates to certain drug product specification issues identified in the second
Approvable Letter received in April 2006 and will be addressed in our response
to the second Approvable Letter. Although the site inspection Form 483 does
not
cite a need for a re-inspection and we anticipate that our responses to the
Form
483 inspectional observations will be satisfactory to the FDA, the FDA may
re-inspect our manufacturing facility at any time.
Surfaxin
is a complex drug and, unlike many drugs, contains four active ingredients.
Surfaxin is aseptically manufactured at our facility and presented as a sterile,
liquid dispersion. The manufacturing process to produce Surfaxin is complex
and
requires ongoing monitoring of the stability and conformance to product
specifications of each of the four active ingredients and must be conducted
in a
sterile environment. Each batch of drug produced at our manufacturing facility
undergoes a stringent test regimen and a requisite number of lots per year
are
placed into a designed stability testing program consisting of specification
testing conducted over multiple time intervals and storage conditions. A batch
of drug product may fail to achieve the specified stability parameters. In
April
2006, based on our stability testing program, we concluded that certain of
the
batches of Surfaxin that were identified in our new drug application (NDA)
as
“process validation batches” and manufactured in the period from June through
August 2005 failed to achieve the designated stability parameters. We have
initiated an investigation to determine the cause of the failure. Because these
process validation batches are a part of our NDA, to complete our NDA, we will
have to manufacture and designate new process validation batches and subject
those new process validation batches to periodic stability testing. Accordingly,
we anticipate a significant delay in the U.S. regulatory approval process for
Surfaxin for the prevention of RDS in premature infants. We do not know at
this
time what exact impact this manufacturing issue will have on the Surfaxin
European regulatory approval process, but such approval is likely to be delayed.
In
March
2006, we completed our Phase 2 clinical trial to treat ARDS in adults. Although
the results of the trial were mixed, due in part to a small patient enrollment,
we observed a clinical and statistically significant improvement in oxygenation
and, for those patients who responded to the surfactant treatment, a better
clinical outcome. We have currently discontinued our ARDS development and will
seek potential partners, with which we can apply the scientific and clinical
observations generated from this trial to support the design of future trials
to
treat ARDS.
In
early
May 2006, a number of law firms issued press releases indicating that they
had
filed shareholder class actions against the Company in the United States
District Court for the Eastern District of Pennsylvania. The Company has not
been served with a complaint and has no basis on which to evaluate the class
action claims at this time.
2
We
are
currently implementing a long-term business strategy which includes the
following:
| · |
We
are analyzing all aspects of our business with an immediate intention
to
conserve cash while we remediate our manufacturing issues. The
establishment of our own commercial infrastructure is no longer in
our
near-term plans. Our strategy includes, among other things, down-sizing
our operations and potentially entering into strategic
partnerships;
|
| · |
We
will use our newly-acquired manufacturing facility, which is critical
to
the production of Surfaxin and our SRT clinical programs, to produce
Surfaxin, other SRT formulations and aerosol development capabilities.
We
view our acquisition of manufacturing operations as an initial step
in our
manufacturing strategy for the continued development of our SRT portfolio,
including life cycle management of Surfaxin, potential formulation
enhancements, and expansion of our aerosol SRT products, beginning
with
Aerosurf. Our long-term strategy includes building or acquiring additional
manufacturing capabilities for the production of our precision-engineered
surfactant drug products;
|
| · |
We
are investing in the development of our aerosol SRT pipeline programs,
including Aerosurf, primarily utilizing the aerosol generating technology
we licensed in December 2005 through a strategic alliance with Chrysalis
Technologies, a division of Philip Morris USA Inc.; and
|
| · |
We
plan on securing corporate partnerships for the development and potential
commercialization of our SRT pipeline for the NICU, including Surfaxin.
We
plan on securing corporate partnerships for the development and potential
commercialization of our SRT pipeline addressing respiratory conditions
affecting young adult and adult patients in the critical care and
other
hospital settings, including ARDS. We have entered into a corporate
partnership with Laboratorios del Dr. Esteve, S.A., primarily for
the
marketing and sale of Surfaxin and certain of our other SRT products
in
Southern Europe.
|
EQUITY
FINANCING WITH KINGSBRIDGE CAPITAL
On
April
17, 2006, we entered into a Committed Equity Financing Facility (the “CEFF”)
with Kingsbridge by way of a Common Stock Purchase Agreement, pursuant to which
Kingsbridge committed to purchase, subject to certain conditions, the lesser
of
up to $50 million or up to 11,677,047
shares
of
our common stock. In connection with the CEFF, we entered into a Registration
Rights Agreement with Kingsbridge. We also issued a Class C Investor Warrant
to
Kingsbridge to purchase 490,000 shares of our common stock at a price of $5.6186
per share, which is fully exercisable beginning October 17, 2006 and for a
period of five years thereafter.
The
Common Stock Purchase Agreement entitles us to sell and obligates Kingsbridge
to
purchase, from time to time over a period of three years, shares of our common
stock for cash consideration up to an aggregate of the lesser of up to $50
million or up to 11,677,047
shares
of
our common stock, subject to certain conditions and restrictions. The shares
of
common stock that may be issued to Kingsbridge under the Common Stock Purchase
Agreement and upon exercise of the Class C Investor Warrant will be issued
pursuant to an exemption from registration under the Securities Act of 1933,
as
amended (the “Securities Act”). Pursuant to the Registration Rights Agreement,
we have filed a registration statement of which this prospectus is a part,
covering the possible resale by Kingsbridge of any shares that we may issue
to
Kingsbridge under the Common Stock Purchase Agreement or the Registration Rights
Agreement or upon exercise of the Class C Investor Warrant. Through this
prospectus, Kingsbridge may offer to the public for resale the shares of our
common stock that we may issue to it pursuant to the Common Stock Purchase
Agreement, or that Kingsbridge may acquire upon exercise of the Class C Investor
Warrant.
For
a
period of 36 months from the first trading day following the effectiveness
of
the registration statement of which this prospectus is a part, we may, from
time
to time, at our discretion, and subject to certain conditions that we must
satisfy, draw down funds under the CEFF by selling shares of our common stock
to
Kingsbridge. The purchase price of these shares will be at a discount ranging
from 6 to 10 percent of the volume weighted average of the price of our common
stock for each of the eight trading days following our election to sell shares,
or “draw down” under the CEFF. The discount on each of these eight trading days
will be determined as follows:
3
|
VWAP*
|
Percent
of VWAP (Applicable Discount)
|
||||||
|
Greater
than $10.50 per share
|
94
|
%
|
(6
|
)%
|
|||
|
Less
than or equal to $10.50 but greater than $7.00 per share
|
92
|
%
|
(8
|
)%
|
|||
|
Less
than or equal to $7.00 but greater than or equal to $2.00 per
share
|
90
|
%
|
(10
|
)%
|
|||
_____
*
As set
forth in the Common Stock Purchase Agreement, “VWAP” means the volume weighted
average price (the aggregate sales price of all trades of our common stock
during each trading day divided by the total number of shares of common stock
traded during that trading day) of our common stock during any trading day
as
reported by Bloomberg, L.P. using the AQR function. The VWAP and corresponding
discount will be determined for each of the eight trading days during a draw
down pricing period.
During
the eight trading day pricing period for a draw down, if the VWAP for any one
trading day is less than the greater of (i) $2.00 or (ii) 85 percent of the
closing price of our common stock for the trading day immediately preceding
the
beginning of the draw down period, the VWAP from that trading day will not
be
used in calculating the number of shares to be issued in connection with that
draw down, and the draw down amount for that pricing period will be reduced
by
one-eighth of the draw down amount we had initially specified. In addition,
if
trading in our common stock is suspended for any reason for more than three
consecutive or non-consecutive hours during any trading day during a draw down
pricing period, that trading day will not be used in calculating the number
of
shares to be issued in connection with that draw down, and the draw down amount
for that pricing period will be reduced by one eighth of the draw down amount we
had initially specified.
We
intend
to exercise our right to draw down amounts under the CEFF, if and to the extent
available, at such times as we have a need for additional capital and when
we
believe that sales of stock under the CEFF provide an appropriate means of
raising capital.
Our
ability to require Kingsbridge to purchase our common stock is subject to
various limitations. Each draw down is limited to the lesser of 2.5 percent
of
the closing price market value of our outstanding shares of common stock at
the
time of the draw down or $10 million. Unless Kingsbridge agrees otherwise,
a
minimum of three trading days must elapse between the expiration of any draw
down pricing period and the beginning of the next draw down pricing period.
Kingsbridge is not obligated to purchase shares at prices below $2.00 per
share.
During
the term of the CEFF, we may not enter into any equity line or other financing
that is substantially similar to the CEFF, under which we agree to issue any
shares of common stock or securities of any type that are, or may become,
convertible or exchangeable into shares of common stock where the purchase,
conversion or exchange price for such common stock is determined using any
floating discount or other post-issuance adjustable discount to the market
price
of common stock. Any future issuance by us of a convertible security that
contains provisions that adjust the conversion price of such convertible
security solely for stock splits, dividends, distributions or similar events
is
permitted so long as such convertible security does not contain a provision
that
adjusts the conversion price as a result of any decline in the market price
of
the common stock after the issue date of the convertible security, other than
a
decline resulting directly from stock splits, dividends, distributions or
similar events including, without limitation, the type of conversion price
adjustments customarily found in a firm commitment Rule 144A offering to
qualified institutional buyers.
The
issuance of our common stock under the CEFF or upon exercise of the Class C
Investor Warrant will have no effect on the rights or privileges of existing
holders of common stock except that the economic and voting interests of each
stockholder will be diluted as a result of the issuance. Although the number
of
shares of common stock that stockholders presently own will not decrease, these
shares will represent a smaller percentage of our total shares that will be
outstanding after any issuances of shares of common stock to Kingsbridge. If
we
draw down amounts under the CEFF when our share price is decreasing, we will
need to issue more shares to raise the same amount than if our stock price
was
higher. Such issuances will have a dilutive effect and may further decrease
our
stock price.
4
Kingsbridge
agreed in the Common Stock Purchase Agreement that during the term of the CEFF,
neither Kingsbridge nor any of its affiliates, nor any entity managed or
controlled by it, will, or will cause or assist any person to, enter into any
short sale of any of our securities, as “short sale” is defined in Regulation
SHO promulgated under the Securities Exchange Act of 1934, as
amended.
Before
Kingsbridge is obligated to buy any shares of our common stock pursuant to
a
draw down, the following conditions, none of which is in Kingsbridge’s control,
must be met:
| · |
Each
of our representations and warranties in the Common Stock Purchase
Agreement must be true and correct in all material respects as of
the date
when made and as of the date of the applicable draw down notice as
though
made at that time, except for representations and warranties that
are
expressly made as of a particular
date.
|
| · |
We
must have performed, satisfied and complied in all material respects
with
all covenants, agreements and conditions required to be performed,
satisfied or complied with by us under the Common Stock Purchase
Agreement, the Registration Rights Agreement and the Class C Investor
Warrant.
|
| · |
We
must have complied in all respects with all applicable federal, state
and
local governmental laws, rules, regulations and ordinances in connection
with the execution, delivery and performance of the Common Stock
Purchase
Agreement and the consummation of the transactions it contemplates
except
for any failures to so comply that would not reasonably be expected
to
have a material adverse effect on us.
|
| · |
The
registration statement that includes this prospectus must be
effective.
|
| · |
We
must not have knowledge of any event that could reasonably be expected
to
have the effect of causing the registration statement applicable
to
Kingsbridge’s resale of shares of our common stock to be suspended or
otherwise ineffective.
|
| · |
Trading
in our common stock shall not have been suspended by the Securities
and
Exchange Commission (the “SEC”), The Nasdaq National Market or the
National Association of Securities Dealers and trading in securities
generally on The Nasdaq National Market shall not have been suspended
or
limited.
|
| · |
No
statute, rule, regulation, executive order, decree, ruling or injunction
shall have been enacted, entered, promulgated or endorsed by any
court or
governmental authority of competent jurisdiction which prohibits
the
consummation of any of the transactions contemplated by the Common
Stock
Purchase Agreement.
|
| · |
No
action, suit or proceeding before any arbitrator or any governmental
authority shall have been commenced, and no investigation by any
governmental authority shall have been threatened, against us or
any of
our officers, directors or affiliates seeking to enjoin, prevent
or change
the transactions contemplated by the Common Stock Purchase
Agreement.
|
| · |
We
must have sufficient shares of common stock, calculated using the
closing
trade price of the common stock as of the trading day immediately
preceding a draw down, registered under the registration statement
to
issue and sell such shares in accordance with such draw down.
|
| · |
The
Class C Investor Warrant must have been duly executed, delivered
and
issued to Kingsbridge, and we shall not be in default in any material
respect thereunder.
|
| · |
Kingsbridge
must have received an opinion from our outside legal counsel in the
form
previously agreed to.
|
| · |
We
must be current on all undisputed expense invoices that we are
required to
pay under the Common Stock Purchase Agreement.
|
5
There
is
no guarantee that we will be able to meet the foregoing conditions or any other
conditions under the Common Stock Purchase Agreement or that we will be able
to
draw down any portion of the amounts available under the CEFF.
We
also
entered into a Registration Rights Agreement with Kingsbridge. Pursuant to
the
Registration Rights Agreement, we have filed a registration statement, which
includes this prospectus, with the SEC relating to Kingsbridge’s resale of any
shares of common stock purchased by Kingsbridge under the Common Stock Purchase
Agreement or issued to Kingsbridge under the Registration Rights Agreement
or as
a result of the exercise of the Class C Investor Warrant. The effectiveness
of
this registration statement is a condition precedent to our ability to sell
common stock to Kingsbridge under the Common Stock Purchase Agreement. We are
entitled in certain circumstances, including the existence of certain kinds
of
nonpublic information, to deliver a blackout notice to Kingsbridge to suspend
the use of this prospectus and prohibit Kingsbridge from selling shares under
this prospectus. If we deliver a blackout notice in the 15 trading days
following the settlement of a draw down, or if the registration statement of
which this prospectus is a part is not effective in circumstances not permitted
by the Registration Rights Agreement, then we must pay amounts to Kingsbridge,
or issue Kingsbridge additional shares in lieu of payment, calculated by means
of a varying percentage of an amount based on the number of shares held by
Kingsbridge that were purchased pursuant to the draw down and the change in
the
market price of our common stock between the date the blackout notice is
delivered (or the registration statement is not effective) and the date the
prospectus again becomes available.
Kingsbridge
may terminate the CEFF upon one business day’s notice to us if we enter into a
transaction prohibited by the Common Stock Purchase Agreement without
Kingsbridge’s prior written consent or if a material adverse effect relating to
our business continues for ten trading days after we receive notice from
Kingsbridge of the material adverse effect. Kingsbridge may also terminate
the
CEFF upon one business day’s notice to us at any time if a registration
statement is not initially declared effective in accordance with the
Registration Rights Agreement. Kingsbridge may terminate the CEFF upon ten
business days’ notice to us at any time if we fail to make cumulative draw downs
of at least $2 million during any 12-month period after the first 12 months
of
the term of the CEFF. We may terminate the CEFF upon one business day’s notice
to Kingsbridge, except that we may not terminate the CEFF during any draw down
pricing period. In addition, either we or Kingsbridge may terminate the CEFF
upon one business day’s notice if the other party has breached a material
representation, warranty or covenant to the Common Stock Purchase Agreement
and
such breach is not remedied within ten trading days after notice of such breach
is delivered to the breaching party.
The
foregoing summary of the CEFF does not purport to be complete and is qualified
by reference to the Common Stock Purchase Agreement, the Registration Rights
Agreement and the Class C Investor Warrant, copies of which have been filed
as
exhibits to the registration statement of which this prospectus is a part.
Corporate
Information
Surfaxin®
is our
trademark. This prospectus also includes product names, trademarks and trade
names of other companies, which names are the exclusive property of the holders
thereof.
Our
executive offices are located at 2600 Kelly Road, Suite 100, Warrington,
Pennsylvania 18976-3622. Our telephone number is (215) 488-9300 and our
facsimile number is (215) 488-9301. We maintain a website on the Internet at
www.discoverylabs.com.
Information contained in our web site is not a part of this
prospectus.
6
RISK
FACTORS
An
investment in our common stock involves significant risks. You should carefully
consider the risks described below or in any applicable prospectus supplement
and other information, including our financial statements and related notes
previously included in our periodic reports filed with the SEC. If any of the
factors or conditions summarized in the following risks actually occur, our
business prospects, financial condition and results of operations could be
materially harmed, the value or trading price of our common stock could decline
and you could lose all or part of your investment. The risks and uncertainties
described below are those that we currently believe may materially affect us.
Additional risks and uncertainties of which we are unaware or which we currently
deem immaterial also may become important factors that affect us.
We
may not successfully develop and market our products, and even if we do, we
may
not become profitable.
We
currently have no products approved for marketing and sale and are conducting
research and development on our product candidates. As a result, we have not
begun to market or generate revenues from the commercialization of any of our
products. Our long-term viability will be impaired if we are unable to obtain
regulatory approval for, or successfully market, our product
candidates.
To
date,
we have only generated revenues from investments, research grants and
collaborative research and development agreements. We will need to engage in
significant, time-consuming and costly research, development, pre-clinical
studies, clinical testing and regulatory approval for our products under
development before their commercialization. In addition, pre-clinical or
clinical studies may show that our products are not effective or safe for one
or
more of their intended uses. We may fail in the development and
commercialization of our products. As of December 31, 2005, we have an
accumulated deficit of approximately $202.0 million and we expect to continue
to
incur significant increasing operating losses over the next several years.
If we
succeed in the development of our products, we still may not generate sufficient
or sustainable revenues or we may not be profitable.
Our
technology platform is based solely on our proprietary precision-engineered
surfactant technology.
Our
precision-engineered surfactant technology platform is based on the scientific
rationale of using SRT to treat life-threatening respiratory disorders and
as
the foundation for the development of novel respiratory therapies and products.
Our business is dependent upon the successful development and approval of our
product candidates based on this technology platform. Any material problems
with
our technology platform could have a material adverse effect on our
business.
The
regulatory approval process for our products is expensive and time-consuming,
and the outcome is uncertain. We may not obtain required regulatory approvals
for the commercialization of our products.
To
sell
Surfaxin or any of our other products under development, we must receive
regulatory approvals for each product. The FDA and foreign regulators
extensively and rigorously regulate the testing, manufacture, distribution,
advertising, pricing and marketing of drug products like our products. This
approval process includes preclinical studies and clinical trials of each
pharmaceutical compound to establish the safety and effectiveness of each
product and the confirmation by the FDA and foreign regulators that, in
manufacturing the product, we maintain good laboratory and manufacturing
practices during testing and manufacturing. Even if favorable testing data
is
generated by clinical trials of drug products, the FDA or EMEA may not accept
or
approve an NDA or Marketing Authorization Application (“MAA”) filed by a
pharmaceutical or biotechnology company for such drug product. To market our
products outside the United States, we also need to comply with foreign
regulatory requirements governing human clinical trials and marketing approval
for pharmaceutical products.
We
have
filed an NDA with the FDA for Surfaxin for the prevention of RDS in premature
infants. As part of the review of the Surfaxin NDA, the FDA, in January 2005,
issued a Form 483 to our then contract manufacturer, Laureate Pharma, Inc.
citing inspectional observations related to basic quality controls, process
assurances and documentation requirements that support the commercial production
process necessary to comply with current good manufacturing practices (cGMPs).
The FDA issued an Approvable Letter to us in February 2005 regarding our NDA.
To
address the Form 483 inspectional observations, we and Laureate implemented
improved quality systems and documentation controls believed to support the
FDA’s regulatory requirements for the approval of Surfaxin. In October 2005, the
FDA accepted our responses to the Approvable Letter as a complete response
thereby establishing April 2006 as its target to complete its review of our
NDA.
In April 2006, the FDA issued a second Approvable Letter to us. We are preparing
a comprehensive information package for the FDA addressing some of the issues
in
the second Approvable Letter. Once we have completed our analysis, we will
request a meeting with the FDA, at which we will seek to clarify the issues
identified by the FDA in the second Approvable Letter. Thereafter, we will
submit our formal response to the second Approvable Letter. At that time, the
FDA will advise us of the time frame in which it will complete its review and
advise us if it will accept our response to the second Approvable Letter as
a
complete response. After we have submitted our complete response, the FDA might
still delay its approval of our NDA or reject our NDA, which would have a
material adverse effect on our business.
7
We
have
filed an MAA with the EMEA for clearance to market Surfaxin for the prevention
of RDS in premature infants in Europe. In February 2006, we received the Day
180
List of Outstanding Issues from the Committee for Medicinal Products for Human
Use (CHMP) in relation to our MAA. We plan to submit a written response to
all
of the CHMP’s outstanding issues in early April 2006 with a possible Oral
Explanation before the CHMP in late June 2006. According to standard CHMP
procedures, the Committee is expected to make a recommendation on whether to
grant a Marketing Authorization for Surfaxin and issue a formal Opinion in
late
July 2006. The EMEA, however, may delay it decision or not complete the review
or may reject the MAA. In addition, we do not know at this time whether the
failure of certain process validation batches to achieve stability parameters
in
periodic stability testing will have any impact on the Surfaxin European
regulatory approval process, but such approval is likely to be
delayed.
If
the FDA and foreign regulators do not approve our products, we will not be
able
to market our products.
The
FDA
and foreign regulators have not yet approved any of our products under
development for marketing in the United States or elsewhere. The FDA or a
foreign regulator could withdraw any approvals we obtain, if any. Further,
if
there is a later discovery of unknown problems or if we fail to comply with
other applicable regulatory requirements at any stage in the regulatory process,
the FDA or a foreign regulator may restrict or delay our marketing of a product
or force us to make product recalls. In addition, the FDA could impose other
sanctions such as fines, injunctions, civil penalties or criminal
prosecutions.
Our
pending NDA for Surfaxin for the prevention of RDS in premature infants may
not
be approved by the FDA in a timely manner or at all, which would adversely
impact our ability to commercialize this product.
We
submitted an NDA to the FDA for Surfaxin for the prevention of RDS in premature
infants. In April 2006, we received a second Approvable Letter from the FDA,
which contained a list of inspectional observations on Form 483. Thereafter,
we
learned that certain process validation batches, which are a part of our NDA,
failed to to achieve the designated stability parameters in periodic stability
testing. These events are expected to significantly delay the review of our
NDA.
When we have completed and submitted our response to the second Approvable
Letter and remediated our manufacturing issues, the FDA may request additional
information from us, including data from additional clinical trials. Ultimately,
the FDA may not approve Surfaxin for RDS in premature infants. Any failure
to
obtain FDA approval or further delay associated with the FDA’s review process
would adversely impact our ability to commercialize our lead product.
Even
though some of our drug candidates have qualified for expedited review, the
FDA
may not approve them at all or any sooner than other drug candidates that do
not
qualify for expedited review.
The
FDA
has notified us that two of our intended indications for our
precision-engineered SRT, BPD in premature infants and ARDS in adults, have
been
granted designation as Fast Track products under provisions of the Food and
Drug
Administration Modernization Act of 1997. Designation as a Fast Track product
means that the FDA has determined that the drug is intended for the treatment
of
a serious or life-threatening condition and demonstrates the potential to
address unmet medical needs for such a condition, and that the FDA will
facilitate and expedite the development and review of the application for the
approval of the product. The FDA generally will review an NDA for a drug granted
Fast Track designation within six months instead of the typical one to three
years. Fast Track designation does not accelerate clinical trials nor does
it
mean that the regulatory requirements are less stringent. Our products may
cease
to qualify for expedited review and our other drug candidates may fail to
qualify for Fast Track designation or expedited review.
8
Our
ongoing clinical trials may be delayed, or fail, which will harm our
business.
Clinical
trials generally take two to five years or more to complete. Like many
biotechnology companies, we may suffer significant setbacks in advanced clinical
trials, even after obtaining promising results in earlier trials or in
preliminary findings for such clinical trials. Data obtained from clinical
trials are susceptible to varying interpretations which may delay, limit or
prevent regulatory approval. In addition, we may be unable to enroll patients
quickly enough to meet our expectations for completing any or all of these
trials. The timing and completion of current and planned clinical trials of
our
product candidates depend on, among other factors, the rate at which patients
are enrolled, which is a function of many factors, including:
| · |
the
number of clinical sites;
|
| · |
the
size of the patient population;
|
| · |
the
proximity of patients to the clinical
sites;
|
| · |
the
eligibility and enrollment criteria for the
study;
|
| · |
the
existence of competing clinical trials;
|
| · |
the
existence of alternative available products;
and
|
| · |
geographical
and geopolitical considerations.
|
Delays
in
patient enrollment in clinical trials may occur, which would likely result
in
increased costs, program delays or both. Patients may also suffer adverse
medical events or side effects that are common to those administered with the
surfactant class of drugs such as a decrease in the oxygen level of the blood
upon administration.
It
is
also possible that the FDA or foreign regulators could interrupt, delay or
halt
any one or more of our clinical trials for any of our product candidates. If
we
or any regulator believe that trial participants face unacceptable health risks,
any one or more of our trials could be suspended or terminated. We also may
not
reach agreement with the FDA or a foreign regulator on the design of any one
or
more of the clinical studies necessary for approval. Conditions imposed by
the
FDA and foreign regulators on our clinical trials could significantly increase
the time required for completion of such clinical trials and the costs of
conducting the clinical trials.
In
addition to our efforts to commercialize Surfaxin for the prevention of RDS
in
premature infants, we are currently conducting a Phase 2 clinical trial to
determine the safety and tolerability of administering Surfaxin as a therapeutic
approach for the prevention and treatment of BPD in premature infants. We are
preparing to conduct multiple Phase 2 pilot studies with Aerosurf for the
potential treatment of premature infants in the NICU suffering from neonatal
respiratory failure.
The
manufacture of our products is a highly exacting and complex process, and if
we
or one of our materials suppliers encounter problems manufacturing our products,
our business could suffer.
The
FDA
and foreign regulators require manufacturers to register manufacturing
facilities. The FDA and foreign regulators also inspect these facilities to
confirm compliance with cGMP or similar requirements that the FDA or foreign
regulators establish. We or our materials suppliers may face manufacturing
or
quality control problems causing product production and shipment delays or
a
situation where we or the supplier may not be able to maintain compliance with
the FDA’s cGMP requirements, or those of foreign regulators, necessary to
continue manufacturing our drug substance. Manufacturing or quality control
problems have already and may again occur at our Totowa facility or our
materials suppliers. Such problems, including, for example, our recent product
stability testing program issues, require potentially complex, time-consuming
and costly investigations to determine the causes and may also require detailed
remediation plans, which can further delay the regulatory approval process.
See
also “Recent Developments” for a description of our recent manufacturing issues.
Any failure to comply with cGMP requirements or other FDA or foreign regulatory
requirements could adversely affect our clinical research activities and our
ability to market and develop our products.
In
December 2005, we acquired Laureate’s clinical manufacturing facility in Totowa,
New Jersey. The facility has been qualified to produce appropriate clinical
grade material of our drug product for use in our ongoing clinical studies.
With
this acquisition, we now maintain a complete manufacturing facility and we
will
be manufacturing our products. We currently own certain specialized
manufacturing equipment, employ certain manufacturing managerial personnel,
and
we expect to invest in additional manufacturing equipment. We may be unable
to
produce Surfaxin and our other SRT drug candidates to appropriate standards
for
use in clinical studies or for commercialization. If we do not successfully
develop our manufacturing capabilities, it will adversely affect the sales
of
our products.
9
If
the parties we depend on for supplying our drug substance raw materials and
certain manufacturing-related services do not timely supply these products
and
services, it may delay or impair our ability to develop, manufacture and market
our products.
We
rely
on suppliers for our drug substance raw materials and third parties for certain
manufacturing-related services to produce material that meets appropriate
standards for commercial distribution and use in clinical trials of our
products. To succeed, clinical trials require adequate supplies of drug
substance and drug product, which may be difficult or uneconomical to procure
or
manufacture. We and our suppliers and vendors may not be able to (i) produce
our
drug substance or drug product to appropriate standards for use in clinical
studies, (ii) perform under any definitive manufacturing, supply or service
agreements with us or (iii) remain in business for a sufficient time to
successfully produce and market our product candidates. If we do not maintain
important manufacturing and service relationships, we may fail to find a
replacement supplier or required vendor or develop our own manufacturing
capabilities which could delay or impair our ability to obtain regulatory
approval for our products and substantially increase our costs or deplete profit
margins, if any. If we do find replacement manufacturers and vendors, we may
not
be able to enter into agreements with them on terms and conditions favorable
to
us and, there could be a substantial delay before a new facility could be
qualified and registered with the FDA and foreign regulatory
authorities.
We
will need additional capital and our ability to continue all of our existing
planned research and development activities is uncertain. Any additional
financing could result in equity dilution.
We
will
need substantial additional funding to conduct our presently planned research
and product development activities. Based on our current operating plan, we
believe that our currently available working capital will be adequate to satisfy
our capital needs into 2007. Our future capital requirements will depend on
a
number of factors that are uncertain, including the results of our research
and
development activities, clinical studies and trials, competitive and
technological advances and the regulatory process, among others. We will likely
need to raise substantial additional funds through collaborative ventures with
potential corporate partners and through additional debt or equity financings.
We may also continue to seek additional funding through capital lease
transactions. We may in some cases elect to develop products on our own instead
of entering into collaboration arrangements. This would increase our cash
requirements for research and development.
We
have
not entered into arrangements to obtain any additional financing, except for
the
CEFFs with Kingsbridge, our revolving credit facility with PharmaBio and our
capital equipment lease financing arrangement with GECC. Kingsbridge has the
right under certain circumstances to terminate the CEFF, including as a
consequence of a material adverse effect, including, potentially, our recent
issues with product stability testing. Any additional financing could include
unattractive terms or result in significant dilution of stockholders’ interests
and share prices may decline. If we fail to enter into collaborative ventures
or
to receive additional funding, we may have to delay, scale back or discontinue
certain of our research and development operations, and consider licensing
the
development and commercialization of products that we consider valuable and
which we otherwise would have developed ourselves. If we are unable to raise
required capital, we may be forced to limit many, if not all, of our research
and development programs and related operations, curtail commercialization
of
our product candidates and, ultimately, cease operations. See also “Risk Factors
- Our Committed Equity Financing Facility may have a dilutive impact on our
stockholders.”
Furthermore,
if the market price of our common stock declines as a result of the dilutive
aspects of such potential financings, we could cease to meet the financial
requirements to maintain the listing of our securities on The Nasdaq National
Market. See “Risk Factors - The market price of our stock may be adversely
affected by market volatility.”
10
Our
Committed Equity Financing Facility may have a dilutive impact on our
stockholders.
There
are
12,167,047 shares of our common stock that are reserved for issuance under
the
CEFF arrangement we entered into with Kingsbridge on April 17, 2006, 490,000
of
which are issuable upon exercise of the Class C Investor Warrant. The issuance
of shares of our common stock under the CEFF and upon exercise of the warrant
will have a dilutive impact on our other stockholders and the issuance or even
potential issuance of such shares could have a negative effect on the market
price of our common stock. In addition, if we access the CEFF, we will issue
shares of our common stock to Kingsbridge at a discount of between 6% and 10%
of
the daily volume weighted average price of our common stock during a specified
period of trading days after we access the CEFF. Issuing shares at a discount
will further dilute the interests of other stockholders.
On
July
7, 2004 we entered into a Committed Equity Financing Facility with Kingsbridge
by way of a Common Stock Purchase Agreement, pursuant to which Kingsbridge
committed to purchase, subject to certain conditions, up to $75 million of
our
common stock (the "2004 CEFF"). In 2005, $20.2 million was successfully raised
under the 2004 CEFF in two separate financings over 15 day periods in September
and November, respectively. On the effective date of the registration statement
of which this prospectus forms a part, the 2004 CEFF will be terminated. We
anticipate using the new CEFF during 2006 to support corporate, manufacturing
and development activities.
To
the
extent that Kingsbridge sells shares of our common stock issued under the CEFF
to third parties, our stock price may decrease due to the additional selling
pressure in the market. The perceived risk of dilution from sales of stock
to or
by Kingsbridge may cause holders of our common stock to sell their shares,
or it
may encourage short sales of our common stock or other similar transactions.
This could contribute to a decline in the stock price of our common
stock.
We
may
not be able to meet the conditions we are required to meet under the CEFF and
we
may not be able to access any portion of the up to $50.0 million available
under
the CEFF. In addition, we are dependent upon the financial ability of
Kingsbridge to fund the CEFF. Any failure by Kingsbridge to perform its
obligations under the CEFF could have a material adverse effect upon
us.
Our
strategy, in many cases, is to enter into collaboration agreements with third
parties with respect to our products and we may require additional collaboration
agreements. If we fail to enter into these agreements or if we or the third
parties do not perform under such agreements, it could impair our ability to
commercialize our products.
Our
strategy for the completion of the required development and clinical testing
of
our products and for the marketing and commercialization of our products, in
many cases, depends upon entering into collaboration arrangements with
pharmaceutical companies to market, commercialize and distribute our products.
Our collaboration arrangement with Esteve for Surfaxin and certain other of
our
product candidates is focused on key Southern European markets. Within these
countries, Esteve will be responsible for the development and marketing of
Surfaxin for a broader portfolio of indications, including the prevention of
RDS
in premature infants and ALI/ARDS in adults. Esteve will also be responsible
for
the sponsorship of certain clinical trial costs related to obtaining EMEA
approval for commercialization of Surfaxin in Europe for several indications.
We
will be responsible for the remainder of the regulatory activities relating
to
Surfaxin, including with respect to EMEA filings.
If
we or
Esteve breach or terminate the agreements that make up such collaboration
arrangements or Esteve otherwise fails to conduct their Surfaxin-related
activities in a timely manner or if there is a dispute about their obligations,
we may need to seek other partners or we may have to develop our own internal
sales and marketing capability for the indications of Surfaxin. Accordingly,
we
may need to enter into additional collaboration agreements and our success
may
depend upon obtaining additional collaboration partners. In addition, we may
depend on our collaborators’ expertise and dedication of sufficient resources to
develop and commercialize our proposed products.
In
December, 2005, we entered into a Strategic Alliance Agreement with Chrysalis
to
develop and commercialize aerosolized SRT to address a broad range of serious
respiratory conditions. Under the agreement, we have exclusive rights to
Chrysalis’ proprietary aerosolization technology for use with pulmonary
surfactants for all respiratory diseases and conditions in hospital and
ambulatory settings. Chrysalis will assist with the development of certain
combination drug-device surfactant products, and provide certain additional
consultative services to us in connection with combination drug-device
surfactant products, provided that certain terms and conditions are satisfied.
Additionally, Chrysalis is responsible for developing the design for the aerosol
device platform, patient interface and disposable dose packets. We are
responsible for aerosolized SRT drug formulations, clinical and regulatory
activities, and the manufacturing and commercialization of the drug-device
products.
11
We
may,
in the future, grant to collaboration partners rights to license and
commercialize pharmaceutical products developed under collaboration agreements.
Under these arrangements, our collaboration partners may control key decisions
relating to the development of the products. The rights of our collaboration
partners would limit our flexibility in considering alternatives for the
commercialization of our products. If we fail to successfully develop these
relationships or if our collaboration partners fail to successfully develop
or
commercialize any of our products, it may delay or prevent us from developing
or
commercializing our products in a competitive and timely manner and would have
a
material adverse effect on the commercialization of Surfaxin. See “Risk Factors
- We do not have sales and marketing experience and our lack of experience
may
restrict our success in commercializing our product candidates.”
If
we cannot protect our intellectual property, other companies could use our
technology in competitive products. If we infringe the intellectual property
rights of others, other companies could prevent us from developing or marketing
our products.
We
seek
patent protection for our drug candidates so as to prevent others from
commercializing equivalent products in substantially less time and at
substantially lower expense. The pharmaceutical industry places considerable
importance on obtaining patent and trade secret protection for new technologies,
products and processes. Our success will depend in part on our ability and
that
of parties from whom we license technology to:
| · |
defend
our patents and otherwise prevent others from infringing on our
proprietary rights;
|
| · |
protect
trade secrets; and
|
| · |
operate
without infringing upon the proprietary rights of others, both in
the
United States and in other
countries.
|
The
patent position of firms relying upon biotechnology is highly uncertain and
involves complex legal and factual questions for which important legal
principles are unresolved. To date, the United States Patent and Trademark
Office has not adopted a consistent policy regarding the breadth of claims
that
the United States Patent and Trademark Office allows in biotechnology patents
or
the degree of protection that these types of patents afford. As a result, there
are risks that we may not develop or obtain rights to products or processes
that
are or may seem to be patentable.
Even
if we obtain patents to protect our products, those patents may not be
sufficiently broad and others could compete with us.
We,
and
the parties licensing technologies to us, have filed various United States
and
foreign patent applications with respect to the products and technologies under
our development, and the United States Patent and Trademark Office and foreign
patent offices have issued patents with respect to our products and
technologies. These patent applications include international applications
filed
under the Patent Cooperation Treaty. Our pending patent applications, those
we
may file in the future or those we may license from third parties may not result
in the United States Patent and Trademark Office or foreign patent office
issuing patents. Also, if patent rights covering our products are not
sufficiently broad, they may not provide us with sufficient proprietary
protection or competitive advantages against competitors with similar products
and technologies. Furthermore, if the United States Patent and Trademark Office
or foreign patent offices issue patents to us or our licensors, others may
challenge the patents or circumvent the patents, or the patent office or the
courts may invalidate the patents. Thus, any patents we own or license from
or
to third parties may not provide any protection against
competitors.
Furthermore,
the life of our patents is limited. We have licensed a series of patents from
Johnson & Johnson and its wholly owned subsidiary, Ortho Pharmaceutical
Corporation, which are important, either individually or collectively, to our
strategy of commercializing our surfactant technology. Such patents, which
include relevant European patents, expire on various dates beginning in 2009
and
ending in 2017 or, in some cases, possibly later. We have filed, and when
possible and appropriate, will file, other patent applications with respect
to
our products and processes in the United States and in foreign countries. We
may
not be able to develop additional products or processes that will be patentable
or additional patents may not be issued to us. See also “Risk Factors - If we
cannot meet requirements under our license agreements, we could lose the rights
to our products.”
12
Intellectual
property rights of third parties could limit our ability to develop and market
our products.
Our
commercial success also significantly depends on our ability to operate without
infringing the patents or violating the proprietary rights of others. The United
States Patent and Trademark Office keeps United States patent applications
confidential while the applications are pending. As a result, we cannot
determine which inventions third parties claim in pending patent applications
that they have filed. We may need to engage in litigation to defend or enforce
our patent and license rights or to determine the scope and validity of the
proprietary rights of others. It will be expensive and time consuming to defend
and enforce patent claims. Thus, even in those instances in which the outcome
is
favorable to us, the proceedings can result in the diversion of substantial
resources from our other activities. An adverse determination may subject us
to
significant liabilities or require us to seek licenses that third parties may
not grant to us or may only grant at rates that diminish or deplete the
profitability of the products to us. An adverse determination could also require
us to alter our products or processes or cease altogether any related research
and development activities or product sales.
If
we cannot meet requirements under our license agreements, we could lose the
rights to our products.
We
depend
on licensing agreements with third parties to maintain the intellectual property
rights to our products under development. Presently, we have licensed rights
from Johnson & Johnson, Ortho Pharmaceutical and Chrysalis. These agreements
require us to make payments and satisfy performance obligations to maintain
our
rights under these licensing agreements. All of these agreements last either
throughout the life of the patents, or with respect to other licensed
technology, for a number of years after the first commercial sale of the
relevant product.
In
addition, we are responsible for the cost of filing and prosecuting certain
patent applications and maintaining certain issued patents licensed to us.
If we
do not meet our obligations under our license agreements in a timely manner,
we
could lose the rights to our proprietary technology.
Finally,
we may be required to obtain licenses to patents or other proprietary rights
of
third parties in connection with the development and use of our products and
technologies. Licenses required under any such patents or proprietary rights
might not be made available on terms acceptable to us, if at all.
We
rely on confidentiality agreements that could be breached and may be difficult
to enforce.
Although
we believe that we take reasonable steps to protect our intellectual property,
including the use of agreements relating to the non-disclosure of confidential
information to third parties, as well as agreements that purport to require
the
disclosure and assignment to us of the rights to the ideas, developments,
discoveries and inventions of our employees and consultants while we employ
them, the agreements can be difficult and costly to enforce. Although we seek
to
obtain these types of agreements from our consultants, advisors and research
collaborators, to the extent that they apply or independently develop
intellectual property in connection with any of our projects, disputes may
arise
as to the proprietary rights to this type of information. If a dispute arises,
a
court may determine that the right belongs to a third party, and enforcement
of
our rights can be costly and unpredictable. In addition, we will rely on trade
secrets and proprietary know-how that we will seek to protect in part by
confidentiality agreements with our employees, consultants, advisors or others.
Despite the protective measures we employ, we still face the risk
that:
| · |
these
agreements may be breached;
|
| · |
these
agreements may not provide adequate remedies for the applicable type
of
breach;
|
| · |
our
trade secrets or proprietary know-how will otherwise become known;
|
| · |
our
competitors will independently develop similar technology;
or
|
| · |
our
competitors will independently discover our proprietary information
and
trade secrets.
|
13
We
do not have sales and marketing experience, and our lack of such experience
may
restrict our success in commercializing our product candidates.
We
do not
have experience in marketing or selling pharmaceutical products. As a result
of
our recent manufacturing problems, we have determined that the establishment
of
a commercial infrastructure is no longer in our near-term plans . To achieve
commercial success for Surfaxin, or any other approved product, we will be
dependent upon entering into arrangements with others to market and sell our
products.
We
may be
unable to establish satisfactory arrangements for marketing, sales and
distribution capabilities necessary to commercialize and gain market acceptance
for Surfaxin or our other product candidates. To obtain the expertise necessary
to successfully market and sell Surfaxin, or any other product, will require
the
development of collaborative commercial arrangements and partnerships. Our
ability to make that investment and also execute our current operating plan
is
dependent on numerous factors, including, the performance of third party
collaborators with whom we may contract. Accordingly, we may not have sufficient
funds to successfully commercialize Surfaxin or any other potential product
in
the United States or elsewhere.
We
may enter into distribution arrangements and marketing alliances, which could
require us to give up rights to our product candidates.
We
may
rely on third-party distributors to distribute our products or enter into
marketing alliances to sell our products. We may not be successful in entering
into distribution arrangements and marketing alliances with third parties.
Our
failure to successfully enter into these arrangements on favorable terms could
delay or impair our ability to commercialize our product candidates and could
increase our costs of commercialization. Our dependence on distribution
arrangements and marketing alliances to commercialize our product candidates
will subject us to a number of risks, including:
| · |
we
may be required to relinquish important rights to our products or
product
candidates;
|
| · |
we
may not be able to control the amount and timing of resources that
our
distributors or collaborators may devote to the commercialization
of our
product candidates;
|
| · |
our
distributors or collaborators may experience financial difficulties;
|
| · |
our
distributors or collaborators may not devote sufficient time to the
marketing and sales of our products thereby exposing us to potential
expenses in terminating such distribution agreements; and
|
| · |
business
combinations or significant changes in a collaborator’s business strategy
may adversely affect a collaborator’s willingness or ability to complete
its obligations under any
arrangement.
|
We
may
need to enter into additional co-promotion arrangements with third parties
where
our own sales force is neither well situated nor large enough to achieve maximum
penetration in the market. We may not be successful in entering into any
co-promotion arrangements, and the terms of any co-promotion arrangements may
not be favorable to us. In addition, if we enter into co-promotion arrangements
or market and sell additional products directly, we may need to further expand
our sales force and incur additional costs.
If
we
fail to enter into arrangements with third parties in a timely manner or
if they
fail to perform, it could adversely affect sales of our products. We and
any of
our third-party collaborators must also market our products in compliance
with
federal, state and local laws relating to the providing of incentives and
inducements. Violation of these laws can result in substantial penalties.
We
have
announced our intention to seek to market and sell Surfaxin through one or
more
marketing partners both in the Unites States and abroad. Although our agreement
with Esteve provides for collaborative efforts in directing a global
commercialization effort, we have somewhat limited influence over the decisions
made by Esteve or their sublicensees or the resources they devote to the
marketing and distribution of Surfaxin products in their licensed territory,
and
Esteve or their sublicensees may not meet their obligations in this regard.
Our
marketing and distribution arrangement with Esteve may not be successful,
and we
may not receive any revenues from it. Also, we may not be able to enter into
marketing and sales agreements on acceptable terms, if at all, for Surfaxin
in
territories not covered by the Esteve agreement, or for any of our other
product
candidates.
14
We
depend upon key employees and consultants in a competitive market for skilled
personnel. If we are unable to attract and retain key personnel, it could
adversely affect our ability to develop and market our
products.
We
are
highly dependent upon the principal members of our management team, especially
our Chief Executive Officer, Dr. Capetola, and our directors, as well as our
scientific advisory board members, consultants and collaborating scientists.
Many of these people have been involved in our formation or have otherwise
been
involved with us for many years, have played integral roles in our progress
and
we believe that they will continue to provide value to us. A loss of any of
these personnel may have a material adverse effect on aspects of our business
and clinical development and regulatory programs. As of April 27, 2006, we
have
employment agreements with eight officers expiring in December 2006. Each
employment agreement provides that its term shall automatically be extended
for
one additional year, unless at least 90 days before January 1 either party
gives
notice that it does not wish to extend the agreement. Although these employment
agreements generally include non-competition covenants and provide for severance
payments that are contingent upon the applicable employee’s refraining from
competition with us, the applicable non-compete provisions can be difficult
and
costly to monitor and enforce. The loss of any of these persons’ services would
adversely affect our ability to develop and market our products and obtain
necessary regulatory approvals. Further, we do not maintain key-man life
insurance.
Our
future success also will depend in part on the continued service of our key
scientific and management personnel and our ability to identify, hire and retain
additional personnel. We experience intense competition for qualified personnel,
and the existence of non-competition agreements between prospective employees
and their former employers may prevent us from hiring those individuals or
subject us to suit from their former employers.
While
we
attempt to provide competitive compensation packages to attract and retain
key
personnel, some of our competitors are likely to have greater resources and
more
experience than we have, making it difficult for us to compete successfully
for
key personnel.
Our
industry is highly competitive and we have less capital and resources than
many
of our competitors, which may give them an advantage in developing and marketing
products similar to ours or make our products obsolete.
Our
industry is highly competitive and subject to rapid technological innovation
and
evolving industry standards. We compete with numerous existing companies
intensely in many ways. We intend to market our products under development
for
the treatment of diseases for which other technologies and treatments are
rapidly developing and, consequently, we expect new companies to enter our
industry and that competition in the industry will increase. Many of these
companies have substantially greater research and development, manufacturing,
marketing, financial, technological, personnel and managerial resources than
we
have. In addition, many of these competitors, either alone or with their
collaborative partners, have significantly greater experience than we do
in:
| · |
developing
products;
|
| · |
undertaking
preclinical testing and human clinical trials;
|
| · |
obtaining
FDA and other regulatory approvals or products;
and
|
| · |
manufacturing
and marketing products.
|
Accordingly,
our competitors may succeed in obtaining patent protection, receiving FDA or
comparable foreign approval or commercializing products before us. If we
commence commercial product sales, we will compete against companies with
greater marketing and manufacturing capabilities who may successfully develop
and commercialize products that are more effective or less expensive than ours.
These are areas in which, as yet, we have limited or no experience. In addition,
developments by our competitors may render our product candidates obsolete
or
noncompetitive.
Presently,
four products are specifically approved for the prevention of RDS in premature
infants. There are no approved drugs that are specifically indicated for the
prevention and treatment of ALI/ARDS in adults and current therapy consists
of
general supportive care and mechanical ventilation. See Item 1: “Business -
Competition” in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2005.
15
We
also
face, and will continue to face, competition from colleges, universities,
governmental agencies and other public and private research organizations.
These
competitors are becoming more active in seeking patent protection and licensing
arrangements to collect royalties for use of technology that they have
developed. Some of these technologies may compete directly with the technologies
that we are developing. These institutions will also compete with us in
recruiting highly qualified scientific personnel. We expect that therapeutic
developments in the areas in which we are active may occur at a rapid rate
and
that competition will intensify as advances in this field are made. As a result,
we need to continue to devote substantial resources and efforts to research
and
development activities.
If
we acquire companies, products or technologies, we may face risks associated
with those acquisitions.
If
we are
presented with appropriate opportunities, we intend to acquire or make other
investments in complementary companies, products or technologies. We may not
realize the anticipated benefit of any acquisition or investment. If we acquire
companies or technologies, we will likely face risks, uncertainties and
disruptions associated with the integration process, including difficulties
in
the integration of these operations and services of an acquired company,
integration of acquired technology with our products, diversion of our
management’s attention from other business concerns, the potential loss of key
employees or customers of the acquired businesses and impairment charges if
future acquisitions are not as successful as we originally anticipate. If we
fail to successfully integrate other companies, products or technologies that
we
may acquire, our business could be harmed. Furthermore, we may have to incur
debt or issue equity securities to pay for any additional future acquisitions
or
investments, the issuance of which could be dilutive to our existing
shareholders. In addition, our operating results may suffer because of
acquisition-related costs or amortization expenses or charges relating to
acquired intangible assets.
If
product liability claims are brought against us, it may result in reduced demand
for our products or damages that exceed our insurance
coverage.
The
clinical testing of, marketing and use of our products exposes us to product
liability claims if the use or misuse of those products causes injury, disease
or results in adverse effects. Use of our products in clinical trials, as well
as commercial sale, could result in product liability claims. In addition,
sales
of our products through third party arrangements could also subject us to
product liability claims. We presently carry product liability insurance with
coverages of up to $10 million per occurrence and $10 million in the aggregate,
an amount we consider reasonable and customary relating to our clinical trials
of Surfaxin. However, this insurance coverage includes various deductibles,
limitations and exclusions from coverage, and in any event might not fully
cover
any potential claims. We may need to obtain additional product liability
insurance coverage before initiating other clinical trials. We expect to obtain
product liability insurance coverage before commercialization of our proposed
products; however, the insurance is expensive and insurance companies may not
issue this type of insurance when we need it. We may not be able to obtain
adequate insurance in the future at an acceptable cost. Any product liability
claim, even one that was not in excess of our insurance coverage or one that
is
meritless and/or unsuccessful, could adversely affect our cash available for
other purposes, such as research and development. In addition, the existence
of
a product liability claim could affect the market price of our common
stock.
We
expect to face uncertainty over reimbursement and healthcare
reform.
In
both
the United States and other countries, sales of our products will depend in
part
upon the availability of reimbursement from third party payors, which include
government health administration authorities, managed care providers and private
health insurers. Third party payors are increasingly challenging the price
and
examining the cost effectiveness of medical products and services.
Directors,
executive officers, principal stockholders and affiliated entities own a
significant percentage of our capital stock, and they may make decisions that
you do not consider to be in your best interest.
As
of
March 31, 2006, our directors, executive officers, principal stockholders and
affiliated entities beneficially owned, in the aggregate, approximately 15%
of
our outstanding voting securities. As a result, if some or all of them acted
together, they would have the ability to exert substantial influence over the
election of our Board of Directors and the outcome of issues requiring approval
by our stockholders. This concentration of ownership may have the effect of
delaying or preventing a change in control of our company that may be favored
by
other stockholders. This could prevent transactions in which stockholders might
otherwise recover a premium for their shares over current market
prices.
16
The
market price of our stock may be adversely affected by market
volatility.
The
market price of our common stock, like that of many other development stage
pharmaceutical or biotechnology companies, has been and is likely to be
volatile. In addition to general economic, political and market conditions,
the
price and trading volume of our stock could fluctuate widely in response to
many
factors, including:
| · |
announcements
of the results of clinical trials by us or our
competitors;
|
| · |
adverse
reactions to products;
|
| · |
governmental
approvals, delays in expected governmental approvals or withdrawals
of any
prior governmental approvals or public or regulatory agency concerns
regarding the safety or effectiveness of our
products;
|
| · |
changes
in the United States or foreign regulatory policy during the period
of
product development;
|
| · |
developments
in patent or other proprietary rights, including any third party
challenges of our intellectual property
rights;
|
| · |
announcements
of technological innovations by us or our
competitors;
|
| · |
announcements
of new products or new contracts by us or our competitors;
|
| · |
actual
or anticipated variations in our operating results due to the level
of
development expenses and other
factors;
|
| · |
changes
in financial estimates by securities analysts and whether our earnings
meet or exceed the estimates;
|
| · |
conditions
and trends in the pharmaceutical and other
industries;
|
| · |
new
accounting standards; and
|
| · |
the
occurrence of any of the risks described in these “Risk
Factors”.
|
Our
common stock is listed for quotation on The Nasdaq National Market. During
the
twelve month period ended April 27, 2006, the price of our common stock has
ranged from $2.18 to $9.15. We
expect
the price of our common stock to remain volatile. The average daily trading
volume in our common stock varies significantly. For the twelve month period
ended April 27, 2006, the average daily trading volume in our common stock
was
approximately 745,000 shares and the average number of transactions per day
was
approximately 2,244. Our relatively low average volume and low average number
of
transactions per day may affect the ability of our stockholders to sell their
shares in the public market at prevailing prices and a more active market may
never develop.
In
addition, we may not be able to continue to adhere to the strict listing
criteria of The Nasdaq National Market. If the common stock were no longer
listed on The Nasdaq National Market, investors might only be able to trade
on
the Nasdaq Capital Market, in the over-the-counter market in the Pink
Sheets®
(a
quotation medium operated by the National Quotation Bureau, LLC) or on the
OTC
Bulletin Board®
of the
National Association of Securities Dealers, Inc. This would impair the liquidity
of our securities not only in the number of shares that could be bought and
sold
at a given price, which might be depressed by the relative illiquidity, but
also
through delays in the timing of transactions and reduction in media
coverage.
In
the
past, following periods of volatility in the market price of the securities
of
companies in our industry, securities class action litigation has often been
instituted against companies in our industry. If we face securities litigation
in the future, even if meritless or unsuccessful, it would result in substantial
costs and a diversion of management attention and resources, which would
negatively impact our business.
A
substantial number of our securities are eligible for future sale and this
could
affect the market price for our stock and our ability to raise
capital.
The
market price of our common stock could drop due to sales of a large number
of
shares of our common stock or the perception that these sales could occur.
As of
April
27,
2006,
we had
61,223,973 shares of common stock issued and outstanding.
17
We
have a
universal shelf registration statement on Form S-3 (File No. 333-128929), filed
with the SEC on October 11, 2005, for the proposed offering from time to time
of
up to $100 million of our debt or equity securities, of which $80 million is
remaining. We have no immediate plans to sell any securities under this
registration statement. However, we may issue securities from time to time
in
response to market conditions or other circumstances on terms and conditions
that will be determined at such time.
Additionally,
there are 12,167,047 shares of our common stock that are currently reserved
for
issuance under the CEFF. See “Risk Factors - Our Committed Equity Financing
Facility may have a dilutive impact on our stockholders.”
As
of
April 27, 2006, up to 12,147,777 shares of
our
common stock were issuable upon exercise of outstanding options and warrants.
Holders of our stock options and warrants are likely to exercise them, if ever,
at a time when we otherwise could obtain a price for the sale of our securities
that is higher than the exercise price per security of the options or warrants.
This exercise, or the possibility of this exercise, may impede our efforts
to
obtain additional financing through the sale of additional securities or make
this financing more costly, and may reduce the price of our common
stock.
Provisions
of our Certificate of Incorporation, Shareholders Rights Agreement and Delaware
law could defer a change of our management which could discourage or delay
offers to acquire us.
Provisions
of our Restated Certificate of Incorporation, as amended, our Shareholders
Rights Agreement and Delaware law may make it more difficult for someone to
acquire control of us or for our stockholders to remove existing management,
and
might discourage a third party from offering to acquire us, even if a change
in
control or in management would be beneficial to our stockholders. For example,
our Restated Certificate of Incorporation, as amended, allows us to issue shares
of preferred stock without any vote or further action by our stockholders.
Our
Board of Directors has the authority to fix and determine the relative rights
and preferences of preferred stock. Our Board of Directors also has the
authority to issue preferred stock without further stockholder approval. As
a
result, our Board of Directors could authorize the issuance of a series of
preferred stock that would grant to holders the preferred right to our assets
upon liquidation, the right to receive dividend payments before dividends are
distributed to the holders of common stock and the right to the redemption
of
the shares, together with a premium, before the redemption of our common stock.
In addition, our Board of Directors, without further stockholder approval,
could
issue large blocks of preferred stock. We have adopted a shareholders rights
agreement which under certain circumstances would significantly impair the
ability of third parties to acquire control of us without prior approval of
our
Board of Directors thereby discouraging unsolicited takeover proposals. The
rights issued under the shareholders rights agreement would cause substantial
dilution to a person or group that attempts to acquire us on terms not approved
in advance by our Board of Directors.
The
failure to prevail in litigation or the costs of litigation, including
securities class action and patent claims, could harm our financial performance
and business operations.
We
are
potentially susceptible to litigation. For example, as a public company, we
are
subject to claims asserting violations of securities laws, as well as derivative
actions. In particular, in early May 2006, several law firms announced that
class action lawsuits were filed against the Company and its Chief Executive
Officer, Robert J. Capetola. The Company has not seen the complaints in these
purported actions and, therefore, cannot, assess their merits or their effect
on
the Company at this time,
In
addition, as a biotechnology company, our processes and potential products
may
conflict with patents that have been or may be granted to competitors, academic
institutions or others. We cannot ensure that our products or methods do not
infringe upon the patents or other intellectual property rights of third
parties. As the biotechnology and pharmaceutical industries expand and more
patents are filed and issued, the risk increases that our patents or patent
applications for our product candidates may give rise to a declaration of
interference by the U.S. Patent and Trademark Office, or to administrative
proceedings in foreign patent offices, or that our activities lead to claims
of
patent infringement by other companies, institutions or individuals. These
entities or persons could bring legal proceedings against us seeking substantial
damages or seeking to enjoin us from researching.
18
FORWARD-LOOKING
STATEMENTS
This
prospectus contains “forward-looking statements” within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act
of 1934. The forward-looking statements are only predictions and provide our
current expectations or forecasts of future events and financial performance
and
may be identified by the use of forward-looking terminology, including the
terms
“believes,” “estimates,” “anticipates,” “expects,” “intends,” “may,” “will” or
“should” or, in each case, their negative, or other variations or comparable
terminology, though the absence of these words does not necessarily mean that
a
statement is not forward-looking. The forward-looking statements include all
matters that are not historical facts and include, without limitation:
statements concerning our research and development programs and clinical trials;
the possibility, timing and outcome of submitting regulatory filings for our
products under development; the seeking of collaboration arrangements with
pharmaceutical companies or others to develop, manufacture and market products;
the research and development of particular compounds and technologies; and
the
period of time for which our existing resources will enable us to fund our
operations.
We
intend
that all forward-looking statements be subject to the safe-harbor provisions
of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements are only predictions and reflect our views as of the date they are
made with respect to future events and financial performance. Forward-looking
statements are subject to many risks and uncertainties which could cause our
actual results to differ materially from any future results expressed or implied
by the forward-looking statements. Examples of the risks and uncertainties
include, but are not limited to:
| · |
risk
that financial conditions may change;
|
| · |
risks
relating to the progress of our research and development;
|
| · |
the
risk that we will not be able to raise additional capital or enter
into
additional collaboration agreements (including strategic alliances
for our
aerosol and Surfactant Replacement Therapies);
|
| · |
risk
that we or our marketing partners will not succeed in developing
market
awareness of our products;
|
| · |
risk
that we or our marketing partners will not be able to attract or
maintain
qualified personnel;
|
| · |
risk
that the FDA or other regulatory authorities may not approve any
applications that we file;
|
| · |
risk
of delay in the FDA’s or other health regulatory authorities’ approval of
any applications we file;
|
| · |
risks
that any such regulatory authority will not approve the marketing
and sale
of a drug product even after acceptance of an application we file
for any
such drug product;
|
| · |
risks
relating to the ability of our third party materials suppliers and
development partners to provide us with adequate supplies of drug
substance and drug products for completion of any of our clinical
studies;
|
| · |
risks
relating to our drug manufacturing
operations;
|
| · |
risks
relating to the integration of our recently-acquired manufacturing
operations into our existing
operations;
|
| · |
risks
relating to the lack of adequate supplies of drug substance and drug
product for completion of any of our clinical studies,
|
| · |
risks
relating to our ability and the ability of our collaborators to develop
and successfully commercialize products that will combine our drug
products with innovative aerosolization
technologies;
|
| · |
risks
relating to the significant, time-consuming and costly research,
development, pre-clinical studies, clinical testing and regulatory
approval for any products that we may develop independently or in
connection with our collaboration arrangements;
|
| · |
risks
relating to the development of competing therapies and/or technologies
by
other companies;
|
| · |
risks
relating to the impact of litigation that
has been and may be brought against the Company and its officers
and
directors; and
|
| · |
the
other risks and certainties detailed in “Risk Factors” and in the
documents incorporated by reference in this prospectus.
|
Companies
in the pharmaceutical and biotechnology industries have suffered significant
setbacks in advanced clinical trials, even after obtaining promising earlier
trial results. Data obtained from tests are susceptible to varying
interpretations, which may delay, limit or prevent regulatory
approval.
19
Except
to
the extent required by applicable laws, rules and regulations, we do not
undertake any obligation or duty to update any forward-looking statements or
to
publicly announce revisions to any of the forward-looking statements, whether
as
a result of new information, future events or otherwise.
USE
OF PROCEEDS
We
will
not receive any proceeds from the sales of common stock by Kingsbridge pursuant
to this prospectus.
SELLING
STOCKHOLDER
This
prospectus relates to the possible resale by the selling stockholder,
Kingsbridge, of shares of common stock that we may issue pursuant to the Common
Stock Purchase Agreement or the Registration Rights Agreement that we entered
into with Kingsbridge on April 17, 2006, or upon exercise of the Class C
Investor Warrant we issued to Kingsbridge. We are filing the registration
statement of which this prospectus is a part pursuant to the provisions of
the
Registration Rights Agreement we entered into with Kingsbridge on April 17,
2006.
The
selling stockholder may from time to time offer and sell pursuant to this
prospectus any or all of the shares that it acquires under the Common Stock
Purchase Agreement or upon exercise of the Class C Investor
Warrant.
The
following table presents information regarding Kingsbridge and the shares that
it may offer and sell from time to time under this prospectus. This table is
prepared based on information supplied to us by the selling stockholder, and
reflects holdings as of April 17, 2006. As used in this prospectus, the term
“selling stockholder” includes Kingsbridge and any donees, pledges, transferees
or other successors in interest selling shares received after the date of this
prospectus from a selling stockholder as a gift, pledge or other non-sale
related transfer. The number of shares in the column “Number of Shares Being
Offered” represents all of the shares that the selling stockholder may offer
under this prospectus. The selling stockholder may sell some, all or none of
its
shares. We do not know how long the selling stockholder will hold the shares
before selling them, and we currently have no agreements, arrangements or
understandings with the selling stockholder regarding the sale of any of the
shares.
Beneficial
ownership is determined in accordance with Rule 13d-3(d) promulgated by the
SEC
under the Securities Exchange Act of 1934, as amended. The percentage of shares
beneficially owned before the offering is based both on 61,223,973 shares of
our
common stock actually outstanding as of April 17, 2006 and on the assumption
that all shares of common stock issuable to Kingsbridge under the Common Stock
Purchase Agreement or upon exercise of the Class C Investor Warrant are
outstanding as of that date.
|
Name
|
Total
Number of
Shares
of Common
Stock
Beneficially
Owned
|
Percentage
Beneficially
Owned
Before
Offering
|
Number
of
Shares
Being
Offered
|
Number
of
Shares
Beneficially
Owned
after
this
Offering
|
Percentage
to be
Beneficially
Owned
after
this Offering
|
|||||||||||
|
Kingsbridge
Capital Limited (1)
|
12,542,047(2
|
)
|
20.5
|
%
|
12,167,047
|
375,000
|
*
|
|||||||||
|
(1)
|
The
address of Kingsbridge is Kingsbridge Capital Limited, c/o Kingsbridge
Corporate Services, Kingsbridge House, New Abbey, County Kildare,
Republic
of Ireland.
|
|
(2)
|
Consists
of (a) 11,677,047 shares of common stock issuable under the Common
Stock
Purchase Agreement or the Registration Rights Agreement we entered
into
with Kingsbridge on April 17, 2006, (b) 490,000 shares of common
stock
issuable upon exercise of the Class C Investor Warrant, which warrant
is
not exercisable before October 17, 2006 and (c) 375,000 shares of
common stock issuable upon exercise of the Class B Investor Warrant
issued
to Kingsbridge on July 7, 2004. For the purposes hereof, we assume
the
issuance of all shares under the Common Stock Purchase Agreement
and upon
exercise of the Class C Investor Warrant. Adam Gurney and Maria O’Donoghue
have shared voting and investment control of the securities held
by
Kingsbridge. Kingsbridge does not accept third party
investments.
|
20
PLAN
OF DISTRIBUTION
We
are
registering 12,167,047 shares of our common stock under this prospectus on
behalf of Kingsbridge. Except as described below, to our knowledge, the selling
stockholder has not entered into any agreement, arrangement or understanding
with any particular broker or market maker with respect to the shares of common
stock offered hereby, nor, except as described below, do we know the identity
of
the brokers or market makers that will participate in the sale of the
shares.
The
selling stockholder may decide not to sell any shares. The selling stockholder
may from time to time offer some or all of the shares of common stock through
brokers, dealers or agents who may receive compensation in the form of
discounts, concessions or commissions from the selling stockholder and/or the
purchasers of the shares of common stock for whom they may act as agent. In
effecting sales, broker-dealers that are engaged by the selling stockholder
may
arrange for other broker-dealers to participate. Kingsbridge is an “underwriter”
within the meaning of the Securities Act. Any brokers, dealers or agents who
participate in the distribution of the shares of common stock may also be deemed
to be “underwriters,” and any profits on the sale of the shares of common stock
by them and any discounts, commissions or concessions received by any such
brokers, dealers or agents may be deemed to be underwriting discounts and
commissions under the Securities Act. Kingsbridge has advised us that it may
effect resales of our common stock through any one or more registered
broker-dealers. To the extent the selling stockholder may be deemed to be an
underwriter, the selling stockholder will be subject to the prospectus delivery
requirements of the Securities Act and may be subject to certain statutory
liabilities of, including but not limited to, Sections 11, 12 and 17 of the
Securities Act and Rule 10b-5 under the Securities Exchange Act of 1934, as
amended, or the Exchange Act.
The
selling stockholder will act independently of us in making decisions with
respect to the timing, manner and size of each sale. Such sales may be made
on
The Nasdaq National Market, on the over-the-counter market, in privately
negotiated transactions or otherwise, or in a combination of such methods of
sale, at then prevailing market prices, at prices related to prevailing market
prices or at negotiated prices. The shares of common stock may be sold according
to one or more of the following methods:
| · |
a
block trade in which the broker or dealer so engaged will attempt
to sell
the shares of common stock as agent but may position and resell a
portion
of the block as principal to facilitate the transaction;
|
| · |
purchases
by a broker or dealer as principal and resale by such broker or dealer
for
its account pursuant to this prospectus;
|
| · |
an
over-the-counter distribution in accordance with the NASDAQ rules;
|
| · |
ordinary
brokerage transactions and transactions in which the broker solicits
purchasers;
|
| · |
privately
negotiated transactions;
|
| · |
a
combination of such methods of sale; and
|
| · |
any
other method permitted pursuant to applicable law.
|
Any
shares covered by this prospectus which qualify for sale pursuant to Rule 144
of
the Securities Act may be sold under Rule 144 rather than pursuant to this
prospectus. In addition, the selling stockholder may transfer the shares by
other means not described in this prospectus.
Any
broker-dealer participating in such transactions as agent may receive
commissions from Kingsbridge (and, if they act as agent for the purchaser of
such shares, from such purchaser). Broker-dealers may agree with Kingsbridge
to
sell a specified number of shares at a stipulated price per share, and, to
the
extent such a broker-dealer is unable to do so acting as agent for Kingsbridge,
to purchase as principal any unsold shares at the price required to fulfill
the
broker-dealer commitment to Kingsbridge. Broker-dealers who acquire shares
as
principal may thereafter resell such shares from time to time in transactions
(which may involve crosses and block transactions and which may involve sales
to
and through other broker-dealers, including transactions of the nature described
above) on The Nasdaq National Market, on the over-the-counter market, in
privately-negotiated transactions or otherwise at market prices prevailing
at
the time of sale or at negotiated prices, and in connection with such resales
may pay to or receive from the purchasers of such shares commissions computed
as
described above. To the extent required under the Securities Act, an amendment
to this prospectus, or a supplemental prospectus may be filed, disclosing:
21
| · |
the
name of any such broker-dealers;
|
| · |
the
number of shares involved;
|
| · |
the
price at which such shares are to be sold;
|
| · |
the
commission paid or discounts or concessions allowed to such
broker-dealers, where applicable;
|
| · |
that
such broker-dealers did not conduct any investigation to verify the
information set out or incorporated by reference in this prospectus,
as
supplemented; and
|
| · |
other
facts material to the transaction.
|
Underwriters
and purchasers that are deemed underwriters under the Securities Act may engage
in transactions that stabilize, maintain or otherwise affect the price of the
securities, including the entry of stabilizing bids or syndicate covering
transactions or the imposition of penalty bids. Kingsbridge and any other
persons participating in the sale or distribution of the shares will be subject
to the applicable provisions of the Securities Exchange Act and the rules and
regulations thereunder including, without limitation, Regulation M. These
provisions may restrict certain activities of, and limit the timing of,
purchases by the selling stockholder or other persons or entities. Furthermore,
under Regulation M, persons engaged in a distribution of securities are
prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time before
the commencement of such distributions, subject to special exceptions or
exemptions. Regulation M may restrict the ability of any person engaged in
the
distribution of the securities to engage in market-making and certain other
activities with respect to those securities. In addition, the anti-manipulation
rules under the Securities Exchange Act may apply to sales of the securities
in
the market. All of these limitations may affect the marketability of the shares
and the ability of any person to engage in market-making activities with respect
to the securities.
We
have
agreed to pay the expenses of registering the shares of common stock under
the
Securities Act, including registration and filing fees, printing expenses,
administrative expenses and certain legal and accounting fees, as well as
certain fees of counsel for the selling stockholder incurred in the preparation
of the CEFF agreements and the registration statement of which this prospectus
forms a part. The selling stockholder will bear all discounts, commissions
or
other amounts payable to underwriters, dealers or agents, as well as transfer
taxes and certain other expenses associated with the sale of
securities.
Under
the
terms of the Common Stock Purchase Agreement and the Registration Rights
Agreement, we have agreed to indemnify the selling stockholder and certain
other
persons against certain liabilities in connection with the offering of the
shares of common stock offered hereby, including liabilities arising under
the
Securities Act or, if such indemnity is unavailable, to contribute toward
amounts required to be paid in respect of such liabilities.
At
any
time a particular offer of the shares of common stock is made, a revised
prospectus or prospectus supplement, if required, will be distributed. Such
prospectus supplement or post-effective amendment will be filed with the SEC
to
reflect the disclosure of required additional information with respect to the
distribution of the shares of common stock. We may suspend the sale of shares
by
the selling stockholder pursuant to this prospectus for certain periods of
time
for certain reasons, including if the prospectus is required to be supplemented
or amended to include additional material information.
22
DESCRIPTION
OF COMMON STOCK
This
description of our common stock is a summary. You should keep in mind, however,
that it is our Certificate of Incorporation and our By-Laws, and not this
summary, which defines any rights you may acquire as a stockholder. There may
be
other provisions in such documents which are also important to you. You should
read such documents for a full description of the terms of our capital stock,
along with the applicable provisions of Delaware law.
We
currently have authorized 180,000,000 shares of common stock, par value $0.001
per share. As of April 27, 2006, there were 61,223,973 shares of common stock
outstanding, which does not include:
| · |
9,294,007
shares of common stock issuable upon exercise of options outstanding,
at a
weighted average exercise price of $6.36 per share;
|
| · |
2,853,770
shares of common stock issuable upon exercise of warrants outstanding,
at
a weighted average exercise price of $7.24;
|
| · |
10,587,651
shares of common stock available for future issuance under our shelf
registration statement on Form S-3 (No. 333-118595) dated August
26, 2004,
which was filed in connection with the
CEFF;
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| · |
an
indeterminate number of shares of common stock issuable under our
shelf
registration statement on Form S-3 (No. 333-128929) dated October
11,
2005;
|
| · |
704,088
shares of common stock available for future grant under our Amended
and
Restated 1998 Employee Stock Option Plan;
and
|
| · |
44,591
shares of common stock available for future issuance under our 401(k)
Plan.
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Common
Stock
Subject
to any preferential rights of any preferred stock created by our Board of
Directors, as a holder of our common stock you are entitled to such dividends
as
our Board of Directors may declare from time to time out of funds that we can
legally use to pay dividends. The holders of common stock possess exclusive
voting rights, except to the extent our Board of Directors specifies voting
power for any preferred stock that, in the future, may be issued.
As
a
holder of our common stock, you are entitled to one vote for each share of
common stock and do not have any right to cumulate votes in the election of
directors. Upon our liquidation, dissolution or winding-up, you will be entitled
to receive on a proportionate basis any assets remaining after provision for
payment of creditors and after payment of any liquidation preferences to holders
of preferred stock. Holders of our common stock have no preemptive rights and
no
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to our common stock. All the outstanding
shares of common stock are, and the shares offered by this prospectus, when
issued and paid for, will be, validly issued, fully paid and nonassessable.
Our
common stock is quoted on The Nasdaq National Market under the symbol “DSCO”.
Stockholder
Rights Plan
The
summary description of the Rights set out herein does not purport to be
complete, and is qualified in its entirety by reference to the terms and
provision of our Shareholder Rights Agreement, dated as of February 6,
2005.
On
February 6, 2004, our Board of Directors adopted a shareholder rights agreement.
Pursuant to the rights agreement our Board of Directors (i) declared that each
stockholder of record as of the close of business on February 6, 2004, would
be
issued a dividend of one preferred stock purchase right (a “Right”) for each
share of our common stock held by such stockholder and (ii) determined that
each
share of common stock issued by us after such date through the Final Expiration
Date (as defined below) shall be issued with a tandem Right. Each Right
represents the right to purchase one ten-thousandth of a share of our Series
A
Junior Participating Cumulative Preferred Stock (“Series A Preferred”) at an
exercise price equal to $50 per Right (as the same may be adjusted, the
“Exercise Price”). The Rights shall be evidenced by certificates for our common
stock until the earlier to occur of:
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·
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10
days following a public announcement that a person or group of
affiliated
or associated persons (with certain exceptions, an “Acquiring Person”)
have acquired beneficial ownership of 15% or more of the outstanding
shares of our common stock; and
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·
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10
business days (or such later date as may be determined by action
of the
Board of Directors before such time as any person or group of affiliated
persons becomes an Acquiring Person) following the commencement
of, or
announcement of an intention to make, a tender offer or exchange
offer the
consummation of which would result in the beneficial ownership
by a person
or group of 15% or more of the outstanding shares of Common Stock
(the
earlier of such dates being called the “Distribution
Date”).
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The
Rights are not exercisable until the Distribution Date. Until a Right is
exercised, the holder thereof, as such, will have no rights as a Discovery
stockholder, including, without limitation, the right to vote or to receive
dividends.
The
Rights will expire upon the close of business on February 6, 2014 (the “Final
Expiration Date”), unless the Rights are earlier redeemed or exchanged by us, in
each case as described below.
The
shares of Series A Preferred purchasable upon exercise of the Rights will be
entitled, when, as and if declared, to a minimum preferential quarterly dividend
payment of 10,000 times the per share amount of dividends declared on our common
stock. If no common stock dividend is declared in a quarter, a preferred stock
quarterly dividend of $1.00 per share will be required. Upon our liquidation,
holders of Series A Preferred will be entitled to a preferential distribution
payment of at least 10,000 times the payment made per share of common stock.
Each share of Series A Preferred will entitle the holder to 10,000 votes, voting
together with our common stock. Upon any merger, consolidation or other
transaction in which shares of our common stock are converted or exchanged,
the
holders of Series A Preferred will be entitled to receive 10,000 times the
amount of consideration received per share of our common stock in respect of
such transaction. The Rights are protected by customary anti-dilution
provisions.
Because
of the nature of the Series A Preferred’s dividend and liquidation rights, the
fair market value of the one ten-thousandth of a share of Series A Preferred
purchasable upon exercise of each Right should approximate the fair market
value
of one share of our common stock. If any person or group of affiliated or
associated persons becomes an Acquiring Person, each holder of a Right, (other
than Rights beneficially owned by the Acquiring Person, which become void),
will
have the right to receive upon exercise and payment of the then current Exercise
Price, that number of shares of our common stock having a market value of two
times the Exercise Price.
If,
after
a person or group has become an Acquiring Person, we are acquired in a merger
or
other business combination transaction, or 50% or more of our consolidated
assets or earning power are sold, proper provision will be made so that each
holder of a Right (other than Rights beneficially owned by an Acquiring Person,
which become void) will thereafter have the right to receive, upon exercise
at
the then current Exercise Price, that number of shares of common stock of the
person with whom we engaged in the foregoing transaction (or its parent), which
at the time of such transaction will have a market value of two times the
Exercise Price. In lieu of exercise, our Board of Directors may exchange the
Rights (other than Rights owned by an Acquiring Person, which become void),
in
whole or in part, for such securities or other property or rights as the Board
may determine, including any class or series of our common stock or preferred
stock.
At
any
time before the time an Acquiring Person becomes such, our Board of Directors
may redeem the Rights in whole, but not in part, at a price of $.001 per Right,
subject to adjustment.
We
may
amend the Rights to the extent and on the conditions set out in the Rights
Agreement.
Anti-Takeover
Provisions
As
a
corporation organized under the laws of the State of Delaware, we are subject
to
Section 203 of the General Corporation Law of the State of Delaware, which
restricts our ability to enter into business combinations with an interested
stockholder or a stockholder owning 15% or more of our outstanding voting stock,
or that stockholder’s affiliates or associates, for a period of three years.
These restrictions do not apply if:
24
—before
becoming an interested stockholder, our Board of Directors approves either
the
business combination or the transaction in which the stockholder becomes an
interested stockholder;
—upon
consummation of the transaction in which the stockholder becomes an interested
stockholder, the interested stockholder owns at least 85% of our voting stock
outstanding at the time the transaction commenced, subject to exceptions;
or
—on
or
after the date a stockholder becomes an interested stockholder, the business
combination is both approved by our Board of Directors and authorized at an
annual or special meeting of our stockholders by the affirmative vote of at
least two-thirds of the outstanding voting stock not owned by the interested
stockholder.
Number
of Directors; Removal
Our
By-Laws provide that our Board of Directors shall consist of at least three
directors and may consist of such larger number as may be determined, from
time-to-time, by the Board of Directors. Our By-laws provide that directors
may
be removed with or without cause by the affirmative vote of holders of a
majority of the total voting power of all outstanding securities.
This
provision and the Board of Directors’ right to issue shares of our preferred
stock from time to time, in one or more classes or series without stockholder
approval are intended to enhance the likelihood of continuity and stability
in
the composition of the policies formulated by our Board of Directors. These
provisions are also intended to discourage some tactics that may be used in
proxy fights.
Transfer
Agent and Registrar
The
Transfer Agent and Registrar for our common stock is Continental Stock Transfer
& Trust Company.
EXPERTS
Ernst
& Young LLP, independent registered public accounting firm, has audited our
consolidated financial statements included in our Annual Report on Form 10-K
for
the year ended December 31, 2005, and management’s assessment of the
effectiveness of our internal control over financial reporting as of December
31, 2005, as set forth in their reports, which are incorporated by reference
in
this prospectus and elsewhere in the registration statement. Our financial
statements and management’s assessment are incorporated by reference in reliance
on Ernst & Young LLP’s reports, given on their authority as experts in
accounting and auditing.
LEGAL
MATTERS
If
and
when offered, the validity of the securities being registered hereunder will
be
passed upon for us by Dickstein Shapiro Morin & Oshinsky LLP.
INTERESTS
OF NAMED EXPERTS AND COUNSEL
Attorneys
of Dickstein Shapiro Morin & Oshinsky LLP beneficially own shares of our
common stock, the aggregate value of which exceeds $50,000.
WHERE
YOU CAN FIND MORE INFORMATION
We
file
annual, quarterly and periodic reports, proxy statements and other information
with the SEC. You may read and copy any materials that we file with the SEC
at
the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. Many of our SEC filings are also available
to
the public from the SEC’s Website at “http://www.sec.gov.” We make available
free of charge our annual, quarterly and current reports, proxy statements
and
other information upon request. To request such materials, please send an e-mail
to ir@DiscoveryLabs.com or contact John G. Cooper, our Executive Vice President,
Chief Financial Officer, at our address as set forth above.
25
We
maintain a Website at “http://www.DiscoveryLabs.com”. Our Website and the
information contained therein or connected thereto are not incorporated into
this Registration Statement.
We
have
filed with the SEC a registration statement on Form S-3 under the Securities
Act
relating to the securities we are offering by this prospectus. This prospectus
does not contain all of the information set forth in the registration statement
and the exhibits and schedules to the registration statement. Please refer
to
the registration statement and its exhibits and schedules for further
information with respect to us and our securities. Statements contained in
this
prospectus as to the contents of any contract or other document are not
necessarily complete and, in each instance, we refer you to the copy of that
contract or document filed as an exhibit to the registration statement. You
may
read and obtain a copy of the registration statement and its exhibits and
schedules from the SEC, as described in the preceding paragraph.
INFORMATION
INCORPORATED BY REFERENCE
The
SEC
allows us to “incorporate by reference” the information we file with them, which
means that we can disclose important information to you by referring you to
those documents. The information incorporated by reference is considered to
be
part of this prospectus, and information that we file later with the SEC will
automatically update and supersede this information. We incorporate by reference
the documents filed with SEC listed below:
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1.
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Our
Annual Report on Form 10-K for the fiscal year ended December 31,
2005,
filed on March 16, 2006;
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2.
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Our
Quarterly Report on Form 10-Q for the quarterly period ended March
31,
2006, filed on May 10, 2006;
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3.
|
Our
Current Reports on Form 8-K filed with the SEC on March 31, 2006,
April 5,
2006, April 18, 2006, April 21, 2006, April 26, 2006 and May 4,
2006;
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4.
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The
description of our common stock contained in our Registration Statement
on
Form 8-A filed with the SEC on July 13, 1995;
and
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5.
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All
documents we have filed with the SEC pursuant to Sections 13(a),
13(c), 14
or 15(d) of the Exchange Act after the date of this registration
statement
and before the effectiveness of the registration statement, as well
as
after the date of this prospectus and before the termination of this
offering, shall be deemed to be incorporated by reference into this
prospectus and to be a part of this prospectus from the date of the
filing
of the documents.
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You
may
request a copy of these filings, at no cost, by sending an e-mail to
ir@DiscoveryLabs.com and requesting any one or more of such filings or by
contacting John G. Cooper, our Executive Vice President, Chief Financial
Officer, at the following address or telephone number: Discovery Laboratories,
Inc., 2600 Kelly Road, Suite 100, Warrington, Pennsylvania 18976-3622,
Attention: John G. Cooper; (215) 488-9300. Exhibits to the documents will not
be
sent, unless those exhibits have specifically been incorporated by reference
in
this prospectus.
All
reports and other documents subsequently filed by us with the SEC pursuant
to
Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934
after
the date of this prospectus and before the termination of the offering shall
be
deemed to be incorporated by reference in this prospectus and to be a part
of
this prospectus from the date of filing of such reports and documents. This
prospectus also incorporates by reference any documents that we file with the
SEC after the date of the initial registration statement and before the
effectiveness of the registration statement. Any statement contained in any
document incorporated or deemed to be incorporated by reference herein shall
be
deemed to be modified or superseded for purposes of this prospectus to the
extent that a statement contained in this prospectus or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference in this prospectus modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this prospectus.
26