|
PROSPECTUS
SUPPLEMENT NO. 1
(TO
PROSPECTUS DATED JUNE 18, 2008)
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Filed
pursuant to Rule 424(b)(3)
under
the Securities Act of 1933 in connection with
Registration
Statement No. 333-151536
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Common
Stock
This
Prospectus Supplement No. 1 supplements and amends the prospectus dated June
18,
2008 relating to the resale of up to 20,153,000 shares of our common stock
by
Kingsbridge Capital Limited (“Kingsbridge”).
This
prospectus supplement should be read in conjunction with the prospectus dated
June 18, 2008 which is to be delivered with this prospectus supplement. This
prospectus supplement is not complete without, and may not be delivered or
utilized except in connection with, the prospectus, including any supplements
or
amendments to it. All references in the prospectus to “this prospectus” are
hereby amended to read “this prospectus (as supplemented and
amended).”
We
are
filing this prospectus supplement to reflect a draw down by us pursuant to
the
Common Stock Purchase Agreement, dated May 22, 2008, between Kingsbridge
and
ourselves.
The
table
appearing under the caption “Selling Stockholder” on page 24 of the prospectus
is hereby further supplemented and amended by adding the following to the
end of
footnote (2) to that table, as previously supplemented and amended:
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“On
June 29, 2008, we delivered a notice to Kingsbridge to effect a draw
down
of up to $2,500,000. The first trading day of the eight day pricing
period
for this draw down was June 30, 2008. In connection with this draw
down,
we issued an aggregate of 1,104,850 shares of our common stock to
Kingsbridge at an aggregate purchase price of $1,562,500. The settlement
dates for this drawdown were July 7, 2008 and July 11, 2008.”
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Investing
in our common stock involves significant risks. See “Risk Factors” beginning on
Page 7 of the prospectus, as well as the section entitled “Risk Factors”
included in our recent quarterly and annual reports filed with the Securities
and Exchange Commission.
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 supplement is July 11, 2008.
PROSPECTUS
20,153,000
Shares
Common
Stock
This
prospectus relates to the resale of up to 20,153,000 shares of our common
stock that we may issue to Kingsbridge Capital Limited (“Kingsbridge”) pursuant
to a Common Stock Purchase Agreement, dated May 22, 2008, between Kingsbridge
and ourselves and a 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 25. 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 Global Market under the symbol “DSCO.” The
last reported sale price for our common stock on June 3, 2008 was $1.82 per
share.
Investing
in our common stock involves significant risks. See “Risk Factors” beginning on
Page 5.
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 June 18, 2008.
TABLE
OF CONTENTS
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ABOUT
THIS PROSPECTUS
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1
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ABOUT
DISCOVERY
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1
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EQUITY
FINANCING WITH KINGSBRIDGE CAPITAL
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2
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RISK
FACTORS
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5
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FORWARD-LOOKING
STATEMENTS
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23
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USE
OF PROCEEDS
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24
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SELLING
STOCKHOLDER
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24
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PLAN
OF DISTRIBUTION
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25
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DESCRIPTION
OF COMMON STOCK
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27
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EXPERTS
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29
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LEGAL
MATTERS
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30
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WHERE
YOU CAN FIND MORE INFORMATION
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30
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INFORMATION
INCORPORATED BY REFERENCE
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30
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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. For a complete
understanding of our business and this offering, you
should
read this entire prospectus carefully, including the risks of investing
discussed under “Risk Factors” beginning on page 5,
and
the information to which we refer you and the information incorporated into
this
prospectus by reference.
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 subsidiary.
References to “selling stockholder” refers to the stockholder listed herein
under the heading “Selling Stockholder” on page 24,
who
may sell shares from time to time as described in this prospectus.
ABOUT
DISCOVERY
Discovery
Laboratories, Inc. (referred to as “we”, “us” and “our”) is a biotechnology
company developing Surfactant Replacement Therapies (SRT) for respiratory
disorders and diseases. Our proprietary technology produces a peptide-containing
synthetic surfactant that is structurally similar to pulmonary surfactant,
a
substance produced naturally in the lung and essential for survival and normal
respiratory function. We believe that our proprietary technology makes it
possible, for the first time, to develop a series of SRT respiratory therapies
to treat conditions for which there are few or no approved therapies available
for patients in the Neonatal Intensive Care Unit (NICU), Pediatric Intensive
Care Unit (PICU), Intensive Care Unit (ICU) and other hospital settings.
Our
SRT
pipeline is focused initially on the most significant respiratory conditions
prevalent in the NICU and PICU. We
have
filed a New Drug Application (NDA) with the U.S. Food and Drug Administration
(FDA) for our lead product, Surfaxin®
(lucinactant) for the prevention of Respiratory Distress Syndrome (RDS) in
premature infants. The FDA recently issued to us an Approvable Letter, which
does not require additional clinical trials. We are also developing Surfaxin
for
other neonatal and pediatric respiratory conditions, including Bronchopulmonary
Dysplasia (BPD), a debilitating and chronic lung disease typically affecting
premature infants who have suffered RDS, and Acute Respiratory Failure (ARF).
Aerosurf™ is our proprietary SRT in aerosolized form and is being developed
initially to treat premature infants in the NICU. Aerosurf has the potential
to
obviate the need for endotracheal intubation and conventional mechanical
ventilation and holds the promise to significantly expand the use of SRT
in
respiratory medicine.
We
also
believe that our SRT will potentially address a variety of debilitating
respiratory conditions such as Acute Lung Injury (ALI), cystic fibrosis (CF),
chronic obstructive pulmonary disease (COPD), and asthma, that affect other
pediatric, young adult and adult patients in the ICU and other hospital
settings.
We
have
implemented a long-term business strategy that includes: (i) ongoing investment
in the development of our SRT pipeline programs, with a primary focus on
efforts
intended to gain regulatory approval to market and sell Surfaxin for the
prevention of RDS in premature infants in the United States, life cycle
development of Surfaxin for other respiratory conditions prevalent in the
NICU
and PICU, and developing Aerosurf for neonatal and pediatric conditions;
(ii) preparing for the potential commercial launch of Surfaxin in the
United States; (iii) seeking collaboration agreements and strategic partnerships
in the international and domestic markets for the development and potential
commercialization of our SRT pipeline; (iv) continued investment in our
quality systems and manufacturing capabilities to meet the anticipated
pre-clinical, clinical and potential future commercial requirements of Surfaxin,
Aerosurf and our other SRT products; and (v) seeking investments of
additional capital, including potentially from business alliances, commercial
and development partnerships, equity financings and other similar opportunities,
although there can be no assurance that we will identify or enter into any
specific actions or transactions.
1
EQUITY
FINANCING WITH KINGSBRIDGE CAPITAL
On
May
22, 2008, we entered into a Committed Equity Financing Facility (the “CEFF”)
with Kingsbridge by way of a Common Stock Purchase Agreement. 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 $60 million
or up
to 19,328,000 shares of our common stock, subject to certain conditions and
restrictions. In connection with the CEFF, we entered into a Registration
Rights
Agreement with Kingsbridge. We also issued a Warrant to Kingsbridge to purchase
825,000 shares of our common stock at a price of $2.506 per share, which
is
fully exercisable beginning November 22, 2008 and for a period of five years
thereafter.
The
shares of common stock that may be issued to Kingsbridge under the Common
Stock
Purchase Agreement and upon exercise of the 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 upon exercise of the 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
Warrant.
For
a
period of 36 months from the first trading day following the effectiveness
of
this prospectus, 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 12 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:
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VWAP*
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% of VWAP
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(Applicable Discount)
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Greater
than $7.25 per share
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94
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%
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6
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%
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Less
than or equal to $7.25 but greater than $3.85 per share
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92
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%
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8
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%
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Less
than or equal to $3.85 but greater than or equal to $1.75 per
share
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90
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%
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10
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%
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Less
than or equal to $1.75 but greater than or equal to $1.15 per
share
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88
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%
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12
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%
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*
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) $1.15 or (ii) 90 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 3.0 percent
of
the aggregate 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 $1.15
per share.
2
During
the term of the CEFF, without the written consent of Kingsbridge, we may
not
enter into any equity line or other financing that is substantially similar
to
the CEFF or 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.
The
issuance of our common stock under the CEFF or upon exercise of the 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.
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:
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·
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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.
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·
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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 Warrant.
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·
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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.
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·
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The
registration statement that includes this prospectus must be effective
under the Securities Act.
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·
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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.
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·
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Trading
in our common stock shall not have been suspended by the Securities
and
Exchange Commission (the “SEC”), The Nasdaq Global Market or the National
Association of Securities Dealers and trading in securities generally
on
The Nasdaq Global Market shall not have been suspended or
limited.
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3
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·
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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.
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·
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No
action, suit or proceeding before any arbitrator or any governmental
authority shall be pending or, to our knowledge, threatened, and,
to our
knowledge, no inquiry or 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, or seeking
material
damages in connection with such transactions, except for any action,
suit
or proceeding which could not reasonably be expected to have a
material
adverse effect.
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·
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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.
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·
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The
Warrant must have been duly executed, delivered and issued to Kingsbridge,
and we shall not be in default in any material respect thereunder.
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·
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Kingsbridge
must have received an opinion from our outside legal counsel in
the form
previously agreed.
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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 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 10 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. 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 10 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 Warrant, copies of which have been filed or incorporated
by
reference as exhibits to the registration statement of which this prospectus
is
a part.
4
Corporate
Information
Surfaxin®
and
Aerosurf™
are
our
trademarks. 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.
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, and in the
documents incorporated therein by reference before deciding to invest in
our
securities. The risks described below are not the only ones that we face.
Additional risks not presently known to us or that we currently deem immaterial
may also impair our business operations. The following risks, among others,
could cause our actual results, performance, achievements or industry results
to
differ materially from those expressed in our forward-looking statements
contained herein and presented elsewhere by management from time to
time. If
any of the following risks actually occurs, our business prospects, financial
condition or results of operations could be materially harmed. In such case,
the
market price of our securities would likely and you could lose all or part
of
your investment.
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 need to continue to
engage
in significant, time-consuming and costly research, development, pre-clinical
studies, clinical testing and regulatory approval activities 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 March 31, 2008, we have an accumulated
deficit of approximately $298.0 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.
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
our products under development, including Surfaxin, 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 are generated by clinical trials of drug
products, the FDA or a foreign regulator, such as the European Medicines
Agency
(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 or conduct clinical trials outside the United States,
we
also must comply with foreign regulatory requirements governing marketing
approval for pharmaceutical products and the conduct of human clinical
trials.
5
We
have
filed an NDA with the FDA for Surfaxin for the prevention of RDS in premature
infants, which is the subject of a third Approvable Letter. On May 1, 2008,
the
FDA issued a third Approvable Letter to us. We have requested a meeting with
the
FDA, which is scheduled to occur on June 18, 2008 by teleconference, to confirm
our approach to responding to certain items identified in this Approvable
Letter. If our approach is confirmed, we anticipate submitting our response
to
the Approvable Letter in June 2008. This timeline could be extended based
on our
discussions with the FDA as well as other factors. If the FDA accepts our
formal
response to the Approvable Letter as a complete response, we believe that
the
FDA may classify our response as a Class 1 resubmission, which will result
in a
60-day target review period. The FDA might still delay its approval of our
NDA
or reject our NDA, which would have a material adverse effect on our business.
See also “Risk Factors – 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 prevent our commercializing this product in the United States
and adversely impact our ability to commercialize this product
elsewhere.”
We
filed
an MAA with the EMEA for clearance to market Surfaxin for the prevention
of RDS
in premature infants in Europe. In April 2006, ongoing analysis of Surfaxin
process validation batches that had been manufactured for us in 2005 by our
then-contract manufacturer as a requirement for our NDA indicated that certain
stability parameters no longer met acceptance criteria. As we determined
that we
could not resolve the related manufacturing issues within the regulatory
time
frames mandated by the EMEA procedure for consideration of our MAA, in June
2006, we voluntarily withdrew the MAA without fully resolving certain
outstanding clinical issues related to the Surfaxin Phase 3 clinical trials.
We
plan in the future to have further discussions with the EMEA and potentially
develop a strategy to gain approval for Surfaxin in Europe.
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. Without regulatory
approval, we are not able to market our products. Further, even if we were
to
succeed in gaining regulatory approvals for any of our products, the FDA
or a
foreign regulator could at any time withdraw any approvals granted 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,
or
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.
Any failure to obtain regulatory approval or any withdrawal or significant
restriction on our ability to market our products after approval would have
a
material adverse effect on our business.
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 prevent
our
commercializing this product in the United States and adversely impact our
ability to commercialize this product elsewhere.
In
April
2006, the FDA issued a second Approvable Letter to us with respect to our
NDA
for Surfaxin for the prevention of RDS in premature infants. In October 2007,
we
filed our complete response to the second Approvable Letter and the FDA
established May 1, 2008 as its target to complete review of our NDA. On May
1,
2008, the FDA issued to us a third Approvable Letter. Of the items listed
in the
Approvable Letter, we believe that the most important involve justifying
and
finalizing one acceptance criterion for Surfaxin biological activity and
limited
acceptance criteria for lipid drug substance impurities and that we and the
FDA
can reach agreement on these acceptance criteria. We have requested a meeting
with the FDA, which is scheduled to occur on June 18, 2008 by teleconference,
to
confirm our approach to respond to these and certain other limited items
identified in this Approvable Letter. If this meeting confirms our approach,
we
anticipate submitting our response to the Approvable Letter in June 2008.
However, this timeline could be extended based on our discussions with the
FDA
as well as other factors. If the FDA accepts our response as a complete
response, we believe that the FDA may classify our complete response as a
Class
1 resubmission, which will result in a 60-day target review period (as compared
to a Class 2 resubmission would result in a 6-month target review period).
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.
6
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. We believe that other potential
products in our SRT pipeline may also qualify for Fast Track designation.
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, 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. 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. Moreover, even if we are successful in gaining Fast Track
designation, other factors could result in significant delays in our development
activities with respect to our Fast Track products.
Our
research and development activities involve significant risks and uncertainties
that are inherent in the clinical development and regulatory approval processes.
Development
risk factors include, but are not limited to whether we, or our third party
collaborators and providers, will be able to:
|
·
|
complete
our pre-clinical and clinical trials of our SRT product candidates
with
scientific results that are sufficient to support further development
and/or regulatory approval;
|
|
·
|
receive
the necessary regulatory approvals;
|
|
·
|
obtain
adequate supplies of surfactant active drug substances, manufactured
to
our specifications and on commercially reasonable terms;
|
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·
|
perform
under agreements to supply the drug substances, medical device
components
and related services necessary to manufacture our SRT drug product
candidates, including Surfaxin and
Aerosurf;
|
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·
|
successfully
resolve the remaining matters identified by the FDA in the May
1, 2008
Approvable Letter;
|
|
·
|
provide
for sufficient manufacturing capabilities, at our manufacturing
operations
in Totowa and with third-party contract manufacturers, to produce
sufficient SRT drug product, including Surfaxin, and aerosolization
systems to meet our pre-clinical and clinical development
requirements;
|
|
·
|
successfully
develop and implement a manufacturing strategy for our aerosolization
systems and related materials to support clinical studies of Aerosurf;
and
|
|
·
|
obtain
capital necessary to fund our research and development efforts,
including
our supportive operations, manufacturing and clinical trials
requirements.
|
Because
these factors, many of which are outside our control, could have a potentially
significant effect on our development activities, the success, timing of
completion, and ultimate cost of development of any of our product candidates
is
highly uncertain and cannot be estimated with any degree of certainty. The
timing and cost to complete drug trials alone may be impacted by, among other
things:
|
·
|
slow
patient enrollment;
|
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·
|
long
treatment time required to demonstrate
effectiveness;
|
|
·
|
lack
of sufficient clinical supplies and
material;
|
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·
|
adverse
medical events or side effects in treated
patients;
|
|
·
|
lack
of compatibility with complementary
technologies;
|
|
·
|
failure
of a product candidate to demonstrate effectiveness;
and
|
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·
|
lack
of sufficient funds.
|
If
we do
not successfully complete clinical trials, we will not receive regulatory
approval to market our SRT products. Failure to obtain and maintain regulatory
approval and generate revenues from the sale of our products would have a
material adverse effect on our financial condition and results of operations
and
could reduce the market value of our common stock.
7
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 that 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 many factors, including the rate at which patients
are enrolled. Delays in patient enrollment in clinical trials may occur,
which
would be likely to result in increased costs, program delays, or both.
Patient
enrollment is a function of many factors, including:
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·
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the
number of clinical sites;
|
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·
|
the
size of the patient population;
|
|
·
|
the
proximity of patients to the clinical
sites;
|
|
·
|
the
eligibility and enrollment criteria for the
study;
|
|
·
|
the
willingness of patients or their parents or guardians to participate
in
the clinical trial;
|
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·
|
the
existence of competing clinical trials;
|
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·
|
the
existence of alternative available products;
and
|
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|
geographical
and geopolitical considerations.
|
If
we
succeed in achieving our patient enrollment targets, patients that enroll
in our
clinical trials could suffer adverse medical events or side effects that
are
known to occur with the administration of the surfactant class of drugs
generally, 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 gain approval of Surfaxin for the prevention of
RDS
in premature infants, we are currently conducting a Phase 2 clinical trial
to
evaluate the use of Surfaxin in children up to two years of age suffering
from
Acute Respiratory Failure. We are also planning to initiate clinical studies
in
support of other products in our SRT pipeline, including planned Phase 2
clinical trials with respect to Aerosurf for the treatment and prevention
of RDS
in premature infants in the NICU. All of these clinical trials will be
time-consuming and potentially costly. Should we fail to complete our clinical
development programs or should such programs yield unacceptable results,
such
failures would have a material adverse effect on our business.
The
manufacture of our drug products is a highly exacting and complex process,
and
if we, our contract manufacturers or any of our materials suppliers encounter
problems manufacturing our products or drug substances, this could cause
us to
delay any potential clinical program or product launch or, following approval,
cause us to experience shortages of products inventories.
The
FDA
and foreign regulators require manufacturers to register manufacturing
facilities. The FDA and foreign regulators also periodically inspect these
facilities to confirm compliance with current good manufacturing procedures
(cGMP) or other similar requirements that the FDA or foreign regulators
establish. Surfaxin is a complex drug and, unlike many drugs, contains four
active ingredients. It must be aseptically manufactured at our facility as
a
sterile, liquid suspension and requires ongoing monitoring of drug product
stability and conformance to specifications.
8
The
manufacture of pharmaceutical products requires significant expertise and
compliance with strictly enforced federal, state and foreign regulations.
We,
our contract manufacturers or our materials and drug substances suppliers
may
experience manufacturing or quality control problems that could result in
a
failure to maintain compliance with the FDA’s cGMP requirements, or those of
foreign regulators, which is necessary to continue manufacturing our drug
products, materials or drug substances. Other problems that may be encountered
include:
| · |
the
need to make necessary modifications to qualify and validate a
facility;
|
| · |
difficulties
with production and yields, including scale-up requirements and
achieving
adequate capacity;
|
| · |
availability
of raw materials and supplies;
|
| · |
quality
control and assurance; and
|
| · |
shortages
of qualified personnel.
|
Such
a
failure could result in product production and shipment delays or an inability
to obtain materials or drug substances supplies.
Manufacturing
or quality control problems have already occurred and may again occur at
our
Totowa, New Jersey facility or may occur at the facilities of a contract
manufacturer or our materials or drug substances suppliers. Such problems
may
require potentially complex, time-consuming and costly comprehensive
investigations to determine the root causes of such problems and may also
require detailed and time-consuming remediation efforts, which can further
delay
a return to normal manufacturing and production activities. Any failure by
our
own manufacturing operations or by the manufacturing operations of any of
our
suppliers to comply with cGMP requirements or other FDA or foreign regulatory
requirements could adversely affect our ability to manufacture our drug
products, which in turn would adversely affect our clinical research activities
and our ability to develop and gain regulatory approval to market our drug
products.
Since
we
acquired our manufacturing operations in Totowa, New Jersey in December 2005,
we
have been manufacturing our drug products. This is the only facility at which
we
produce our drug product. Any interruption in manufacturing operations at
this
location could result in our inability to satisfy our needs for planned clinical
trials, and, if approved, commercial requirements for Surfaxin. A number
of
factors could cause interruptions, including:
| · |
equipment
malfunctions or failures;
|
| · |
technology
malfunctions;
|
| · |
work
stoppages or slowdowns;
|
| · |
damage
to or destruction of the facility;
|
| · |
regional
power shortages; and
|
| · |
product
tampering.
|
To
assure
adequate drug supplies and continued compliance with cGMP and other FDA or
foreign regulatory requirements, we own certain specialized manufacturing
equipment, employ experienced manufacturing senior executive and managerial
personnel, and continue to invest in enhanced quality systems and manufacturing
capabilities. However, we may nevertheless be unable to produce Surfaxin
and our
other SRT drug candidates to appropriate standards. If we are unable to
successfully develop and maintain our manufacturing capabilities and comply
with
cGMP, it will adversely affect our clinical development activities and,
potentially, the sales of our products.
If
we fail to maintain relationships with our manufacturers, assemblers and
integrator of our aerosolization systems, or if we fail to identify additional,
qualified replacement manufacturers, assemblers and integrators to manufacture
subcomponents and integrate our initial prototype aerosolization system or
our
anticipated next-generation and later development versions of our capillary
aerosolization technology, the timeline of our plans for the development
and, if
approved, commercialization of Aerosurf could suffer.
In
connection with the development of aerosol formulations of our SRT, including
Aerosurf, we currently plan to rely on third-party contract manufacturers
to
manufacture, assemble and integrate the subcomponents of our capillary
aerosolization technology to support our clinical studies and potential
commercialization of Aerosurf. Certain of these key components must be
manufactured in an environmentally-controlled area and, when assembled, the
critical product-contact components and patient interface systems must be
packaged and sterilized. Each of the aerosolization system devices must be
quality-control tested prior to release and monitored for conformance to
designated product specifications, and each manufacturer, assembler and
integrator must be registered with the FDA and conduct its manufacturing
activities in compliance with cGMP requirements or other FDA or foreign
regulatory requirements.
9
We
currently have identified component manufacturers and an integrator to
manufacture and integrate our initial prototype aerosolization system that
we
currently plan to use in early Phase 2 clinical trials. However, we may not
be
able to identify qualified additional or replacement manufacturers and
integrators to manufacture subcomponents and integrate our current prototype
or
next generation and later development versions of our aerosolization systems
or
we may not be able to enter into agreements with them on terms and conditions
favorable and acceptable to us. In addition, the manufacturers and assemblers
and integrators that we identify may be unable to timely comply with FDA,
or
other foreign regulatory agency, requirements regulating manufactures of
combination drug-device products. If we do not successfully identify and
enter
into a contractual agreements with aerosolization systems and components
manufacturers, assemblers and integrators, it will adversely affect the timeline
of our plans for the development and, if approved, commercialization of
Aerosurf.
If
the parties we depend on for supplying our active drug substance 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 active drug substances, materials and excipient products,
and third parties for certain manufacturing-related services to produce drug
material that meets appropriate content, quality and stability standards
for use
in clinical trials and, if approved, for commercial distribution. To succeed,
clinical trials require adequate supplies of drug substance and drug product,
which may be difficult or uneconomical to procure or manufacture. The
manufacturing process for Aerosurf, a combination drug-device product, includes
the integration of a number of components, many of which are comprised of
a
large number of subcomponent parts that we expect will be produced by
potentially a number of manufacturers. We and our suppliers may not be able
to
(i) produce our drug substances, drug product or drug product devices or
related subcomponent parts to appropriate standards for use in clinical studies,
(ii) perform to applicable specifications 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.
In
some
cases, we are dependent upon a single supplier to produce our full requirement
of drug substances, drug product or drug product devices. If we do not maintain
important manufacturing and service relationships, we may fail to find a
replacement supplier or vendor and may not be able to 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 our profit margins, if any. Even if we are able to find replacement
manufacturers, suppliers and vendors when needed, we may not be able to enter
into agreements with them on terms and conditions favorable to us or there
could
be a substantial delay before such manufacturer, vendor or supplier, or a
related new facility is properly qualified and registered with the FDA or
other
foreign regulatory authorities. Such delays could have a material adverse
effect
on our development activities and our business.
If
we do not adequately forecast customer demand for our product candidates,
including Surfaxin, if approved, our business could
suffer.
The
timing and amount of customer demand is difficult to predict and the commercial
requirements to meet changing customer demand is difficult to predict. If
we are
successful in gaining regulatory approval of our products, we may not be
able to
accurately forecast customer demand for our product candidates, including
Surfaxin, or respond effectively to unanticipated increases in demand. This
could have an adverse effect on our business. If we overestimate customer
demand, or attempt to commercialize products for which the market is smaller
than we anticipate, we could incur significant unrecoverable costs from creating
excess capacity. In addition, if we do not successfully develop and timely
commercialize our product candidates, we may never require the production
capacity that we expect to have available.
10
Our
limited sales and marketing experience may restrict our success in
commercializing our product candidates.
We
have
limited experience in marketing or selling pharmaceutical products and have
a
limited marketing and sales team. In the second quarter 2006, following receipt
of the second Approvable Letter and the occurrence of the process validation
stability failures, we discontinued our commercial activities. Therefore,
if we
are successful in gaining approval to market Surfaxin, we will have to
re-establish satisfactory marketing, sales and distribution capabilities
necessary to commercialize and gain market acceptance for Surfaxin or our
other
product candidates, if approved.
We
expect
to rely primarily on our marketing and sales team to market Surfaxin, if
approved, in the United States. Our pre-approval preparations have included
the
hiring of experienced management personnel. We have also begun to invest
in our
medical affairs capabilities to provide for increased scientific and medical
educational activities. We do not plan to hire our sales representatives
until
after we have received approval to market Surfaxin. Developing a marketing
and
sales team to market and sell products is a difficult, expensive and
time-consuming process. Recruiting, training and retaining qualified sales
personnel is critical to our success. Competition for skilled personnel can
be
intense, and we may be unable to attract and retain a sufficient number of
qualified individuals to successfully launch Surfaxin. Additionally, we may
not
be able to provide adequate incentive to our sales force. If we are unable
to
successfully motivate and expand our marketing and sales force and further
develop our sales and marketing capabilities, we will have difficulty selling,
maintaining and increasing the sales of our products.
We
expect
to incur significant expenses in developing our marketing and sales team.
Our
ability to make that investment and also execute our current operating plan
is
dependent on numerous factors, including, potentially, 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.
The
commercial success of our product candidates will depend upon the degree
of
market acceptance by physicians, patients, healthcare payers and others in
the
medical community.
Any
potential products that we bring to market may not gain or maintain market
acceptance by governmental purchasers, group purchasing organizations,
physicians, patients, healthcare payers and others in the medical community.
If
any products that we develop do not achieve an adequate level of acceptance,
we
may not generate material revenues with these products. The degree of market
acceptance of our product candidates, if approved for commercial sale, will
depend on a number of factors, including:
|
·
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the
perceived safety and efficacy of our
products;
|
|
·
|
the
potential advantages over alternative
treatments;
|
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·
|
the
prevalence and severity of any side
effects;
|
|
·
|
the
relative convenience and ease of
administration;
|
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·
|
cost
effectiveness;
|
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·
|
the
willingness of the target patient population to try new products
and of
physicians to prescribe our
products;
|
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·
|
the
effectiveness of our marketing strategy and distribution support;
and
|
|
·
|
the
sufficiency of coverage or reimbursement by third
parties.
|
Our
strategy with respect to development and marketing of our products, in many
cases, is to enter into collaboration agreements and strategic partnerships
with
third parties. If we fail to enter into these agreements, or if we or the
third
parties fail to perform under such agreements, it could impair our ability
to
develop and commercialize our products.
To
fund
development, clinical testing and marketing and commercialization of our
products, our strategy, in many cases, depends upon collaboration arrangements
and strategic partnerships with pharmaceutical and other biotechnology companies
to develop, market, commercialize and distribute our products. In addition
to
funding our activities, we may depend on our collaborators’ expertise and
dedication of sufficient resources to develop and commercialize the covered
products. In addition, if our current collaboration arrangements fail to
timely
meet our objectives, we may need to enter into additional collaboration
agreements and our success may depend upon obtaining such additional
collaboration partners.
11
Our
collaboration arrangement with Esteve for Surfaxin and certain other of our
product candidates is focused on key southern European markets. If we or
Esteve
should fail to conduct our respective collaboration-related activities in
a
timely manner, or otherwise breach or terminate the agreements that make
up our
collaboration arrangements, or if a dispute should arise under our collaboration
arrangements, such events could impair our ability to commercialize or develop
our products for the Esteve territory in Europe covered by the arrangement.
In
such events, we may need to seek other partners and collaboration agreements,
or
we may have to develop our own internal capabilities to market the covered
products in the Esteve territory without a collaboration
arrangement.
We
have
recently restructured our strategic alliance with Philip Morris USA, Inc.
d/b/a/
Chrysalis (PM USA). Under the restructured arrangement, we are now responsible
for finalizing design development for the initial prototype aerosolization
device platform and disposable dose packets. Prior to June 30, 2008, PM USA
is
responsible to make a technology transfer to us of its capillary aerosolization
technology to permit us to fully practice our license to this technology
in all
respects. We expect to rely on our own engineering expertise as well as design
engineers, medical device experts and other third party collaborators to
advance
the development of our capillary aerosolization technology. If PM USA should
fail to complete the technology transfer to us, or if we are unable to identify
design engineers and medical device experts to support our program in the
future, or if we should fail to complete development of the initial prototype
aerosolization system as well as next generation versions of the aerosolization
system, such events could impair our ability to commercialize or develop
our
aerosolized SRT products.
We
may,
in the future, grant to our present or additional collaboration partners
rights
to license and commercialize our pharmaceutical products. Under such
arrangements, our collaboration partners may control key decisions relating
to
the development and commercialization of the covered products. By granting
such
rights to our collaboration partners, we would likely limit our flexibility
in
considering alternative strategies to develop and commercialize our products.
If
we were to fail to successfully develop these relationships, or if our
collaboration partners were to fail to successfully develop, market or
commercialize any of the covered products, such failures 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 and our other SRT product candidates. See “Risk Factors – Our limited
sales and marketing experience may restrict our success in commercializing
our
product candidates.”
Under
our restructured collaboration arrangement with PM
USA,
we are responsible for future development of the capillary aerosolization
technology, which will require us to build internal development capabilities
or
enter into future collaboration or other arrangements to gain the engineering
expertise required to further develop the technology.
In
March
2008, we restructured our collaboration arrangement with PM USA. We now have
responsibility for the development of the capillary aerosolization technology
and will not have development support from PM USA after June 30, 2008. Our
future development of the capillary aerosolization technology is subject
to
certain risks and uncertainties, including, without limitation:
|
·
|
We
may not be able to complete the development of the initial prototype
aerosolization device, if at all, on a timely basis and such inability
may
delay or prevent initiation of our planned Phase 2 clinical trials;
|
|
·
|
We
will require sophisticated engineering expertise to continue the
development of the capillary aerosolization technology. Although
we are
building our own internal medical device engineering expertise
and have
recently begun working with a leading engineering and design firm
that has
a successful track record of developing innovative devices for
major
companies in the medical and pharmaceutical industries, there is
no
assurance that our efforts will be successful or that we will be
able to
identify other potential collaborators to complete the development
of the
next-generation aerosolization system and enter into agreements
with such
collaborators on terms and conditions that are favorable to us,
and,
if we are unable to identify or retain design engineers and medical
device experts to support our development program, this could impair
our
ability to commercialize or develop it’s aerosolized drug
products;
|
12
|
·
|
We
currently hold an exclusive license to the capillary aerosolization
technology in the United States from PM USA and outside the United
States
from Philip Morris Products S.A. (PMPSA). PM USA and PMPSA are
no longer
affiliated entities; as such, there is a risk that, if we were
to require
the consent of PMPSA and PM Philip Morris Products S.A. (PMPSA)under
the
License Agreements, they may not agree on the appropriate course
and we
may be forced to develop the capillary aerosolization technology
in the
two territories under different circumstances. Such inconsistencies
could
have an adverse effect on the our ability to develop the capillary
aerosolization technology or to successfully commercialize the
Licensed
Products in one or both of the territories;
and
|
|
·
|
We
have additional rights under the US License Agreement that are
not
provided under the International License Agreement. Although the
International License Agreement provides for the potential expansion
of
rights with the consent of PMPSA, there can be no assurance that
PMPSA
would agree to any such expansion and, as a result, we may be unable
to
develop and commercialize Licensed Products under its expanded
rights
outside the United States markets.
|
To
market and distribute our products, 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, either internationally or in the
United States. We may not be successful in identifying such third parties
or
finalizing such arrangements on terms and conditions that are favorable to
us.
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
also
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 such
parties fail to perform, it could adversely affect sales of our products.
We and
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
intend
to market and sell Surfaxin outside of the United States, if approved, through
one or more marketing partners. 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 its sublicensees
or the resources that they may devote to the marketing and distribution of
Surfaxin products in their licensed territory, and Esteve or its sublicensees
may not meet their obligations in this regard. Our marketing and distribution
arrangement with Esteve may not be successful, and, as a result, we may not
receive any revenues from it. Also, we may not be able to enter into marketing
and sales agreements for Surfaxin on acceptable terms, if at all, in territories
not covered by the Esteve agreement, or for any of our other product candidates.
13
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. Our operating plans require that
expenditures will only be committed if we achieve important development and
regulatory milestones and have the necessary working capital resources.
Therefore, our existing capital will allow us to continue operations into
2009.
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 new capital financing arrangements, if
available. In some cases, we may elect to develop products on our own instead
of
entering into collaboration arrangements, which would increase our cash
requirements for research and development.
We
have
not entered into arrangements to obtain any additional financing, except
for the
Committed Equity Financing Facility that we entered with Kingsbridge in April
2006 (the 2006 CEFF), the Committed Equity Financing Facility that we entered
with Kingsbridge on May 22, 2008 (the 2008 CEFF), our loan with PharmaBio
Development Inc. d/b/a NovaQuest (PharmaBio), the strategic investment group
of
Quintiles Transnational Corp., and our equipment financing facility with
GE
Business Financial Services Inc. (formerly known as Merrill Lynch Business
Financial Services Inc.) (GE). Any future financing could be on unattractive
terms or result in significant dilution of stockholders’ interests and, in such
event, the market price of our common stock may decline. Furthermore, if
the
market price of our common stock were to decline, we could cease to meet
the
financial requirements to maintain the listing of our securities on The Nasdaq
Global Market.
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 Facilities may have a dilutive impact on our
stockholders.”
We
continue to consider multiple strategic alternatives, including, but not
limited
to potential additional financings as well as potential business alliances,
commercial and development partnerships and other similar opportunities,
although we cannot assure you that we will take any further specific actions
or
enter into any transactions.
The
terms of our indebtedness may impair our ability to conduct our business.
Our
capital requirements are funded in part by an $8.5 million loan with PharmaBio,
which is secured by substantially all of our assets and contains a number
of
covenants and restrictions that, with certain exceptions, restricts our ability
to, among other things, incur additional indebtedness, borrow money or issue
guarantees, use assets as security in other transactions, and sell assets
to
other companies. We may not be able to engage in these types of transactions,
even if we believe that a specific transaction would be in our best interests.
Moreover, our ability to comply with these restrictions could be affected
by
events outside our control. A breach of any of these restrictions could result
in a default under the PharmaBio loan documents. If a default were to occur,
PharmaBio would have the right to declare all borrowings to be immediately
due
and payable. If we are unable to pay when due amounts owed to PharmaBio,
whether
at maturity or in connection with acceleration of the loan following a default,
PharmaBio would have the right to proceed against the collateral securing
the
indebtedness.
We
have
financed the acquisition of personal property, machinery and equipment through
a
$12.5 million equipment financing facility with GE under a Credit and Security
Agreement that we entered with GE in May 2007. Our ability to draw under
this
facility expired in May 2008; however, we and GE recently agreed to extend
this
facility for six months into November 2008 to finance capital expenditure
of up
to $300,000, which represents our anticipated capital requirements for this
period. If we require additional funds to support our activities during this
period, as well as after this facility expires, there can be no assurance
that
GE or any other lender will be willing to provide us funding to support our
capital programs.
14
In
addition, the aggregate amount of our indebtedness may adversely affect our
financial condition, limit our operational and financing flexibility and
negatively impact our business.
Our
Committed Equity Financing Facilities may have a dilutive impact on our
stockholders.
The
issuance of shares of our common stock under the 2006 CEFF and the 2008 CEFF
(the CEFFs) and upon exercise of the warrants we issued to Kingsbridge 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 CEFFs, we will issue shares of
our
common stock to Kingsbridge at a discount (6% to 10% for the 2006 CEFF and
6% to
12% for the 2008 CEFF) to the daily volume weighted average price of our
common
stock during the eight trading-day period after we access the CEFF. Issuing
shares at a discount will further dilute the interests of other
stockholders.
To
the
extent that Kingsbridge sells to third parties the shares of our common stock
that we issue to Kingsbridge under the CEFFs, 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.
If
we are
unable to meet the conditions provided under the CEFFs, we may not be able
to
issue any portion of the shares potentially available for issuance for future
financings, subject to the terms and conditions of the CEFFs. Kingsbridge
has
the right under certain circumstances to terminate the CEFFs, including in
the
event of a material adverse event. In addition, even if we meet all conditions
provided under the CEFFs, we are dependent upon the financial ability of
Kingsbridge to perform its obligations and purchase shares of our common
stock
under the CEFFs. Any inability on our part to use at least one of the CEFFs
or
any failure by Kingsbridge to perform its obligations under the CEFFs could
have
a material adverse effect upon us.
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;
|
| · |
patient
adverse reactions to drug 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;
|
| · |
changes
in the United States or foreign political environment and the passage
of
laws, including tax, environmental or other laws, affecting the
product
development business;
|
| · |
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” or
elsewhere in this Annual Report on Form 10-K or our other publics
filings.
|
15
Our
common stock is listed for quotation on The Nasdaq Global Market. During
the 12
months ended June 3, 2008, the price of our common stock ranged from $1.29
to
$3.58. We
expect
the price of our common stock to remain volatile. The average daily trading
volume in our common stock varies significantly. For the 12 months ended
June 3,
2008, the average daily trading volume in our common stock was approximately
1,017,594 shares and the average number of transactions per day was
approximately2,576. The variability of our average volume and 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 Global Market. If the common stock were no longer
listed
on The Nasdaq Global Market, investors might only be able to trade 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. We recently won dismissal of
such
an action, which was brought against us and certain of our former and current
executive officers. Even if they or other actions that we may face in the
future
are ultimately determined to be meritless or unsuccessful, such actions involve
substantial costs and a diversion of management attention and resources,
which
could negatively impact our business.
Future
sales and issuances of our common stock or rights to purchase our common
stock,
including pursuant to our stock incentive plans and upon the exercise of
outstanding securities exercisable for shares of our common stock, could
result
in substantial additional dilution of our stockholders, cause our stock price
to
fall and adversely affect our ability to raise capital.
We
expect
that we will require significant additional capital to continue to execute
our
business plan and advance our research and development efforts. To the extent
that we raise additional capital through the issuance of additional equity
securities and through the exercise of outstanding warrants, our stockholders
may experience substantial dilution. We may sell shares of our common stock
in
one or more transactions at prices that may be at a discount to the then-current
market value of our common stock and on such other terms and conditions as
we
may determine from time to time. Any such transaction could result in
substantial dilution of our existing stockholders. If we sell shares of our
common stock in more than one transaction, stockholders who purchase our
common
stock may be materially diluted by subsequent sales. Such sales could also
cause
a drop in the market price of our common stock. As of June 3, 2008, we had
96,693,377 shares of common stock issued and outstanding.
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 $24.8 million
is
remaining. We may issue securities pursuant to this shelf registration statement
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 (i) 375,000 shares of our common stock that are currently reserved
for
issuance with respect to the Class B Investor Warrant, (ii) approximately
5.2
million shares of our common stock that are currently reserved for issuance
under the 2006 CEFF, including 490,000 shares reserved for issuance with
respect
to the Class C Investor Warrant issued to Kingsbridge in connection with
the
2006 CEFF, and (iii) approximately 19.33 million shares of our common stock
that are currently reserved for issuance under the new 2008 CEFF with
Kingsbridge dated May 22, 2008, and 825,000 shares of our common stock reserved
for issuance with respect to the Warrant that we issued to Kingsbridge in
connection with the new 2008 CEFF. See “Risk Factors: Our Committed Equity
Financing Facility may have a dilutive impact on our stockholders.”
16
As
of
June 3, 2008, 18,631,821 shares of our common stock are reserved for issuance
pursuant to our equity incentive plans (including 13,880,283 shares underlying
outstanding stock options and 55,913 shares underlying unvested restricted
stock
awards), 7,164,196 shares of our common stock are reserved for issuance upon
exercise of outstanding warrants, and 169,756 shares of our common stock
are
reserved for issuance pursuant to our 401(k) Plan. The exercise of stock
options
and other securities could cause our stockholders to experience substantial
dilution. Moreover, 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. Such exercises, or the possibility of such exercises,
may impede our efforts to obtain additional financing through the sale of
additional securities or make such financing more costly. It may also reduce
the
price of our common stock.
If,
during the term of certain of our warrants, we declare or make any dividend
or
other distribution of our assets to holders of shares of our common stock,
by
way of return of capital or otherwise (including any distribution of cash,
stock
or other securities, property or options by way of a dividend, spin off,
reclassification, corporate rearrangement or other similar transaction),
then
the exercise price of such warrants may adjust downward and the number of
shares
of common stock issuable upon exercise of such warrants would increase. As
a
result, we may be required to issue more shares of common stock than previously
anticipated, which could result in further dilution of our existing
stockholders.
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, 2008, our directors, executive officers, principal stockholders
and
affiliated entities beneficially owned, in the aggregate, approximately 17%
of
the issued and outstanding shares of our common stock. For the purpose of
computing this amount, an affiliated entity includes any entity that is known
to
us to be the beneficial owner of more than five percent of our issued and
outstanding common stock. 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.
Our
technology platform is based solely on our proprietary precision-engineered
surfactant technology.
Our
technology platform is based solely on the scientific rationale of using
our
precision-engineered surfactant technology 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.
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 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:
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defend
our patents and otherwise prevent others from infringing on our
proprietary rights;
|
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·
|
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 (USPTO) has not adopted a consistent policy regarding the breadth
of
claims that it will allow 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 appear
to be
patentable.
17
Even
if we obtain patents to protect our products, those patents may not be
sufficiently broad or they may expire and others could then 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 USPTO 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 USPTO or foreign patent
office
issuing patents. In addition, 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, even if the USPTO or foreign patent offices
were
to 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 us any protection against competitors.
The
patents that we hold also have a limited life. We have licensed a series
of
patents from Johnson & Johnson and its wholly-owned subsidiary, Ortho
Pharmaceutical Corporation (Ortho Pharmaceutical), and from PM USA and PMPSA,
which are important, either individually or collectively, to our strategy
of
commercializing our surfactant technology. These patents, which include relevant
European patents, expire on various dates beginning in 2009 and ending in
2017
or, in some cases, possibly later. For our aerosolized SRT, we hold exclusive
licenses in the United States and outside the United States to PM USA’s
capillary aerosolization technology for use with pulmonary surfactants for
all
respiratory diseases. Our exclusive license in the United States also extends
to
other drugs to treat specified target indications in specified target
populations. The capillary aerosolization technology patents expire on various
dates beginning in May 2016 and ending in 2022, 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 enhanced or additional
products or processes that will be patentable under patent law and, if we
do
enhance or develop additional products that we believe are patentable,
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.”
Intellectual
property rights of third parties could limit our ability to develop and market
our products.
Our
commercial success also depends upon our ability to operate our business
without
infringing the patents or violating the proprietary rights of others. The
USPTO
keeps United States patent applications confidential while the applications
are
pending. As a result, we cannot determine in advance what inventions third
parties may claim in their pending patent applications. We may need to defend
or
enforce our patent and license rights or to determine the scope and validity
of
the proprietary rights of others through legal proceedings, which would be
costly, unpredictable and time consuming. Even in proceedings where the outcome
is favorable to us, they would likely divert substantial resources, including
management time, from our other activities. Moreover, any adverse determination
could subject us to significant liability or require us to seek licenses
that
third parties might not grant to us or might only grant at rates that diminish
or deplete the profitability of our products. An adverse determination could
also require us to alter our products or processes or cease altogether any
product sales or related research and development activities.
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, PM USA and PMPSA. 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.
18
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 our
confidential information to third parties, as well as agreements that provide
for disclosure and assignment to us of all rights to the ideas, developments,
discoveries and inventions of our employees and consultants while we employ
them, such agreements can be difficult and costly to enforce. Although we
generally seek to enter into these types of agreements with our consultants,
advisors and research collaborators, to the extent that such parties apply
or
independently develop intellectual property in connection with any of our
projects, disputes may arise concerning allocation of the related proprietary
rights. If a dispute were to arise, enforcement of our rights could be costly
and the result unpredictable. In addition, we also rely on trade secrets
and
proprietary know-how that we seek to protect, in part, through confidentiality
agreements with our employees, consultants, advisors or others.
Despite
the protective measures we employ, we still face the risk that:
|
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agreements
may be breached;
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·
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agreements
may not provide adequate remedies for the applicable type of
breach;
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our
trade secrets or proprietary know-how may otherwise become known;
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·
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our
competitors may independently develop similar technology;
or
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our
competitors may independently discover our proprietary information
and
trade secrets.
|
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, Robert J. Capetola, Ph.D., 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 our key personnel may have a material adverse effect on aspects
of our business and clinical development and regulatory programs.
Following
receipt of the second Approvable Letter and the occurrence of the process
validation stability failures in April 2006, we reduced our staff levels
by
approximately 50 people and reorganized our corporate structure. To retain
and
provide incentives to our key executives and certain officers, in 2006, we
entered into amended and new employment agreements that generally include
provisions such as a stated term, enhanced severance benefits in the event
of a
change of control and equity incentives in the form of stock and option grants.
As
of
February 29, 2008, we have employment agreements with 13 officers, three
of
which expire in May 2010 and the remainder in December 2008. Each employment
agreement provides that its term shall automatically be extended for one
additional year, unless at least 90 days prior to the renewal date 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
noncompete 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 may 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.
19
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:
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developing
products;
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undertaking
preclinical testing and human clinical trials;
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·
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obtaining
FDA and other regulatory approvals or products;
and
|
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·
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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.
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
product liability claims are brought against us, it may result in reduced
demand
for our products or damages that exceed our insurance coverage and we may
incur
substantial costs.
The
clinical testing, marketing and use of our products exposes us to product
liability claims if the use or misuse of our 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 coverage
of up to $10 million per occurrence and $10 million in the aggregate. 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, including
by
insurers licensed in countries where we conduct our clinical trials, before
initiating clinical trials. We expect to obtain product liability insurance
coverage before commercializing any of our product candidates; however, such
insurance is expensive and may not be available when we need it.
20
In
the
future, we may not be able to obtain adequate insurance, with acceptable
limits
and retentions, at an acceptable cost. Any product liability claim, even
one
that is within the limits of our insurance coverage or one that is meritless
and/or unsuccessful, could adversely affect the availability or cost of
insurance generally and our cash available for other purposes, such as research
and development. In addition, such claims could result in:
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·
|
uninsured
expenses related to defense or payment of substantial monetary
awards to
claimants;
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·
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a
decrease in demand for our product candidates;
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damage
to our reputation; and
|
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·
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an
inability to complete clinical trial programs or to commercialize
our
product candidates, if approved.
|
Moreover,
the existence of a product liability claim could affect the market price
of our
common stock.
Our
corporate compliance program cannot ensure that we are in compliance with
all
applicable laws and regulations affecting our activities in the jurisdictions
in
which we may sell our products, if approved, and a failure to comply with
such
regulations or prevail in litigation related to noncompliance could harm
our
business.
Many
of
our activities, including the research, development, manufacture, sale and
marketing of our products, are subject to extensive laws and regulation,
including without limitation, health care "fraud and abuse" laws, such as
the
federal false claims act, the federal anti-kickback statute, and other state
and
federal laws and regulations. We have developed and implemented a corporate
compliance policy and oversight program based upon what we understand to
be
current industry best practices, but we cannot assure you that this program
will
protect us from governmental investigations or other actions or lawsuits
stemming from a failure to be in compliance with such laws or regulations.
If
any such investigations, actions or lawsuits are instituted against us, and
if
we are not successful in defending or disposing of them without liability,
such
investigations, actions or lawsuits could result in the imposition of
significant fines or other sanctions and could otherwise have a significant
impact on our business.
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 payers, which include
governmental health administration authorities, managed care providers and
private health insurers. Third party payers are increasingly challenging
the
price and examining the cost effectiveness of medical products and services.
Moreover, the current political environment in the United States and abroad
may
result in the passage of significant legislation that could, among other
things,
restructure the markets in which we operate and restrict pricing strategies
of
drug development companies. If, for example, price restrictions were placed
on
the distribution of drugs such as our SRT, we may be forced to curtail
development of our pipeline products and this could have a material adverse
effect on our business, results of operations and financial condition. Even
if
we succeed in commercializing our SRT, uncertainties regarding health care
policy, legislation and regulation, as well as private market practices,
could
affect our ability to sell our products in quantities or at prices that will
enable us to achieve profitability.
To
obtain
reimbursement from a third party payer, it must determine that our drug product
is a covered benefit under its health plan, which is likely to require a
determination that our product is:
| · |
safe,
effective and medically necessary;
|
| · |
appropriate
for the specific patient;
|
| · |
cost-effective;
and
|
| · |
neither
experimental nor investigational.
|
Obtaining
a determination that a product is a covered benefit may be a time-consuming
and
costly process that could require us to provide supporting scientific, clinical
and cost-effectiveness data about our products to each payer. We may not
be able
to provide sufficient data to gain coverage.
Even
when
a payer determines that a product is covered, the payer may impose limitations
that preclude payment for some uses that are approved by the FDA or other
regulatory authorities. Moreover, coverage does not imply that any product
will
be covered in all cases or that reimbursement will be available at a rate
that
would permit a health care provider to cover its costs of using our
product.
21
Provisions
of our Restated Certificate of Incorporation, Shareholder Rights Agreement
and
Delaware law could defer a change of our management and thereby discourage
or
delay offers to acquire us.
Provisions
of our Restated Certificate of Incorporation, as amended, our Shareholder
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 Shareholder 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 Shareholder 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. In early May 2006,
four shareholder class actions and two derivative actions were filed in the
United States District Court for the Eastern District of Pennsylvania naming
as
defendants the Company and certain of its current and former executive officers
and directors. The derivative actions were consolidated under the caption
“In
re: Discovery Laboratories Securities Litigation” and the class actions were
consolidated under the caption “In re: Discovery Laboratories Securities
Litigation”. The District Court granted our motions to dismiss two Consolidated
Amended Complaints in each proceeding. The derivative actions were not appealed
and that matter is concluded. In April 2008, the Third Circuit Court of Appeals
affirmed the District Court’s dismissal of the second Consolidated Amended
Complaint in the class actions for the reasons set forth in the District
Court
opinion, and this matter is now concluded.
Even
if
actions such as these are found to be without merit, the potential impact
of
such actions, all of which generally seek unquantified damages, attorneys
fees
and expenses, is uncertain. Additional actions based upon similar allegations,
or otherwise, may be filed in the future. There can be no assurance that
an
adverse result in any future proceeding would not have a potentially material
adverse effect on our business, results of operations and financial condition.
We
have
from time to time been involved in disputes and proceedings arising in the
ordinary course of business, including in connection with the conduct of
clinical trials and the termination of certain pre-launch commercial programs
following the April 2006 manufacturing issues. Such claims, with or without
merit, if not resolved, could be time-consuming and result in costly litigation.
Although we believe such claims are unlikely to have a material adverse effect
on our financial condition or results of operations, it is impossible to
predict
with certainty the eventual outcome of such claims and there can be no assurance
that we will be successful in any proceeding to which we may be a
party.
In
addition, as the USPTO keeps United States patent applications confidential
while the applications are pending, 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 USPTO, 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 conducting research and development activities.
22
FORWARD-LOOKING
STATEMENTS
This
prospectus contains “forward-looking statements” within the meaning of Section
27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934
(Exchange Act). 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,” “plans,” “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. Forward-looking
statements include all matters that are not historical facts and include,
without limitation statements concerning: our business strategy, outlook,
objectives, future milestones, plans, intentions, goals, and future financial
condition; plans regarding the May 2008 Approvable Letter that we received
from
the FDA for Surfaxin®
(lucinactant) for the prevention of Respiratory Distress Syndrome in premature
infants; our research and development programs and planning for and timing
of
any clinical trials; the possibility, timing and outcome of submitting
regulatory filings for our products under development; plans regarding strategic
alliances and collaboration arrangements with pharmaceutical companies and
others to develop, manufacture and market our drug products; research and
development of particular drug products, technologies and aerosolization
drug
devices; the development of financial, clinical, manufacturing and marketing
plans related to the potential approval and commercialization of our drug
products, 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 that 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:
|
·
|
the
risk that we may not be able to timely respond to the Approvable
Letter
that we recently received for Surfaxin and that any response that
we do
file will not satisfy the FDA;
|
|
·
|
the
risk that the FDA or other regulatory authorities may not accept,
or may
withhold or delay consideration of, any applications that we may
file,
including our New Drug Application (NDA) for Surfaxin, or may not
approve
our applications or may limit approval of our products to particular
indications or impose unanticipated label limitations;
|
|
·
|
risks
relating to the rigorous
regulatory approval processes, including pre-NDA activities, required
for
approval of any drug or medical device products that we may develop,
independently, with development partners or pursuant to collaboration
arrangements;
|
|
·
|
the
risk that changes in the national or international political and
regulatory environment may make it more difficult to gain FDA or
other
regulatory approval of our drug product
candidates;
|
|
·
|
risks
relating to
our research and development
activities, which involve time-consuming and expensive pre-clinical
studies, multi-phase clinical trials and other studies and other
efforts,
and which may be subject to potentially significant delays or regulatory
holds, or fail;
|
|
·
|
the
risk that we, our contract manufacturers or any of our materials
suppliers
encounter problems manufacturing our products or drug substances
on a
timely basis or in an amount sufficient to meet
demand;
|
|
·
|
risks
relating to the transfer of our manufacturing technology to third-party
contract manufacturers;
|
|
·
|
risks
relating to the ability of our development partners and third-party
suppliers of materials, drug substances and aerosolization systems
and
related components to timely provide us with adequate supplies
and
expertise to support development and manufacture of drug product
and
aerosolization systems for initiation and completion of our clinical
studies, and, if approved, commercialization of our drug and combination
drug-device products;
|
|
·
|
the
risk that we may not successfully and profitably market our
products;
|
|
·
|
the
risk that, even if approved, we may be unable, for reasons related
to
market conditions, the competitive landscape or otherwise, to successfully
launch and market our products;
|
23
|
·
|
risks
relating to our ability to develop a successful sales and marketing
organization to market Surfaxin, if approved, and our other product
candidates, in a timely manner, if at all, and that we or our marketing
and advertising consultants will not succeed in developing market
awareness of our products;
|
|
·
|
the
risk that we or our development partners, collaborators or marketing
partners will not be able to attract or maintain qualified
personnel;
|
|
·
|
the
risk that our product candidates will not gain market acceptance
by
physicians, patients, healthcare payers and others in the medical
community;
|
|
·
|
the
risk that we may
not be able to raise additional capital or enter into additional
collaboration agreements (including strategic alliances for development
or commercialization of SRT);
|
|
·
|
the
risk that recurring losses, negative cash flows and the inability
to raise
additional capital could threaten our ability to continue as a
going
concern;
|
|
·
|
risks
relating to reimbursement and health care
reform;
|
|
·
|
risks
that financial market conditions may change, additional financings
could
result in equity dilution, or we will be unable to maintain The
Nasdaq
Global Market listing requirements, causing the price of our shares
of
common stock to decline;
|
|
·
|
the
risk that we may be unable to maintain and protect the
patents
and licenses
related
to
our SRT;
other companies may
develop competing therapies and/or technologies or
health care reform may adversely affect
us;
|
|
·
|
the
risk that we may become involved in securities, product liability
and
other litigation;
|
|
·
|
other
risks and uncertainties detailed in “Risk Factors” and in the documents
incorporated by reference in this prospectus.
|
Pharmaceutical
and biotechnology companies have suffered significant setbacks in advanced
clinical trials, even after obtaining promising earlier trial results. Data
obtained from such clinical trials are susceptible to varying interpretations,
which could delay, limit or prevent regulatory approval. After gaining approval
of a drug product, pharmaceutical companies face considerable challenges
in
marketing and distributing their products, and may never become
profitable.
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 we entered into with Kingsbridge on May 22, 2008,
or
upon exercise of the 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 May 22, 2008.
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 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 May 22, 2008. 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.
24
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 96,688,377 shares
of our
common stock actually outstanding as of May 22, 2008 and on the assumption
that
all shares of common stock issuable to Kingsbridge under the Common Stock
Purchase Agreement or upon exercise of the 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 to be
Owned after
this Offering
|
Percentage to be
Beneficially
Owned after this
Offering
|
|||||||||||
|
Kingsbridge
Capital Limited (1)
|
21,018,000
|
(2)
|
21.7
|
%
|
20,153,000
|
865,000
|
*
|
|||||||||
|
(1)
|
The
address of Kingsbridge is Kingsbridge Capital Limited, PO Box 1075,
Elizabeth House, 9 Castle Street, St. Helier, Jersey, JE42QP, Channel
Islands.
|
|
(2)
|
Consists
of (a) 19,328,000 shares of common stock issuable under the Common
Stock
Purchase Agreement we entered into with Kingsbridge on May 22,
2008,
(b) 825,000 shares of common stock issuable upon exercise of the
Warrant, which warrant is not exercisable before November 22, 2008
(c)
490,000 shares of common stock issuable upon exercise of the Warrant
and
(d) 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 Warrant. We have
been
advised that Adam Gurney, Maria O’Donoghue and Tony Gardner-Hillman have
shared voting and investment control of the securities held by
Kingsbridge, and that Kingsbridge does not accept third party investments.
Accordingly, Mr. Gurney, Ms. O’Donoghue and Mr. Gardner-Hillman
beneficially own the shares of our common stock owned by
Kingsbridge.
|
PLAN
OF DISTRIBUTION
We
are
registering 20,153,000 shares of 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.
25
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
over
The
Nasdaq Global Market , on the over-the-counter market, 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 NASDAQ Stock Market
LLC
or Financial Industry Regulatory Authority 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 Global 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:
|
·
|
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 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 prior
to
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
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.
26
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.
DESCRIPTION
OF COMMON STOCK
This
description of our common stock is a summary. You should keep in mind, however,
that it is our Restated Certificate of Incorporation and our By-Laws, and
not
this summary, which define 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 June 3, 2008, there were 96,693,377 shares of common stock
outstanding, which does not include:
|
·
|
13,880,283
shares of common stock issuable upon exercise of options outstanding
as of
June 3, 2008, at a weighted average exercise price of $4.23 per
share;
|
|
·
|
7,164,196
shares of common stock issuable upon exercise of warrants outstanding
as
of June 3, 2008, at a weighted average exercise price of
$4.71;
|
|
·
|
5,170,024
shares of common stock reserved for potential future issuance pursuant
to
the 2006 CEFF.
|
|
·
|
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;
|
|
·
|
55,913
shares of common stock issuable upon the vesting of restricted
stock
awards outstanding as of June 3,
2008;
|
|
·
|
4,695,625
shares of common stock available for future grant under our 2007
Long-Term
Incentive Plan; and
|
|
·
|
169,756
shares of common stock reserved for potential future issuance pursuant
to
a 401(k) Plan, as of June 3, 2008.
|
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 Global Market under the symbol “DSCO”.
27
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
provisions of our Shareholder Rights Agreement, dated as of February 6,
2004.
On
February 6, 2004, our Board of Directors adopted a Shareholder Rights Agreement
(the 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 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.
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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:
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—
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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;
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—
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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
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—
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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.
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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
The
consolidated financial statements of Discovery incorporated by reference
in
Discovery Laboratories, Inc. Annual Report (Form 10-K) for the year ended
December 31, 2007, and the effectiveness of Discovery’s internal control over
financial reporting as of December 31, 2007 have been audited by Ernst
&
Young LLP, independent registered public accounting firm, as set forth
in their
reports thereon, incorporated by reference therein, and incorporated herein
by
reference. Such consolidated financial statements are incorporated herein
by
reference in reliance upon such reports given on the authority of such
firm as
experts in accounting and auditing.
29
LEGAL
MATTERS
If
and
when offered, the validity of the securities being registered hereunder will
be
passed upon for us by Dickstein Shapiro LLP.
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 the following address or telephone number: Discovery
Laboratories, Inc., 2600 Kelly Road, Suite 100, Warrington, Pennsylvania
18976,
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.
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.
|
Our
Annual Report on Form 10-K for the fiscal year ended December 31,
2007,
filed on March 14, 2008;
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|
2.
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Our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2008,
filed
on May 9, 2008;
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|
3.
|
Our
Current Reports on Form 8-K filed with the SEC on January 3, 2008
and
February 15, 2008 (excluding the matters in Item 2.02 and Exhibit
99.1
therein, which are not incorporated by reference herein), April
3, 2008,
April 11, 2008, May 2, 2008, May 8, 2008(excluding the matters
in Item
2.02 and Exhibit 99.1 therein, which are not incorporated by reference
herein), May 19, 2008, May 28, 2008, May 29, 2008, and June 2,
2008;
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|
4.
|
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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30
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.
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.
31