The information in this preliminary
prospectus supplement and the accompanying prospectus is not complete and may be
changed. This preliminary prospectus supplement and the accompanying prospectus
are not an offer to sell nor do they seek an offer to buy these securities in
any jurisdiction where the offer or sale is not
permitted.
|
Filed pursuant to Rule
424(b)(5)
|
|
Registration No.
333-151654
|
SUBJECT TO COMPLETION, DATED JUNE 16,
2010
|
PRELIMINARY PROSPECTUS
SUPPLEMENT
|
|
(To Prospectus dated June 11,
2010)
|
Shares
of Common Stock
Series I Warrants to
Purchase Shares
of Common Stock
Series II Warrants to
Purchase Shares
of Common Stock
We are offering an aggregate
of shares
of our common stock and warrants to purchase an aggregate
of shares
of our common stock in this offering (and the shares of common stock
issuable from time to time upon exercise of the warrants). The
common stock and warrants will be sold in units, with each unit consisting of
one share of common stock, a five-year warrant to purchase one half of a share
of common stock at an exercise price of
$ per share and a
short-term warrant to purchase one half of a share of common stock at an
exercise price of $ per
share. Each unit will be sold at a public offering price of
$ per unit. Units will not be issued or
certificated. The shares of common stock and warrants are immediately separable
and will be issued separately. Our common stock is listed on The
Nasdaq Capital Market under the symbol “DSCO.” On June 15, 2010, the
last reported sale price of our common stock on The Nasdaq Capital Market was
$0.37 per share.
Investing in our common stock involves
significant risks. See “Risk Factors” beginning on page S-7 of this
prospectus supplement and page 4 of the accompanying
prospectus.
Neither the Securities and Exchange
Commission nor any other regulatory body has approved or disapproved of these
securities, or passed upon the accuracy or adequacy of this prospectus
supplement or the accompanying prospectus. Any representation to the
contrary is a criminal offense.
|
Per
Unit
|
Total
|
|||||||
|
Public offering
price
|
$
|
$
|
||||||
|
Underwriting
discount
|
$
|
$
|
||||||
|
Proceeds to us (before
expenses)
|
$
|
$
|
||||||
We estimate the total expenses of this
offering payable by us, excluding underwriting discount, will be approximately
$240,000.
We anticipate that delivery of the
shares and warrants will be made on or about
June ,
2010, subject to customary closing conditions.
LAZARD CAPITAL
MARKETS
BOENNING & SCATTERGOOD,
INC.
Prospectus Supplement dated
June , 2010
TABLE OF CONTENTS
|
Prospectus
Supplement
|
Page
|
Prospectus
|
Page
|
|||
|
About this Prospectus
Supplement
|
S-1
|
About This
Prospectus
|
3
|
|||
|
Prospectus Supplement
Summary
|
S-2
|
About
Discovery
|
3
|
|||
|
Forward-Looking
Statements
|
S-5
|
Risk
Factors
|
4
|
|||
|
Risk
Factors
|
S-7
|
Forward-Looking
Statements
|
21
|
|||
|
Use of
Proceeds
|
S-8
|
Use of
Proceeds
|
24
|
|||
|
Dilution
|
S-9
|
Ratio of Earnings to Fixed
Charges
|
24
|
|||
|
Description of Securities We are
Offering
|
S-10
|
Description of Debt
Securities
|
25
|
|||
|
Underwriting
|
S-12
|
Description of Preferred
Stock
|
33
|
|||
|
Legal
Matters
|
S-14
|
Description of Common
Stock
|
34
|
|||
|
Experts
|
S-14
|
Description of
Warrants
|
37
|
|||
|
Where You Can Find More
Information and
|
Plan of
Distribution
|
39
|
||||
|
Incorporation by
Reference
|
S-15
|
Experts
|
44
|
|||
|
Annex A: Form of
Warrant
|
A-1
|
Legal
Matters
|
44
|
|||
|
Where You Can Find More
Information
|
44
|
|||||
|
Information Incorporated by
Reference
|
45
|
ABOUT THIS PROSPECTUS
SUPPLEMENT
This document is in two parts. The first
part is the prospectus supplement, which describes the specific terms of the
securities we are offering, including the price, the amount of common stock
being offered and the risks of investing in our common stock, and also adds to
and updates information contained in the accompanying prospectus and the
documents incorporated by reference into the accompanying prospectus. The second
part, the accompanying prospectus, including the documents incorporated by
reference, provides more general information, some of which may not apply to our
common stock. This prospectus supplement and the accompanying prospectus are
part of a “shelf” registration statement on Form S-3 that we filed with the
Securities and Exchange Commission on June 13, 2008. Generally, when
we refer to this prospectus, we are referring to both parts of this document
combined. You should read both this prospectus supplement and the
accompanying prospectus together with the additional information about us
described in the section entitled “Where You Can Find More Information and
Incorporation by Reference.” To the extent there is a conflict
between the information contained in this prospectus supplement, on the one
hand, and the information contained in the accompanying prospectus or in any
document incorporated by reference that was filed with the SEC before the date
of this prospectus supplement, on the other hand, you should rely on the
information in this prospectus supplement. If any statement in one of these
documents is inconsistent with a statement in another document having a later
date — for example, a document incorporated by reference in the accompanying
prospectus — the statement in the document having the later date modifies or
supersedes the earlier statement.
You should rely only on the information
contained in this prospectus supplement, the accompanying prospectus and the
documents incorporated by reference herein or therein. We have not,
and the underwriter has not, authorized anyone to provide you with information
different from that contained in any of these documents. If anyone
provides you with different or inconsistent information, you should not rely on
it. The information contained in these documents is accurate only as
of the date of each document, as the case may be, regardless of the time of
delivery of this prospectus supplement and accompanying prospectus or of any
sale of common stock. Our business, financial condition, results of
operations and prospects may change after the date set forth in each document in
which the information is presented.
We are making offers to sell and seeking
offers to buy shares of common stock and warrants only in jurisdictions where
offers and sales are permitted. Persons outside the United States who
come into possession of this prospectus must inform themselves about, and
observe any restrictions relating to, the offering of the common stock and
warrants to purchase common stock and the distribution of this prospectus
outside the United States. You should not consider this prospectus
supplement and the accompanying prospectus to be an offer to sell, or a
solicitation of an offer to buy, shares of common stock and warrants if the
person making the offer or solicitation is not qualified to do so or if it is
unlawful for you to receive the offer or solicitation.
S - 1
References in the prospectus supplement,
the accompanying prospectus and the documents incorporated by reference herein
and therein to “we,” “our,” “us” and the “company” refer to Discovery
Laboratories, Inc. and its subsidiary, unless the context requires
otherwise.
PROSPECTUS SUPPLEMENT
SUMMARY
This summary highlights certain
information about us, this offering and information appearing elsewhere in this
prospectus supplement and in the accompanying prospectus and in the documents we
incorporate by reference. This summary is not complete and does not contain all
of the information that you should consider before investing in our securities.
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this prospectus supplement and the
accompanying prospectus. Before you decide to invest in our securities, to fully
understand this offering and its consequences to you, you should carefully read
the entire prospectus supplement and the accompanying prospectus carefully,
including the risk factors beginning on page S-7 of this prospectus supplement
and beginning on page 4 of the accompanying prospectus, and the consolidated
financial statements and related notes included or incorporated by reference in
this prospectus supplement, the accompanying prospectus and the other documents
incorporated by reference herein and therein.
Our Business
We are a biotechnology company
developing Surfactant Replacement Therapies (SRT) to treat respiratory disorders
and diseases for which there frequently are few or no approved
therapies. Our novel KL 4 proprietary technology
produces a synthetic, peptide-containing surfactant (KL 4 surfactant) that is
structurally similar to pulmonary surfactant, a substance produced naturally in
the lung and essential for survival and normal respiratory
function. In addition, our proprietary capillary aerosol generating
technology (Capillary Aerosolization Technology) produces a dense aerosol with a
defined particle size, to potentially deliver our aerosolized KL 4 surfactant to the deep
lung. As many respiratory disorders are associated with surfactant
deficiency or surfactant degradation, we believe that our proprietary technology
platform makes it possible, for the first time, to develop a significant
pipeline of surfactant products targeted to treat a wide range of previously
unaddressed respiratory problems.
Company Information
We maintain our principal offices and
research at 2600 Kelly Road, Suite 100, Warrington, Pennsylvania. Our
telephone number is 215-488-9300. Our website address is www.discoverylabs.com. Information contained in,
or accessible through, our website does not constitute a part of this prospectus
supplement or the accompanying prospectus.
S - 2
THE OFFERING
|
Common Stock
offered
|
shares
|
||
|
Five-Year
Warrants
|
Warrants to purchase up
to shares
of common stock, exercisable beginning on the date of original
issuance and at any time up to the date that is five years after such date
at an exercise price
of $ per
share of common stock. This prospectus also relates to the offering of the
shares of common stock issuable upon exercise of the
warrants.
|
||
|
Short-Term
Warrants
|
Warrants to purchase up
to shares
of common stock, exercisable beginning on the date of original
issuance and at any time up to the date that is nine months after such
date at an exercise price
of $ per
share of common stock. This prospectus also relates to the offering of the
shares of common stock issuable upon exercise of the
warrants.
|
||
|
Common stock to
be outstanding after this offering (1)
|
shares
|
||
|
Risk
Factors
|
See “Risk Factors” beginning on
page S-7 of this prospectus supplement and page 4 of the
accompanying prospectus for a discussion of factors you should consider
carefully when making an investment decision.
|
||
|
Use of
proceeds
|
The net proceeds from this
offering will be used for general corporate purposes, including
potentially satisfying our outstanding obligations, and to support
research and research and development activities, which
include:
|
||
|
· Expenses
related to resolving the sole remaining Chemistry, Manufacturing and
Controls (CMC) issue that must be addressed to potentially gain
regulatory approval of Surfaxin® for the prevention of RDS,
including completion of the ongoing comprehensive pre-clinical
program.
|
|||
|
· Expenses
related to ongoing development of our Surfaxin LS™ and Aerosurf® programs,
which, together with Surfaxin, are focused on redefining and improving the
management of neonatal patients with RDS. Surfaxin LS is a
lyophilized formulation of Surfaxin that is manufactured as a dry powder
and reconstituted as a liquid prior to administration and offers ease of
administration and other potential benefits. Aerosurf, our KL 4
surfactant in aerosolized form, is a drug-device combination product based
on our proprietary capillary aerosolization technology and potentially can
be administered without the invasive procedures that are required for the
currently-approved surfactants. Expenses related to Surfaxin LS
include our preclinical development program and costs to meet with the FDA
and the European regulatory authorities to discuss our proposed Phase 3
global registration clinical program. Expenses related to
Aerosurf include activities to advance our ongoing device development and
preclinical work and the costs of preparing an IND filing in anticipation
of our planned Phase 2 clinical program. We plan to initiate
the Surfaxin LS and Aerosurf clinical development programs after we have
secured additional capital resources in the form of strategic alliances or
other financial alternatives.
|
|||
S - 3
|
See “Use of Proceeds” on
page S-8.
|
|||
|
The Nasdaq Capital Market
Symbol
|
DSCO
|
|
(1)
|
The number of shares of common
stock to be outstanding immediately after this offering as shown above is
based on 154,012,467
shares of common stock outstanding as of March 31, 2010. This number
excludes the shares
issuable upon the exercise of the warrants offered hereby and also
excludes: (i) 15,789,593 shares of our common stock subject to
options outstanding as of March 31, 2010, which
have a weighted average exercise price of $3.77 per share; (ii) 28,214,196
shares of common stock issuable upon exercise of warrants outstanding as
of March 31, 2010, at a weighted average exercise price of $1.77 per
share; (iii) 367,928 shares of common
stock reserved for potential future issuance pursuant to our 401(k) Plan
as of March 31, 2010; and (iv) 19,885,186 shares of common stock reserved
for potential future issuance pursuant to two Committed Equity Financing
Facilities, as of March 31, 2010 (not
yet including 31,597,149 shares reserved for
potential issuance under the June 2010
CEFF).
|
S - 4
FORWARD-LOOKING
STATEMENTS
This prospectus supplement, the
accompanying prospectus and the documents incorporated by reference herein and
therein, including in “Risk Factors,” contain “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. The forward-looking statements are only
predictions and provide our current expectations or forecasts of future events
and financial performance and may be identified by the use of forward-looking
terminology, including the terms “believes,” “estimates,” “anticipates,”
“expects,” “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, including the period of time for which our existing
resources will enable us to fund our operations; plans regarding our efforts to
gain U.S. regulatory approval for our lead product, Surfaxin®
(lucinactant) for the prevention of Respiratory Distress Syndrome in premature
infants; the possibility, timing and outcome of submitting regulatory filings
for our products under development; our research and development programs for
our KL4 surfactant technology and our capillary aerosolization technology
platform, including planning for and timing of any clinical trials and potential
development milestones; the development of financial, clinical, manufacturing
and distribution plans related to the potential commercialization of our drug
products, if approved; and plans regarding potential strategic alliances and
other collaborative arrangements with pharmaceutical companies and others to
develop, manufacture and market our products.
We intend that all forward-looking
statements be subject to the safe-harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are subject to many
risks and uncertainties that could cause actual results to differ materially
from any future results expressed or implied by the forward-looking statements.
We caution you therefore against relying on any of these forward-looking
statements. They are neither statements of historical fact nor guarantees or
assurances of future performance. Examples of the risks and uncertainties
include, but are not limited to:
|
•
|
risks
related generally to our efforts to gain regulatory approval, in the
United States and elsewhere, for our drug product candidates, including
our lead products that we are developing to address Respiratory
Distress Syndrome (RDS) in premature infants: Surfaxin®
(lucinactant) for the prevention of RDS, Surfaxin LS™ (our lyophilized
KL4 surfactant) and
Aerosurf® (our
initial aerosolized KL4 surfactant);
|
|
•
|
the
risk that we and the U.S. Food and Drug Administration (FDA) or other
regulatory authorities will not be able to agree on matters raised during
the regulatory review process, or that we may be required to conduct
significant additional activities to potentially gain approval of our
product candidates, if ever;
|
|
•
|
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, 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-filing activities, required for approval of any drug or combination
drug-device products that we may develop, whether independently, with
strategic development partners or pursuant to collaboration
arrangements;
|
|
•
|
the
risk that the FDA will not be satisfied with the results of either our
efforts to optimize and revalidate the BAT or the side-by-side studies
that we are conducting as part of our comprehensive preclinical program to
address the open CMC issue, which is needed to gain regulatory approval
for Surfaxin and advance our KL4 surfactant
pipeline;
|
|
•
|
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;
|
S - 5
|
•
|
risks
relating to our research and development activities, which involve
time-consuming and expensive preclinical studies and other efforts, and
potentially multiple clinical trials, which may be subject to potentially
significant delays or regulatory holds, or which may fail, and which must
be conducted using sophisticated and extensive analytical methodologies,
including an acceptable biological activity test, if required, as well as
other quality control release and stability tests to satisfy the
requirements of the regulatory
authorities;
|
|
•
|
risks
relating to our ability to develop and manufacture drug products and
drug-device combination products based on our capillary aerosolization
technology for clinical studies and, if approved, for commercialization of
our products;
|
|
•
|
risks
relating to the transfer of our manufacturing technology to third-party
contract manufacturers and
assemblers;
|
|
•
|
the
risk that we, our contract manufacturers or any of our third-party
suppliers may encounter problems or delays in manufacturing or assembling
drug products, drug product substances, capillary aerosolization devices
and related components and other materials on a timely basis or in an
amount sufficient to support our development efforts and, if our products
are approved, commercialization;
|
|
•
|
the
risk that we may be unable to identify potential strategic partners or
collaborators with whom we can develop and, if approved, commercialize our
products in a timely manner, if at
all;
|
|
•
|
the
risk that we or our strategic partners or collaborators will not be able
to attract or maintain qualified
personnel;
|
|
•
|
the
risk that, if approved, market conditions, the competitive landscape or
otherwise may make it difficult to launch and profitably sell our
products;
|
|
•
|
the
risk that we may not be able to raise additional capital or enter into
strategic alliances or collaboration agreements (including strategic
alliances for development or commercialization of our drug products and
combination drug-device products);
|
|
•
|
risks
that the unfavorable credit environment will adversely affect our ability
to fund our activities, that our share price will fall below the price
level necessary for us to access capital under our Committed
Equity Financing Facilities (CEFF), including our new June 2010
CEFF (as of June 7, 2010, the market price of our shares is
below the level necessary to access our previous two CEFFs), that our
CEFFs may expire before we are able to access the full dollar amount
potentially available thereunder, and that additional equity financings
could result in substantial equity
dilution;
|
|
•
|
the
risk that we will be unable to regain compliance with the minimum bid
price requirement of The NASDAQ Capital Market by November 29, 2010, or
maintain compliance with the other listing requirements of The NASDAQ
Capital Market, which could cause our stock to be delisted from Nasdaq and
cause our stock price to decline;
|
|
•
|
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;
|
|
•
|
the
risks that we may be unable to maintain and protect the patents and
licenses related to our products and that other companies may develop
competing therapies and/or
technologies;
|
|
•
|
the
risk that we may become involved in securities, product liability and
other litigation;
|
|
•
|
risks
related to reimbursement and health care reform that may adversely affect
us;
|
|
•
|
the
risk that the FDA may not approve Surfaxin® or
may subject the marketing of Surfaxin® to
onerous requirements that significantly impair marketing
activities;
|
S - 6
|
•
|
the
risk that we may identify unforeseen problems that have not yet been
discovered or the FDA could in the future impose additional requirements
to gain approval of Surfaxin®;
and
|
|
•
|
other
risks and uncertainties detailed in “Risk Factors” herein and in the
accompanying prospectus and in the documents incorporated by reference in
this prospectus supplement and the accompanying
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.
The forward-looking statements contained
in this prospectus supplement, the accompanying prospectus or the documents
incorporated by reference herein or therein speak only of their respective
dates. Except to the extent required by applicable laws, rules and
regulations, we do not undertake to publicly announce revisions to any of the
forward-looking statements in this prospectus supplement, the accompanying
prospectus or the documents incorporated by reference herein or therein, whether
as a result of new information, future events or otherwise.
RISK FACTORS
Investing in our securities
involves a high degree of risk. You should consider the following
risk factors, the risk factors contained in the accompanying prospectus
beginning on page 4, as well as other information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus, before
deciding to purchase any of our securities. The risks and
uncertainties described below and incorporated by reference herein are not the
only ones we face. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may become important
factors that affect us. If any of these risks occur, our business
could suffer, the market price of our common stock could decline and you could
lose all or part of your investment in our securities.
Risks Related to Our Common
Stock
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;
|
S - 7
|
|
·
|
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 in our Annual Report on Form
10-K for the year ended December 31, 2009 or our other public
filings.
|
In addition, the price of our common
stock could be affected by market factors, including rebalancing of portfolios by
institutional investors and resetting of indexes, such as the Russell Index,
which notified us recently that our stock would be removed from its health index
on June 25, 2010, the next reset date. Our common stock is
listed for quotation on The NASDAQ Capital Market. During the
twelve month period ended December 31, 2009, the price of our common stock
ranged from $0.33 to $2.40. We expect the price of our common stock
to remain volatile. The average daily trading volume in our common stock varies
significantly. For the twelve month period ended December 31, 2009,
the average daily trading volume in our common stock was approximately 3,586,958
shares and the average number of transactions per day was approximately 4,621.
The instability observed in our daily
volume and number of transactions per day may affect the ability of our
stockholders to sell their shares in the public market at prevailing
prices.
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. Even if securities class actions that we
may face in the future are ultimately determined to be meritless or
unsuccessful, they involve substantial costs
and a diversion of management attention and resources, which could negatively
impact our business.
Risks Related to This
Offering
A substantial number of shares may be
sold in the market following this offering, which may depress the market price
for our common stock.
Sales of a substantial number of shares
of our common stock in the public market following this offering could cause the
market price of our common stock to decline. Upon completion of this
offering, we will have outstanding an aggregate of
approximately million
shares of common stock,
assuming no exercise of outstanding options or warrants. A
substantial majority of the outstanding shares of our common stock are, and all
of the shares sold in this offering upon issuance will be, freely tradable
without restriction or further registration under the Securities Act of 1933
unless these shares are purchased by affiliates. In addition, as of
June 14, 2010, 44,734,295 shares of our common stock are issuable
upon exercise of outstanding options and warrants granted by us, which also have
been registered for resale on registration statements filed with the Securities
and Exchange Commission. The outstanding options have a weighted
average exercise price of $3.77 per share and expire between June 16, 2010 and
June 7, 2020. The outstanding warrants have a weighted average
exercise price of $1.38 per share and expire between September 19, 2010 and
December 11, 2015.
Our management will have broad
discretion with respect to the use of the proceeds of this
offering.
Although we have highlighted the
intended use of proceeds for this offering, our management will have broad
discretion as to the application of these net proceeds and could use them for
purposes other than those contemplated at the time of this
offering. Our stockholders may not agree with the manner in which our
management chooses to allocate and spend the net proceeds.
You will experience immediate dilution
in the book value per share of the common stock you
purchase.
You will suffer substantial immediate
dilution in the net tangible book value of the common stock you purchase in this
offering because the price per share of our common stock being offered hereby is
substantially higher than the book value per share of our common
stock. Based on the assumed public offering price of $0.37 per
share and assuming the sale of 30,000,000 shares in this offering, if
you purchase shares of common stock in this offering, you will suffer immediate
and substantial dilution of $0.12 per share in the net tangible book value of
the common stock. See “Dilution” on page S-9 for a more detailed
discussion of the dilution you will incur in this offering.
USE OF PROCEEDS
We estimate the net proceeds from the
securities offered pursuant to this prospectus to be approximately $6.6 million
after deducting the estimated underwriting discount and other estimated offering
expenses, assuming the sale of 20,000,000 units and an assumed offering price of
$0.37 per share, which was the last reported sale price of our common stock on
The Nasdaq Capital Market on June 15, 2010. The actual net proceeds
could be less than or greater than $6.6 million, depending on the actual
offering price and the actual number of units to be sold. Except as
described in any later prospectus supplement or post-effective amendment, we
currently anticipate using the net proceeds from the sale of our common stock
and warrants primarily for general corporate purposes, including potentially
satisfying our outstanding obligations, and to support research and research and
development activities, which include:
|
·
|
Expenses
related to resolving the sole remaining Chemistry, Manufacturing and
Controls (CMC) issue that must be addressed to potentially gain
regulatory approval of Surfaxin® for the prevention of RDS,
including completion of the ongoing comprehensive pre-clinical
program.
|
|
·
|
Expenses
related to ongoing development of our Surfaxin LS™ and Aerosurf® programs,
which, together with Surfaxin, are focused on redefining and improving the
management of neonatal patients with RDS. Surfaxin LS is a
lyophilized formulation of Surfaxin that is manufactured as a dry powder
and reconstituted as a liquid prior to administration and offers ease of
administration and other potential benefits. Aerosurf, our KL 4
surfactant in aerosolized form, is a drug-device combination product based
on our proprietary capillary aerosolization technology and potentially can
be administered without the invasive procedures that are required for the
currently-approved surfactants. Expenses related to Surfaxin LS
include our preclinical development program and costs to meet with the FDA
and the European regulatory authorities to discuss our proposed Phase 3
global registration clinical program. Expenses related to
Aerosurf include activities to advance our ongoing device development and
preclinical work and the costs of preparing an IND filing in anticipation
of our planned Phase 2 clinical program. We plan to initiate
the Surfaxin LS and Aerosurf clinical development programs after we have
secured additional capital resources in the form of strategic alliances or
other financial alternatives.
|
The
amounts and timing of the expenditures may vary significantly depending on
numerous factors, such as the progress of our research and development efforts,
technological advances and the competitive environment for Surfaxin and our
other SRT drug candidates and their intended uses. Pending the
application of the net proceeds, we intend to invest the proceeds in short-term,
interest-bearing instruments or other investment-grade
securities.
S - 8
DILUTION
The net tangible book value of our
common stock on March 31, 2010, was approximately $12.7 million, or approximately
$0.08 per share. Net tangible book
value per share is equal to the amount of our total tangible assets, less total
liabilities, divided by the aggregate number of shares of common stock
outstanding. Dilution in net tangible book value per share represents
the difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the net tangible book value per share of our
common stock immediately after this offering. For purposes of this
calculation, the entire purchase price for the unit is being allocated to the
common stock contained in the unit. Assuming the sale of 30,000,000
shares of our common stock in this offering at an assumed offering price
equal to $0.37 per share (which was the last reported sale price of our common
stock on The Nasdaq Capital Market on June 15, 2010), and after deducting
the estimated underwriting discount and the estimated offering expenses,
but excluding any effects of potential exercises of the warrants issued in this
offering, our net tangible book value on March 31, 2010 would have been
approximately $22.2 million, or approximately $0.12 per share. This
represents an immediate increase in the net tangible book value of $0.04
per share to existing shareholders and an immediate dilution of $0.25 per share
to new investors purchasing shares of common stock in this
offering. The following table illustrates this
dilution:
|
Assumed offering price per
share included in each unit
|
$ |
0.37
|
||
|
Net
tangible book value per share as of March 31, 2010
|
$ |
0.08
|
||
|
Increase
per share after the offering
|
$ |
0.04
|
||
|
Pro forma net tangible book value
per share as of March 31, 2010, after giving effect to this
offering
|
$ |
0.12
|
||
|
Dilution per share to new
investors
|
$ |
0.25
|
In addition, investors that
purchase common stock upon the exercise of the warrants offered hereby may
experience dilution depending on our net tangible book value at the time of
exercise. The foregoing table does not take into account further
dilution to new investors that could occur upon the exercise of outstanding
options and warrants having a per share exercise price less than the per share
offering price to the public in this offering. As of March 31, 2010,
there were 154,012,467 shares of common stock outstanding, which does not
include:
|
·
|
15,789,593 shares of common stock issuable
upon exercise of options outstanding as of March 31, 2010, at a weighted
average exercise price of $3.77 per
share;
|
|
·
|
28,214,196 shares of common stock issuable
upon exercise of warrants outstanding as of March 31, 2010, at a weighted
average exercise price of $1.77 per share;
|
|
·
|
367,928 shares of common stock
reserved for potential future issuance pursuant to our 401(k) Plan as of
March 31, 2010; and
|
|
·
|
19,885,186 shares of common stock
reserved for potential future issuance pursuant to two Committed Equity
Financing Facilities, as of March 31, 2010 (not yet including 31,597,149
shares reserved for potential issuance under the June 2010
CEFF).
|
S - 9
DESCRIPTION OF SECURITIES WE ARE
OFFERING
In this offering, we are offering a
maximum
of units,
consisting
of shares
of common stock, five-year warrants to puchase up
to shares of
common stock and short-term warrants to purchase up
to shares of
common stock. Each unit consists of one share of common stock, one
five-year warrant to purchase one half of a share of common stock at an exercise
price of $ per share, and one
short-term warrant to purchase one half of a share of common stock at an
exercise price of $ per
share. Units will not be issued or certificated. The shares of common
stock and warrants are immediately separable and will be issued separately. This
prospectus supplement also relates to the offering of shares of our common stock
upon exercise, if any, of the warrants.
Common Stock
The material terms and provisions of our
common stock and each other class of our securities which qualifies or limits
our common stock are described under the caption “Description of Common Stock”
starting on page 31 of the accompanying prospectus.
Warrants
The following summary of certain terms
and provisions of the warrants offered hereby is not complete and is subject to,
and qualified in its entirety by reference to, the terms and provisions set
forth in the form of warrant attached as Annex A to this prospectus
supplement. Prospective investors should carefully review the terms and
provisions set forth in the form of warrant.
Terms Applicable to Five-Year
Warrants
The five-year warrants are exercisable
beginning on the date of original issuance and at any time up to the date that
is five years after such date, at an exercise price of
$ per share of common stock being
purchased.
Term Applicable to Short-Term
Warrants
The short-term warrants are exercisable
beginning on the date of original issuance and at any time up to the date that
is nine months after such date, at an exercise price of
$ per share of common stock being
purchased.
Terms Applicable to Both Types of
Warrants
Exercisability. The warrants will be
exercisable, at the option of each holder, in whole or in part by delivering to
us a duly executed exercise notice accompanied by payment in full for the number
of shares of our common stock purchased upon such exercise (except in the case
of a cashless exercise as discussed below). Unless otherwise specified in the
warrant, the holder will not have the right to exercise any portion of the
warrant if the holder (together with its affiliates) would beneficially own in
excess of 9.99% of the number of shares of our common stock outstanding
immediately after giving effect to the exercise, as such percentage ownership is
determined in accordance with the terms of the warrants.
Cashless
Exercise. In the
event that a registration statement covering shares of common stock underlying
the warrants, or an exemption from registration, is not available for the resale
of such shares of common stock underlying the warrants, the holder may, in its
sole discretion, exercise the warrant in whole or in part and, in lieu of making
the cash payment otherwise contemplated to be made to us upon such exercise in
payment of the aggregate exercise price, elect instead to receive upon such
exercise the net number of shares of common stock determined according to the
formula set forth in the warrant.
Adjustment of
Exercise Price. The exercise price is
subject to appropriate adjustment in the event of certain stock dividends and
distributions, stock splits, stock combinations, reclassifications or similar
events affecting our common stock and also upon any distributions of assets,
including cash, stock or other property to our stockholders.
Transferability. Subject to applicable laws,
the warrants may be offered for sale, sold, transferred or assigned without our
consent.
S - 10
Exchange
Listing. We do
not plan on making an application to list the warrants on The Nasdaq Capital
Market, any other national securities exchange or other nationally recognized
trading system.
Fundamental
Transactions. We
will not enter into or be party to a fundamental transaction, which is a merger
or other change of control transaction, as described in the warrants, unless the
successor entity, as described in the warrants, assumes the warrants and
delivers new warrants that are substantially similar. If we enter into, or are a
party to, a fundamental transaction pursuant to which our stockholders are
entitled or required to receive securities issued by another company or cash or
other assets in exchange for shares of our common stock, which we refer to as a
corporate event, a holder of a warrant will have the right to receive, upon an
exercise of the warrant, consideration as if the holder had exercised its
warrant immediately prior to such corporate event.
Rights as a
Stockholder. Except as
otherwise provided in the warrants or by virtue of such holder’s ownership of
shares of our common stock, the holder of a warrant does not have the rights or
privileges of a holder of our common stock, including any voting rights, until
the holder exercises the warrant.
Waivers and
Amendments. Any term of the
warrants may be amended or waived with our written consent and the written
consent of the holders of warrants.
S - 11
UNDERWRITING
Under the terms and subject to the
conditions in an underwriting agreement dated the date of this prospectus
supplement, Lazard Capital Markets LLC and Boenning & Scattergood, Inc., as
underwriters, have agreed to purchase, and we have agreed to sell to them, the
number of units (each unit consisting of one share of common stock
and one warrant to
purchase of
a share of common stock) at the public offering price, less the
underwriting discount, as set forth on the cover page of this prospectus
supplement, as indicated below:
|
Underwriters
|
Number of
Units
|
|
Lazard Capital Markets
LLC
|
|
|
Boenning & Scattergood,
Inc.
|
|
|
Total:
|
The underwriters are offering the units
subject to its acceptance of the securities included in the units from us and
subject to prior sale. The underwriting agreement provides that the obligations
of the underwriters to pay for and accept delivery of the units offered by this
prospectus supplement are subject to the approval of certain legal matters by
their counsel and to other conditions. The underwriters are obligated to take
and pay for all of the units offered by this prospectus supplement if any such
units are taken.
The underwriters initially propose to
offer the units directly to the public at the public offering price listed on
the cover page of this prospectus supplement. After the initial offering of the
units, the offering price and other selling terms may from time to time be
varied by the underwriters.
The underwriting agreement provides that
the obligations of the underwriters are subject to certain conditions precedent,
including the absence of any material adverse change in our business and the
receipt of customary legal opinions, letters and
certificates.
Discount and
Expenses
The following table summarizes the
public offering price, underwriting discount and proceeds before expenses to
us:
|
Per Unit
|
Total
|
|||||||
|
Public offering
price
|
$ | $ | ||||||
|
Underwriting
discount
|
$ | $ | ||||||
|
Proceeds, before expenses, to
us
|
$ | $ | ||||||
The expenses of the offering, not
including the underwriting discount, payable by us are estimated to be $240,000,
which includes $75,000 that we have agreed to reimburse the underwriters for
their legal fees incurred in connection with this offering. Lazard
Frères & Co. LLC referred this transaction to Lazard Capital Markets LLC and
will receive a referral fee from Lazard Capital Markets LLC in connection
therewith; however, such referral fee is not in addition to the fee paid by us
to Lazard Capital Markets LLC described above. The aggregate value of
all compensation received or to be received by participating FINRA members does
not exceed 8% of the offering proceeds.
Listing on The Nasdaq Capital
Market
Our shares of common stock included in
the units are listed on The Nasdaq Capital Market under the symbol
“DSCO.” Our registrar and transfer agent for all shares of common
stock is Continental Stock Transfer & Trust Company.
No Sales of Similar
Securities
We, each of our executive officers and
directors and certain of our stockholders, subject to certain exceptions, have
agreed with the underwriters not to dispose of or hedge any of our shares of
common stock or securities convertible into or exercisable or exchangeable for
common stock for 90 days after the date of this prospectus without first
obtaining the written consent of Lazard Capital Markets LLC. The 90-day
“lock-up” period is subject to extension such that, in the event that either
(i) during the last 17 days of the “lock-up” period, we issue an
earnings or financial results release or material news or a material event
relating to us occurs, or (ii) prior to the expiration of the “lock-up”
period, we announce that we will release earnings or financial results during
the 16-day period beginning on the last day of the “lock-up” period, then in
either case the expiration of the “lock-up” period will be extended until the
expiration of the 18-day period beginning on the issuance of the earnings or
financial results release or the occurrence of the material news or material
event, as applicable, unless Lazard Capital Markets LLC waives, in writing, such
an extension.
S - 12
Price Stabilization, Short
Positions
In order to facilitate the offering of
the units, the underwriters may engage in transactions that stabilize, maintain
or otherwise affect the price of our common stock. Specifically, the
underwriters may sell more units than they are obligated to purchase under the
underwriting agreement, creating a short position. The underwriters must close
out any short position by purchasing shares of common stock in the open market.
A short position may be created if the underwriters are concerned that there may
be downward pressure on the price of the common stock in the open market after
pricing that could adversely affect investors who purchased in this offering. As
an additional means of facilitating this offering, the underwriters may bid for,
and purchase, shares of our common stock in the open market to stabilize the
price of the common stock. These activities may raise or maintain the market
price of our common stock above independent market levels or prevent or slow a
decline in the market price of our common stock. The underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
We and the underwriters have agreed to
indemnify each other, and we have also agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, as amended, and liabilities arising from breaches of representations and
warranties contained in the underwriting agreement. We have also
agreed to contribute to payments the underwriters and Lazard Frères & Co.
LLC may be required to make in respect of such liabilities.
A prospectus in electronic format may be
made available on websites maintained by the underwriters. The underwriters may
agree to allocate a number of units to other underwriters for sale to its online
brokerage account holders. Internet distributions will be allocated by the
underwriters on the same basis as other allocations.
United Kingdom
This document is only being distributed
to and is only directed at (i) persons who are outside the United Kingdom
or (ii) to investment professionals falling within Article 19(5) of
the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005
(the “Order”) or (iii) high net worth entities, and other persons to whom
it may lawfully be communicated, falling within Article 49(2)(a) to
(e) of the Order (all such persons together being referred to as “relevant
persons”). The units are only available to, and any invitation, offer or
agreement to subscribe, purchase or otherwise acquire such units will be engaged
in only with, relevant persons. Any person who is not a relevant person should
not act or rely on this document or any of its contents.
The underwriters have represented and
agreed that:
(a) they have only communicated or
caused to be communicated and will only communicate or cause to be communicated
an invitation or inducement to engage in investment activity (within the meaning
of Section 21 of the Financial Services and Markets Act 2000 or FSMA)
received by them in connection with the issue or sale of the units in
circumstances in which Section 21(1) of the FSMA does not apply to
us, and
(b) they have complied with, and
will comply with all applicable provisions of FSMA with respect to anything done
by them in relation to the units in, from or otherwise involving the United
Kingdom.
European Economic
Area
To the extent that the offer of the
units is made in any Member State of the European Economic Area that has
implemented the Prospectus Directive before the date of publication of a
prospectus in relation to the units which has been approved by the competent
authority in the Member State in accordance with the Prospectus Directive (or,
where appropriate, published in accordance with the Prospectus Directive and
notified to the competent authority in the Member State in accordance with the
Prospectus Directive), the offer (including any offer pursuant to this document)
is only addressed to qualified investors in that Member State within the meaning
of the Prospectus Directive or has been or will be made otherwise in
circumstances that do not require us to publish a prospectus pursuant to the
Prospectus Directive.
S - 13
In relation to each Member State of the
European Economic Area which has implemented the Prospectus Directive (each, a
“Relevant Member State”), the underwriters have represented and agreed that with
effect from and including the date on which the Prospectus Directive is
implemented in that Relevant Member State (the “Relevant Implementation Date”)
they have not made and will not make an offer of shares to the public in that
Relevant Member State prior to the publication of a prospectus in relation to
the shares which has been approved by the competent authority in that Relevant
Member State or, where appropriate, approved in another Relevant Member State
and notified to the competent authority in that Relevant Member State, all in
accordance with the Prospectus Directive, except that it may, with effect from
and including the Relevant Implementation Date, make an offer of units to the
public in that Relevant Member State at any time:
(a) to legal entities which are
authorized or regulated to operate in the financial markets or, if not so
authorized or regulated, whose corporate purpose is solely to invest in
securities,
(b) to any legal entity which has
two or more of (1) an average of at least 250 employees during the last
financial year; (2) a total balance sheet of more than €43,000,000 and
(3) an annual net turnover of more than €50,000,000, as shown in its last
annual or consolidated accounts, or
(c) in any other circumstances
which do not require the publication by us of a prospectus pursuant to
Article 3 of the Prospectus Directive. For the purposes of this provision,
the expression an “offer of units to the public” in relation to any shares in
any Relevant Member State means the communication in any form and by any means
of sufficient information on the terms of the offer and the units to be offered
so as to enable an investor to decide to purchase or subscribe the units, as the
same may be varied in that Relevant Member State by any measure implementing the
Prospectus Directive in that Relevant Member State and the expression
“Prospectus Directive” means Directive 2003/71/EC and includes any relevant
implementing measure in each Relevant Member State.
The EEA selling restriction is in
addition to any other selling restrictions set out below. In relation to each
Relevant Member State, each purchaser of units (other than the underwriters)
will be deemed to have represented, acknowledged and agreed that it will not
make an offer of units to the public in any Relevant Member State, except that
it may, with effect from and including the date on which the Prospectus
Directive is implemented in the Relevant Member State, make an offer of units to
the public in that Relevant Member State at any time in any circumstances which
do not require the publication by us of a prospectus pursuant to Article 3
of the Prospectus Directive, provided that such purchaser agrees that it has not
and will not make an offer of any units in reliance or purported reliance on
Article 3(2)(b) of the Prospectus Directive. For the purposes of this
provision, the expression an “offer of units to the public” in relation to any
units in any Relevant Member State has the same meaning as in the preceding
paragraph.
LEGAL MATTERS
The validity of the issuance of the
securities offered hereby will be passed upon by Sonnenschein Nath &
Rosenthal LLP, New York, New York. Proskauer Rose LLP, New York, New
York, is acting as counsel for the underwriter in connection with this
offering.
EXPERTS
Ernst & Young LLP, independent
registered public accounting firm, has audited our consolidated financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2009, and the effectiveness of our internal control over financial
reporting as of December 31, 2009, as set forth in their reports, which are
incorporated by reference in this prospectus supplement and elsewhere in the
registration statement. Our financial statements are incorporated by reference
in reliance on Ernst & Young LLP’s reports, given on their authority as
experts in accounting and auditing.
S - 14
WHERE YOU CAN FIND MORE INFORMATION AND
INCORPORATION BY REFERENCE
We file annual, quarterly and periodic
reports, proxy statements and other information with the SEC. You may read and
copy any materials that we file with the SEC at the SEC’s Public Reference Room
at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information
on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. Many of our SEC filings are also available to the public from
the SEC’s Website at “http://www.sec.gov.” We make available free of charge our
annual, quarterly and current reports, proxy statements and other information
upon request. To request such materials, please send an e-mail to
ir@DiscoveryLabs.com or contact John G. Cooper, our Executive Vice President,
Chief Financial Officer, at our address as set forth in the accompanying
prospectus.
We maintain a website at
“http://www.DiscoveryLabs.com” (this is not a hyperlink, you must visit this
website through an Internet browser). Our website and the information contained
therein or connected thereto are not incorporated into this prospectus
supplement.
We have filed with the Securities and
Exchange Commission a registration statement on Form S-3 under the Securities
Act relating to the common stock we are offering by this prospectus supplement.
The SEC allows us to “incorporate by reference” the information that we file
with it, 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 supplement, and information that we
file later with the SEC will automatically update and supersede information in
this prospectus supplement. We incorporate by reference the documents listed
below and any future filings we make with the SEC pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, until
this offering is completed:
1. Our Annual Report on Form 10-K for
the fiscal year ended December 31, 2009, filed on March 10, 2010, as amended by
our Annual Report on Form 10-K/A, filed on April 30, 2010;
2. Our Quarterly Report on Form
10-Q for the quarter ended March 31, 2010, filed on May 10,
2010;
3. Our Current Reports on Form 8-K
filed with the SEC on February 16, 2010, February 18, 2010, February 26, 2010,
March 15, 2010 (excluding the matters in Item 2.02 and Exhibit 99.1 therein,
which are not incorporated by reference herein), April 28, 2010 (excluding the
matters in Item 2.02 and Exhibit 99.1 therein, which are not incorporated by
reference herein), April 29, 2010, May 21, 2010, June 4, 2010, June 9, 2010,
June 9, 2010 and June 14, 2010; and
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 February 6, 2004.
Furthermore, all reports and other
documents subsequently filed (but not furnished) by us with the SEC pursuant to
Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934 prior
to the termination of this offering shall be deemed to be incorporated by
reference in this prospectus supplement and to be a part of this prospectus
supplement from the date of filing of such reports and documents. We
are not incorporating by reference any documents or portions thereof that are
not deemed "filed" with the SEC, including information “furnished” pursuant to
Items 2.02 or 7.01 of Form 8-K. 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 supplement
to the extent that a statement contained in this prospectus supplement or in any
other subsequently filed document which also is or is deemed to be incorporated
by reference in this prospectus supplement 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 supplement.
This prospectus supplement and the
accompanying prospectus are only part of a registration statement on Form S-3
that we have filed with the SEC under the Securities Act and therefore omits
certain information contained in the registration statement. We have also filed
exhibits and schedules with the registration statement that are excluded from
this prospectus supplement and the accompanying prospectus. Statements contained
in this prospectus supplement as to the contents of any contract or other
document are qualified by reference to the copy of that contract or document
filed as an exhibit to the registration statement or that will be filed as an
exhibit to the current report on Form 8-K upon completion of this
offering.
Each person to whom a copy of this
prospectus supplement is delivered may request a copy of any or all of the
information incorporated by reference in this prospectus supplement, including
the exhibits to any filings incorporated by reference herein, from us, at no
charge, or from the Securities and Exchange Commission in the above described
manner.
S - 15
$150,000,000
Discovery
Laboratories, Inc.
Debt
Securities, Preferred Stock, Common Stock,
Debt
Warrants and Equity Warrants
We
may sell from time to time in one or more offerings up to $150,000,000 in the
aggregate of:
· our
secured or unsecured debt securities, in one or more series, which may be either
senior, senior subordinated or subordinated debt securities;
· shares
of our preferred stock in one or more series;
· shares
of our common stock;
· debt
warrants;
· equity
warrants; and
· any
combination of the foregoing.
When we decide to sell particular
securities, we will provide you with the specific terms and the public offering
price of the securities we are then offering in one or more prospectus
supplements to this prospectus. The prospectus supplement may add to, change or
update information contained in this prospectus. The prospectus supplement may
also contain important information about U.S. federal income tax consequences.
You should carefully read this prospectus, together with any prospectus
supplements and information incorporated by reference in this prospectus and any
prospectus supplements, before you decide to invest. This prospectus may
not be used to offer or sell any securities unless accompanied by a prospectus
supplement.
Our
common stock is quoted on The NASDAQ Capital Market®
under the trading symbol “DSCO.” Any
common stock sold pursuant to this prospectus or any prospectus supplement will
be listed on that exchange, subject to official notice of issuance. Each
prospectus supplement to this prospectus will contain information, where
applicable, as to any other listing on any national securities exchange of the
securities covered by the prospectus supplement.
Investing
in our securities involves significant risks. See “Risk Factors” beginning on
page 6.
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 11, 2010.
TABLE
OF CONTENTS
|
Page
|
||||
|
ABOUT
THIS PROSPECTUS
|
3 | |||
|
ABOUT
DISCOVERY
|
3 | |||
|
RISK
FACTORS
|
4 | |||
|
FORWARD-LOOKING
STATEMENTS
|
21 | |||
|
USE
OF PROCEEDS
|
24 | |||
|
RATIO
OF EARNINGS TO FIXED CHARGES
|
24 | |||
|
DESCRIPTION
OF DEBT SECURITIES
|
25 | |||
|
DESCRIPTION
OF PREFERRED STOCK
|
33 | |||
|
DESCRIPTION
OF COMMON STOCK
|
34 | |||
|
DESCRIPTION
OF WARRANTS
|
37 | |||
|
PLAN
OF DISTRIBUTION
|
39 | |||
|
EXPERTS
|
44 | |||
|
LEGAL
MATTERS
|
44 | |||
|
WHERE
YOU CAN FIND MORE INFORMATION
|
44 | |||
|
INFORMATION
INCORPORATED BY REFERENCE
|
45 | |||
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.
-
2 -
ABOUT
THIS PROSPECTUS
This
prospectus is part of a registration statement that we filed with the Securities
and Exchange Commission (the “SEC”) utilizing a “shelf” registration process or
continuous offering process, which allows us to offer and sell any combination
of the securities described in this prospectus in one or more offerings. Using
this prospectus, we may offer up to a total dollar amount of $150,000,000 of
these securities.
This
prospectus provides you with a general description of the securities we may
offer. Each time we sell securities pursuant to this registration statement and
the prospectus contained herein, we will provide a prospectus supplement that
will contain specific information about the terms of that offering. That
prospectus supplement may include additional risk factors about us and the terms
of that particular offering. Prospectus supplements may also add to, update or
change the information contained in this prospectus. To the extent that any
statement that we make in a prospectus supplement is inconsistent with
statements made in this prospectus, the statements made in this prospectus will
be deemed modified or superseded by those made in such prospectus supplement. In
addition, as we describe in the section entitled “Where You Can Find More
Information,” we have filed and plan to continue to file other documents with
the SEC that contain information about us and the business conducted by us and
our subsidiaries. Before you decide whether to invest in any of these
securities, you should read this prospectus, the prospectus supplement that
further describes the offering of these securities and the information we file
with the SEC.
In
this prospectus and any prospectus supplement, unless otherwise indicated, the
terms “Discovery”, “the Company”, “we”, “us” and “our” refer and relate to
Discovery Laboratories, Inc., and its consolidated subsidiaries.
ABOUT
DISCOVERY
Discovery
Laboratories, Inc. (referred to as “we,” “us,” or the “Company”) is a
biotechnology company developing surfactant therapies to treat respiratory
disorders and diseases for which there frequently are few or no approved
therapies. Our novel KL4
proprietary technology produces a synthetic, peptide-containing surfactant
(KL4
surfactant) that is structurally similar to pulmonary surfactant, a substance
produced naturally in the lung and essential for survival and normal respiratory
function. In addition, our proprietary capillary aerosol-generating
technology (capillary aerosolization technology) produces a dense aerosol with a
defined particle size, to potentially deliver our aerosolized KL4
surfactant to the lung. As many respiratory disorders are associated
with surfactant deficiency or surfactant degradation, we believe that our
proprietary technology platform makes it possible, for the first time, to
develop a significant pipeline of surfactant products targeted to treat a wide
range of previously unaddressed respiratory problems.
We
are developing our lead products, Surfaxin®(lucinactant),
Surfaxin LS™ and Aerosurf®,
to address the most significant respiratory conditions affecting pediatric
populations. Our research and development efforts are currently
focused on the management of Respiratory Distress Syndrome (RDS) in premature
infants. We have filed a New Drug Application (NDA) for our first
product based on our novel KL4
surfactant technology, Surfaxin for the prevention of RDS in premature
infants, and received a Complete Response Letter from the U.S. Food and Drug
Administration (FDA) in April 2009. To potentially resolve the sole
remaining Chemistry, Manufacturing and Controls (CMC) issue regarding the fetal
rabbit Biological Activity Test (BAT, an important quality control release and
stability test) that must be addressed to gain Surfaxin approval, in May, we
completed optimization
and revalidation of the BAT, which successfully met all pre-specified acceptance
criteria. We are currently conducting a series of
prospectively-designed, side-by-side preclinical studies employing both the
newly-optimized and revalidated BAT and
the well-established preterm lamb model of RDS. We expect to be able
to assess study data, on a somewhat limited basis, as analysis of the
different batches is completed, beginning in the fourth quarter of 2010, and
potentially complete the preclinical program late in the fourth quarter
2010. We believe that we remain on target to submit a Complete
Response in the first quarter of 2011. We believe that the RDS market
represents a significant opportunity from both a medical and a business
perspective. We further believe that Surfaxin, Surfaxin LS and
Aerosurf, have the potential to greatly improve the management of RDS and,
collectively, represent the opportunity, over time, to significantly expand the
current RDS worldwide annual market.
-
3 -
In
addition to our lead products, we plan over time to develop our KL4
surfactant technology into a broad product pipeline that potentially will
address a variety of debilitating respiratory conditions for which there
currently are no or few approved therapies, in patient populations ranging from
premature infants to adults. We have recently completed enrollment in
and released preliminary top line results for a Phase 2 clinical trial of
Surfaxin to potentially address Acute Respiratory Failure
(ARF). Our KL4
surfactant is also the subject of an investigator-initiated Phase 2a clinical
trial assessing the safety, tolerability and short-term effectiveness (via
improvement in mucociliary clearance) of aerosolized KL4
surfactant in patients with Cystic Fibrosis (CF). We are conducting
research and preclinical development with our KL4
surfactant potentially to address Acute Lung Injury (ALI), and, potentially in
the future, other diseases associated with inflammation of the lung, such as
Asthma and Chronic Obstructive Pulmonary Disease (COPD). We have also
initiated exploratory preclinical studies to assess the feasibility of using our
KL4
surfactant in combination with small and large molecule therapeutics to
efficiently and effectively deliver therapies to the lung to treat a range of
pulmonary conditions and disease.
An
important priority is to secure strategic and financial resources to potentially
maximize the inherent value of our KL4
surfactant technology. We prefer to accomplish our objectives through
strategic alliances, including potential business alliances, commercial and
development partnerships. With respect to our lead products, we
continue to engage in discussions with potential strategic and/or financial
partners. In addition, our plans include potentially taking our early
stage exploratory programs through a Phase 2 proof-of-concept phase and, if
successful, thereafter determining whether to seek strategic alliances or
collaboration arrangements or to utilize other financial alternatives to fund
their further development. To secure required capital, we are also
considering other alternatives, including additional financings and other
similar opportunities. Although securing strategic partners and
capital to support our research and development activities is a key priority,
there can be no assurance that any strategic alliance will be successfully
identified or other financing alternatives will be successfully
concluded. Until such time as we secure the necessary capital, we
plan to continue conserving our financial resources, predominantly by limiting
investments in our pipeline programs.
We
have focused our current resources on our lead products, primarily to address
the requirements to gain the potential approval of Surfaxin for the prevention
of RDS in premature infants in the United States. Until such time as
we secure sufficient strategic and financial resources to support the continuing
development of our KL4
surfactant technology and support our operations, we will continue to conserve
our resources, predominantly by curtailing and pacing investments in our
pipeline programs.
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.
We
maintain our principal offices and research at 2600 Kelly Road, Suite 100,
Warrington, Pennsylvania. Our telephone number is 215-488-9300. Our website
address is www.discoverylabs.com.
Information contained in our web site is not a part of this prospectus. Our
common stock is listed on The NASDAQ Capital Market, where our symbol is
DSCO.
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. Even if we successfully develop and gain regulatory approval
for our products, we still may not generate sufficient or sustainable revenues
or we may not become profitable.
-
4 -
To
date, we have generated revenues primarily from investments, research grants and
collaboration 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 we can commercialize them. In addition, after making significant
investments, the development, pre-clinical or clinical studies may show that our
products are not effective or safe for one or more of their intended uses.
We may fail in the development and commercialization of our
products.
As
of December 31, 2009, we have an accumulated deficit of approximately $357.6
million and we expect to continue to incur significant increasing operating
losses over the next several years. As a result of our financial position
as of December 31, 2009, the audit opinion we received from our independent
auditors, which is included in our financial statements in our annual report on
Form 10-K for the year ended December 31, 2009, contained a notation related to
our ability to continue as a going concern, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of
business. Our ability to continue as a going concern is dependent on our
ability to raise additional capital, to fund our research and development and
commercial programs and meet our obligations on a timely basis. If we are
unable to successfully raise sufficient additional capital, through strategic
alliances and other financing alternatives, we will likely not have sufficient
cash flow and liquidity to fund our business operations, forcing us to curtail
our activities and, ultimately, potentially cease operations. Even if we
are able to raise additional capital, such financings may only be available on
unattractive terms, or could result in significant dilution of stockholders’
interests and, in such event, the market price of our common stock may
decline.
In
addition, we may face significant challenges if conditions in the global
financial markets do not significantly improve, including an inability to access
the capital markets at a time when we would like or require, and an increased
cost of capital. Except for our Committed Equity Financing Facilities
(CEFFs) (which are subject to certain limitations), we currently do not have
arrangements to obtain additional financing. Any such financing could be
difficult to obtain or only available on unattractive terms and could result in
significant dilution of stockholders’ interests. In any such event, the
market price of our common stock may decline. In addition, failure to
secure any necessary financing in a timely manner and on favorable terms could
have a material adverse effect on our business plan, financial performance and
stock price and could delay new product development and clinical trial
plans.
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
test, make and sell our products under development, including Surfaxin, we must
receive regulatory approvals for each product. The FDA and foreign
regulators, such as the EMEA, extensively and rigorously regulate the testing,
manufacture, distribution, advertising, pricing and marketing of drug
products. This approval process includes (i) preclinical studies and
clinical trials of each drug product candidate and active pharmaceutical
ingredient to establish its safety and effectiveness, and (ii) confirmation by
the FDA and foreign regulators that we maintain good laboratory and
manufacturing practices during testing and manufacturing. Even if
favorable data are generated by clinical trials, the FDA or foreign regulator
may not accept or approve an NDA or MAA filed for a drug product on a timely
basis or at all.
In
particular, we filed an NDA with the FDA for Surfaxin for the prevention of RDS
in premature infants. On April 17, 2009, we received a Complete Response
Letter for this NDA. We met with the FDA in June 2009 and September 2009
to discuss proposals for resolving the sole remaining Chemistry, Manufacturing,
Control (CMC) issue regarding our fetal rabbit Biological Activity
Test (BAT, an important quality and release test for Surfaxin). We have
continued to have communications with the FDA to develop a program to resolve
the remaining issue identified in the April 2009 Complete Response
Letter. In May, we completed the initial phase of a comprehensive
preclinical program in which we optimized and revalidated the BAT, which
successfully met all pre-specified acceptance criteria. We are
currently executing the second phase of a comprehensive preclinical program,
consisting of a series of prospectively-designed, side-by-side preclinical
studies employing our optimized and revalidated BAT and the well-established
preterm lamb model of RDS. The FDA indicated that, to gain approval of
Surfaxin, data generated from the preterm lamb model and BAT studies must
demonstrate the same relative changes in respiratory compliance between both
models over time. We expect to be able to assess study data, on a somewhat
limited basis, as analysis of the different batches is completed, beginning in
the fourth quarter of 2010, and potentially complete the preclinical program
late in the fourth quarter 2010. We believe that we remain on target
to submit a Complete Response in the first quarter of 2011. Even if
the FDA is satisfied with the results of our efforts to optimize and revalidate
the BAT, the FDA may not be satisfied with the results of our side-by-side
studies or, may interpret the data in a different manner such that, ultimately,
the FDA may not approve Surfaxin for the prevention of RDS in premature
infants. Any failure to secure FDA approval or further delay associated
with the FDA’s review process with respect to Surfaxin could potentially delay
or prevent the approval of our other products and would have a material adverse
effect on our business.
-
5 -
Even
assuming that we gain regulatory approval to market our drugs, if the FDA and
foreign regulators later withdraw their approval or otherwise restrict
marketing, our business would be materially harmed.
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 will not be able to market our products. 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 previously unidentified 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 withdrawal of our regulatory approval or significant
restriction on our ability to market our products after approval would have a
material adverse effect on our business.
The
April 2009 Complete Response Letter and the resulting delay in our gaining
approval of Surfaxin have caused us to make fundamental changes in our business
strategy, which now focuses on securing strategic alliances, and take additional
steps to conserve our financial resources, which may subject us to unanticipated
risks and uncertainties.
Following
receipt of the April 2009 Complete Response Letter from the FDA, to conserve our
cash resources, we implemented cost containment measures and reduced our
workforce.
Because
of the delay in our gaining approval of Surfaxin, we also made fundamental
changes in our business strategy. To secure capital and develop and, if
approved, commercialize our KL4
surfactant pipeline programs and products, we are now seeking to enter into
strategic alliances, development agreements or other collaboration arrangements
in all markets, including the United States, and are reviewing various other
financial alternatives that would provide infusions of capital and other
resources needed to advance our KL4
respiratory pipeline programs and meet our capital requirements and continue our
operations. In April 2010, we restructured our loan with PharmaBio
Development Inc. (PharmaBio), a former investment subsidiary of Quintiles
Transnational Corp. (Quintiles), and, as a result, we paid approximately $6.6
million of the loan and extended the maturity of the remaining $4 million, $2
million of which is now due and payable on July 31, 2010 and the balance on
September 30, 2010. As part of the restructuring, PharmaBio invested
$2 million to purchase approximately 4.1 million shares of our common stock and
also agreed to negotiate in good faith to potentially enter into a strategic
arrangement under which PharmaBio would provide funding for a research
collaboration between Quintiles and us relating to the possible research and
development, and commercialization of two of our drug product candidates,
Surfaxin LS and Aerosurf, for the prevention and treatment of RDS in premature
infants. However, neither party is obligated to enter into any such
arrangement. Although we continue to consider potential
opportunities, there can be no assurance that any strategic alliance or other
financing alternatives will be successfully concluded.
Assuming
that we are able to identify strategic partners and secure
such strategic alliances, our ability to execute our current operating plan will
be dependent on numerous factors, including, the performance of third-party
strategic partners and collaborators with whom we may contract. Under
these arrangements, our partners may control key decisions relating to the
development, and assuming approval, commercialization, of our products.
The rights of our partners would limit our flexibility in considering
development strategies and in the alternatives for the commercialization of our
products. In addition, if we breach or terminate our strategic alliance
agreements or if our strategic partners otherwise fail to conduct their
activities in a timely manner, or if there is a dispute about our respective
obligations, we may need to seek other partners or we may have to develop our
own internal sales and marketing capabilities to commercialize our products in
the United States. If we fail to successfully develop these relationships,
or if we or our partners fail to successfully develop or commercialize any of
our products, it may delay or prevent us from developing or commercializing our
products in a competitive and timely manner and would have a material adverse
effect on the commercialization of our products.
-
6 -
For
example, our collaboration arrangement with Esteve for Surfaxin and certain
other of our drug 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. In that event, we may need to seek other partners and
collaboration arrangement, or we may have to develop our own internal
capabilities to market the covered products in the Esteve territory without a
collaboration arrangement.
As
we continue to manage our cash resources and work towards securing potential
strategic alliances, we have also reassessed the level of investment and the
pace of our research and development programs, including for Aerosurf, BPD, ARF
and new formulations of our KL4
surfactant, including Surfaxin LS. Reductions in investment will cause us
to experience delays in the progress of some of our programs. Also, as we
reassess our regulatory position and financial resources, at any time
we may implement additional and potentially significant changes to our
development plans and our operations as we seek to strengthen our financial and
operational position. Such changes, if adopted, could prove to be
disruptive and detrimental to our development programs. Moreover,
consideration and planning of such strategic changes diverts management’s
attention and other resources from day-to-day operations, which may subject us
to further risks and uncertainties.
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, drug substances and materials suppliers and third-party contract
manufacturers, will be able to:
|
·
|
complete
our pre-clinical and clinical trials of our KL4 surfactant
product candidates with scientific results that are sufficient to support
further development and regulatory approval;
|
|
|
·
|
receive
the necessary regulatory approvals;
|
|
·
|
obtain
adequate supplies of surfactant active drug substances, manufactured to
our specifications and on commercially reasonable
terms;
|
|
|
·
|
perform
under agreements to supply drug substances, medical device components and
related services necessary to manufacture our KL4 surfactant
product candidates, including Surfaxin, Surfaxin LS and
Aerosurf;
|
|
·
|
resolve
to the FDA’s satisfaction the matters identified in the April 2009
Complete Response Letter for Surfaxin for the prevention of RDS in
premature infants;
|
|
|
·
|
provide
for sufficient manufacturing capabilities, at our manufacturing operations
in Totowa and with third-party contract manufacturers, to produce
sufficient drug product, including Surfaxin, Surfaxin LS and capillary
aerosolization systems to meet our pre-clinical and clinical development
requirements;
|
|
|
·
|
successfully
implement a strategy for the development and manufacture of capillary
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 impact 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;
|
|
|
·
|
long
treatment time required to demonstrate
effectiveness;
|
|
·
|
lack
of sufficient clinical supplies and material;
|
|
|
·
|
adverse
medical events or side effects in treated
patients;
|
|
·
|
lack
of compatibility with complementary technologies;
|
|
|
·
|
failure
of a drug product candidate to demonstrate effectiveness;
and
|
|
·
|
lack
of sufficient funds.
|
-
7 -
If
we do not successfully complete clinical trials, we will not receive regulatory
approval to market our KL4 surfactant 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 likely reduce the market value of our
common stock.
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, even after obtaining promising results in earlier
trials or in preliminary findings for such clinical trials, we may suffer
significant setbacks in late-stage 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:
|
·
|
the
number of clinical sites;
|
|
|
·
|
the
size of the patient population;
|
|
·
|
the
proximity of patients to the clinical sites;
|
|
|
·
|
the
eligibility and enrollment criteria for the
study;
|
|
·
|
the
willingness of patients or their parents or guardians to participate in
the clinical trial;
|
|
|
·
|
the
existence of competing clinical
trials;
|
|
·
|
the
existence of alternative available products; and
|
|
|
·
|
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, such as a decrease in the oxygen level of the blood upon administration,
or currently unknown to us. 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 have recently completed and released preliminary top
line results for a Phase 2 clinical trial to evaluate the use of Surfaxin in
children up to two years of age suffering from Acute Respiratory Failure and our
aerosolized KL4
surfactant is the subject of an investigator-initiated Phase 2a trial assessing
the safety, tolerability and short-term effectiveness of aerosolized
KL4
surfactant in patients with CF. We are also planning to initiate clinical
studies in support of certain of our other products in our KL4 surfactant
technology pipeline. 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 the drug substances used to make our
products, this could potentially cause us to delay development or clinical
programs or, following approval, product launch, or cause us to experience
shortages of products inventories.
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:
-
8 -
|
·
|
the
need to make necessary modifications to qualify and validate a
facility;
|
|
|
·
|
difficulties
with production and yields, including manufacturing and completing all
required release testing on a timely basis to meet
demand;
|
|
·
|
availability
of raw materials and supplies;
|
|
|
·
|
quality
control and assurance;
|
|
·
|
casualty
damage to a facility; and
|
|
|
·
|
shortages
of qualified personnel.
|
Such
a failure could result in product production and shipment delays or an inability
to obtain materials or drug substance supplies.
Manufacturing
or quality control problems have in the past occurred and may again occur at our
Totowa, New Jersey facility, or may occur at the facilities of a contract
manufacturer of our drug substances and materials 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 similar 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.
We
manufacture our own drug products at our facility in Totowa, New Jersey.
We currently do not have a back-up facility. Any interruption in
manufacturing operations at this location could result in shortage of drug
supply for planned preclinical experiments and 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 do not have fully-redundant systems and
equipment to respond promptly in the event of a significant loss at our
manufacturing operations. We may under certain conditions be unable to
produce Surfaxin and our other KL4 surfactant
product candidates at the required volumes or to appropriate standards, if at
all. If we are unable to successfully develop and maintain our
manufacturing capabilities and at all times comply with cGMP, it will adversely
affect our clinical development activities and, potentially, the sales of our
products, if approved.
If
we fail to identify or maintain relationships with our manufacturers,
assemblers and integrator of our capillary aerosolization systems or
subcomponents, the timeline of our plans for the development and, if approved,
commercialization of Aerosurf could suffer.
In
connection with the development of the drug-device combination aerosol
formulation of our KL4 surfactant
technology, including Aerosurf, we currently plan to rely on third-party
contract manufacturers to manufacture and assemble the subcomponents of our
capillary aerosolization technology and to assemble and integrate the component
parts to support our preclinical experiments, planned clinical studies and
potential commercialization of Aerosurf. Certain of these components must
be manufactured in an environmentally-controlled area and, when assembled, the
critical drug 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 specification.
-
9 -
We
have identified component manufacturers and an integrator to manufacture and
integrate our initial prototype capillary aerosolization system that we plan to
use in Phase 2 clinical trials. However, as with many device development
initiatives, there is a risk that these manufacturers and integrator may not be
able to manufacture and integrate the subcomponents of our capillary
aerosolization systems to our specified standards. In addition, 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 capillary 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. If we do not
successfully identify and enter into contractual agreements with, manufacturers,
assemblers and integrators that have the required expertise, it will adversely
affect our timeline for the development and, if approved, commercialization of
Aerosurf.
If
the parties we depend on for supplying our active drug substances, materials and
excipients as well as 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 excipients, and
third parties for certain manufacturing-related services to manufacture drug
product that meets appropriate content, quality and stability standards
for use in clinical trials and, if approved, for commercial
distribution. Our ability to manufacture depends upon receiving adequate
supplies and related services, which may be difficult or uneconomical to
procure. The manufacturing process for Aerosurf, a combination drug-device
product, includes the integration of a number of component parts, many of which
are comprised of a large number of subcomponent parts that we expect will be
produced by potentially a large number of manufacturers. We and our
suppliers may not be able to (i) produce our drug substances, or
manufacture materials and excipients or our drug product, or capillary
aerosolization systems subcomponent parts or integrated devices, to appropriate
standards for use in clinical studies, (ii) comply with manufacturing
specifications under any definitive manufacturing, supply or services agreements
with us, or (iii) maintain relationships with our suppliers and service
providers for a sufficient time to successfully produce and market our product
candidates.
In
some cases, we are dependent upon a single supplier to provide all of our
requirements for one or more of our drug substances, materials and excipients or
one or more of our drug product device subcomponents, components and
subassemblies. If we do not maintain manufacturing and service
relationships that are important to us and are not able to identify a
replacement supplier or vendor or develop our own manufacturing
capabilities, our ability to obtain regulatory approval for our products could
be impaired or delayed and our costs could substantially increase,. 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.
Under
our restructured license agreement with PMUSA/PMPSA, we now have rights to
develop the capillary aerosolization technology, which will require us to build
internal development capabilities or enter into future collaborations or other
arrangements to gain the engineering expertise required to support our
development activities.
In
March 2008, we restructured a strategic alliance with Philip Morris USA, Inc.
(PMUSA) d/b/a/ Chrysalis and assumed full responsibility for development of the
capillary aerosolization technology. We now license our capillary
aerosolization technology from PMUSA in the United States and certain U.S.
territories and from a former PMUSA affiliate, Philip Morris Products S.A.
(PMPSA) elsewhere in the world. We currently plan 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.
Our
development activities are subject to certain risks and uncertainties,
including, without limitation:
|
·
|
To
develop the capillary aerosolization technology, we will require access to
sophisticated engineering capabilities. To meet that requirement, we
have assembled our own internal medical device engineering expertise and
plan to work 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. If we are unable to
identify design engineers and medical device experts to support our
development efforts, including the initial prototype aerosolization system
and the next generation versions of the capillary aerosolization systems,
it would impair our ability to commercialize or develop our aerosolized
KL4 surfactant products.
|
-
10 -
|
·
|
To
advance the development of our capillary aerosolization technology, we
will require additional capital and expect to seek a strategic partner or
third-party collaborator to provide financial support and the necessary
medical device development expertise. There can be no assurance,
however, that we will successfully identify or be able to enter into
agreements with such potential partners or collaborators on terms and
conditions that are favorable to us. If we are unable to secure the
necessary medical device development expertise to support our development
program, this could impair our ability to commercialize or develop our
aerosolized KL4 surfactant.
|
The
realization of any of the foregoing risks would have a material adverse effect
on our business.
To
market, sell and distribute our products, we plan to enter into distribution
arrangements and marketing alliances, which could require us to give up rights
to our drug product candidates.
We
have limited experience in marketing or selling pharmaceutical products and have
a limited marketing and sales team. To market, sell and distribute our
products, we may rely on third-party distributors to distribute, or enter into
marketing alliances to sell, our products, both internationally and 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 drug product
candidates and could increase our costs of commercialization. Our
dependence on distribution arrangements and marketing alliances to commercialize
our drug product candidates will subject us to a number of risks,
including:
|
·
|
we
may be required to relinquish important rights to our products or drug
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
drug 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.
|
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 distributors and collaborators must also
market our products in compliance with federal, state and local laws related to
providing incentives and inducements. Violation of these laws can result
in substantial penalties.
We
intend to market and sell Surfaxin, if approved, through one or more strategic
partners or other collaborators. We currently have such an alliance with
Esteve for distribution of our KL4 surfactant
products in Andorra, Greece, Italy, Portugal and Spain. We have 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 drug product
candidates.
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 sufficient revenues to support
continued commercialization of these products. The degree of market acceptance
of our product candidates, if approved for commercial sale, will depend on a
number of factors, including:
-
11 -
|
·
|
the
perceived safety and efficacy of our products;
|
|
|
·
|
the
potential advantages over alternative
treatments;
|
|
·
|
the
prevalence and severity of any side effects;
|
|
|
·
|
the
relative convenience and ease of
administration;
|
|
·
|
cost
effectiveness;
|
|
|
·
|
the
willingness of the target patient population to try new products and of
physicians to prescribe our
products;
|
|
·
|
the
effectiveness of our marketing strategy and distribution support;
and
|
|
|
·
|
the
sufficiency of coverage or reimbursement by third
parties.
|
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 and the commercial requirements to meet
changing customer demand are 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 drug 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.
We will require
significant additional capital to continue our planned research and development
activities and continue to operate as a going concern. Moreover, such
additional financing could result in equity dilution.
Until
such time as we are able to commercialize any of our lead products, if
approved, and generate revenues, we will need substantial additional funding to
conduct our ongoing research and product development activities and continue to
operate as a going concern. Our operating plans require that we make
prudent investments in preclinical studies and our drug product and device
development programs, and focus our resources on being in a position to initiate
key clinical programs only after we have secured strategic and financial
alternatives needed to provide the necessary capital. We would prefer to
accomplish our objectives through strategic alliances. If we are unable to
raise substantial additional funds through strategic alliances or other
alternatives, including potentially, future debt and equity financings, we
may be forced to further limit many, if not all, of our programs, which could
have a material adverse impact on our business plan. In the meantime, as we
attempt to conserve our financial resources, we may experience additional delays
in certain of our development programs.
The
terms of our indebtedness may impair our ability to conduct our
business.
Our
capital requirements have been funded in part by the loan from PharmaBio, with
respect to which we completed a restructuring on April 28,
2010. Under the restructuring, we paid in cash $6.6 million of the
total outstanding ($10.6 million at the time of restructuring), representing
$4.5 million in outstanding principal and approximately $2.1 million in accrued
interest. Of the remaining $4 million principal amount under the
loan, $2 million will now be due and payable on July 30, 2010 and the balance of
$2 million will be due and payable on September 30, 2010. If we make
our payments on time, no further interest will accrue on the outstanding
principal amount. The PharmaBio loan is secured by substantially all
of our assets, including our proprietary technologies, and contains a number of
covenants and restrictions that, with certain exceptions, restrict 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. In connection with the restructuring we agreed to an
additional covenant to maintain (i) at least $10 million in cash and cash
equivalents until payment of the first $2 million installment is made on or
before July 30, 2010, and (ii) at least $8 million in cash and cash equivalents
until the payment of the second $2 million installment on or before September
30, 2010, after which the PharmaBio loan will be paid in full. In
order to comply with these cash covenants and to have sufficient working capital
to make payment of the remaining principal amount and continue operate our
business, we will likely need to secure sources of additional
capital. If we are unable to secure additional sources of capital, we
will be forced to further reduce our cash outflows and limit our investments in
our research and development programs. If we fail to comply with the
cash covenants required under the restructuring, 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.
-
12 -
Under
the restructuring, PharmaBio agreed to negotiate in good faith to potentially
enter into a strategic arrangement under which PharmaBio would provide funding
for a research collaboration between Quintiles and us relating to the possible
research and development, and commercialization of two of our drug product
candidates, Surfaxin LS and Aerosurf, for the prevention and treatment of RDS in
premature infants. However, neither party is obligated to enter into
any such arrangement and there can be no assurances that any such arrangement
will be completed or that we will be successful in securing the additional
capital required to continue our operations.
We
have financed certain acquisitions of personal property, machinery and equipment
through an equipment financing facility with GE Business Financial Services Inc.
and a loan from the Commonwealth of Pennsylvania, Department of Community and
Economic Development, Machinery and Equipment Loan Fund (MELF). As of
December 31, 2009, an aggregate of $1.0 million was outstanding under
the facility and the loan. If we were unable to pay our creditors when due
amounts owed, they would have the right to proceed against the collateral
securing the debt.
If
we require additional funds to support our capital programs, there can be no
assurance that we will be able to secure a lender that will be willing to
provide us funding or that we will be able to secure additional funding through
the MELF or other program of the Commonwealth. 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 become unavailable to us if we do not
comply with their conditions.
If
we are unable to meet the conditions provided under the CEFFs, we will not be
able to issue any portion of the shares potentially available for issuance under
the CEFFs and therefore may not be able to use the CEFFs to fund our activities,
and the CEFFs could expire without being fully utilized. Moreover,
Kingsbridge Capital Limited, the CEFF provider, 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 the 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;
|
-
13 -
|
·
|
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 in our
Annual Report on Form 10-K for the year ended December 31, 2009 or our
other public filings.
|
Our
common stock is listed for quotation on The NASDAQ Capital Market. During
the twelve month period ended December 31, 2009, the price of our common stock
ranged from $0.33 to $2.40. We
expect the price of our common stock to remain volatile. The average daily
trading volume in our common stock varies significantly. For the twelve
month period ended December 31, 2009, the average daily trading volume in our
common stock was approximately 3,586,958 shares and the average number of
transactions per day was approximately 4,621. The instability observed in
our daily volume and number of transactions per day may affect the ability of
our stockholders to sell their shares in the public market at prevailing
prices.
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. Even if securities class
actions that we may face in the future are ultimately determined to be meritless
or unsuccessful, they involve substantial costs and a diversion of management
attention and resources, which could negatively impact our
business.
If
we are unable to regain compliance with the Minimum Bid Price Requirement of The
NASDAQ Capital Market prior to November 29, 2010, our stock price may
decline and our common stock may be subject to delisting from Nasdaq. If
our stock were no longer listed on Nasdaq, the liquidity of our securities would
be impaired.
Effective
June 4, 2010, our common stock listing was transferred from The NASDAQ Global
Market®
to The NASDAQ Capital Market®. All
companies listed on The NASDAQ Capital Market must meet certain financial
requirements and adhere to Nasdaq’s corporate governance standards.
As
previously disclosed, on December 2, 2009, we had received a delisting
notification from The NASDAQ Global Market indicating that our common stock had
failed to close at or above $1.00 per share for more than 30 consecutive trading
days and, as a result, we were not in compliance with Nasdaq Listing Rule
5450(a)(1), the minimum bid price rule. The delisting notification
also granted us 180 calendar days, or until June 1, 2010, to regain compliance
with the minimum bid price rule.
As our common stock did not
close at or above $1.00 per share for 10 consecutive trading days within the
grace period provided, we filed an application to transfer the listing of our
common stock from The NASDAQ Global Market to The NASDAQ Capital
Market. In connection with the transfer to The NASDAQ Capital Market,
Nasdaq on June 2, 2010 notified us that it has granted us an additional 180
calendar days, or until November 29, 2010, to regain compliance with the minimum
bid price rule, which would require at a minimum that our common stock close at
or above $1.00 for at least 10 consecutive trading days prior to November 29,
2010.
If
compliance is not regained, Nasdaq will notify us of its determination to delist
our common stock, which decision may be appealed to a Nasdaq Listing
Qualifications Panel. There can be no assurances that such an appeal
would be successful. If our common stock were no longer listed on The
NASDAQ Capital Market, investors might only be able to trade in the
over-the-counter market in the Pink Sheets®
(a quotation medium operated by Pink OTC Markets Inc.) or on the OTC Bulletin
Board®
of the Financial Industry Regulatory Authority, Inc. (FINRA). 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.
-
14 -
Future
sales and issuances of our common stock or rights to purchase our common stock,
including pursuant to our CEFFs, 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
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. The
issuance of shares of our common stock under the CEFFs has, and the issuance of
shares upon exercise of the related 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 (from 4.375% to 17.5%, depending
upon the market price and which CEFF is used) to the daily volume weighted
average price of our common stock on each trading day, which will further dilute
the interests of other stockholders. Furthermore, to the extent that
Kingsbridge sells to third parties the shares of our common stock that we sell
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.
We
filed the universal shelf registration statement to which this prospectus
relates with the SEC on Form S-3 (File No. 333-151654) on June 13, 2008 (which
was declared effective shortly thereafter) for the proposed offering from time
to time of up to $150 million of our securities, including common stock,
preferred stock, varying forms of debt and warrant securities, or any
combination of the foregoing. We have issued securities pursuant to this
shelf registration statement on three prior occasions, including in February and
April 2010, and plan to do so again in the future in response to market
conditions or other circumstances on terms and conditions that will be
determined at such time.
As
of May 31, 2010, we had 158,064,779 shares of common stock issued and
outstanding. In addition, as of May 31, 2010, approximately (i) 27.8
million shares of our common stock were reserved for potential issuance upon the
exercise of outstanding warrants, (ii) 17.6 million shares of our common stock
were reserved for issuance pursuant to our equity incentive plans, and
(iii)367,928 shares of our common stock were 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.
-
15 -
Directors,
executive officers and beneficial owners of more than five percent of our
capital stock 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, 2010, our directors, executive officers and beneficial owners of
more than five percent (5%) of our issued and outstanding common stock,
beneficially owned, in the aggregate, approximately fifteen percent
(15%) of the issued and outstanding shares of our 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 KL4 surfactant
technology and capillary aerosolization technology.
Our
technology platform is based on the scientific rationale of using
our KL4 surfactant
technology and capillary aerosolization technology to treat
life-threatening respiratory disorders and to serve as the foundation for the
development of novel respiratory therapies and products. Our business is
dependent upon the successful development and approval of our drug product
candidates and our drug-device combination products based on these
technologies. Any material problems with our technology platforms 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. 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
seek patent protection for our drug product 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 successfully
obtain patents, defend our patents and otherwise prevent others from infringing
our proprietary rights, including our trade secrets.
The
patent position of companies 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 secure rights to products or processes that appear to be
patentable.
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.
-
16 -
The
patents that we hold also have a limited life. We have licensed a series
of patents for our KL4 surfactant
technology from Johnson & Johnson and its wholly-owned subsidiary Ortho
Pharmaceutical Corporation (Ortho Pharmaceutical), which are important, both
individually and collectively, to our strategy of commercializing our KL4 surfactant
products. These patents, which include important KL4
composition of matter claims and relevant European patents, began to expire in
November 2009, and will expire on various dates ending in 2017 or, in
some cases, possibly later. Of the patents that have expired, we have
filed to extend our most important patent one year, with further extensions
possible into 2014. For our aerosolized KL4 surfactant,
we hold exclusive licenses in the United States and outside the United States to
PMUSA’s capillary aerosolization technology for use with pulmonary
surfactants for all respiratory diseases. Our exclusive license in the
United States also extends to other (non-surfactant) drugs to treat a wide range
of pediatric and adult respiratory indications in hospitals and other health
care institutions. The capillary aerosolization technology patents expire
on various dates beginning in May 2016 and ending in 2023, 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,
“– 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. In
certain cases, 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, PMUSA 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 for a number of years after the first commercial sale of the relevant
product.
In
addition, we are responsible for the cost of filing and prosecuting certain
patent applications and maintaining certain issued patents licensed to us.
If we do not meet our obligations under our license agreements in a timely
manner, we could lose the rights to our proprietary technology.
Finally,
we may be required to obtain licenses to patents or other proprietary rights of
third parties in connection with the development and use of our products and
technologies. Licenses required under any such patents or proprietary
rights might not be made available on terms acceptable to us, if at
all.
We
rely on confidentiality agreements that could be breached and may be difficult
to enforce.
Although
we take what we believe to be 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. We generally
seek to enter into these types of agreements with consultants, advisors and
research collaborators; however, 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. Such disputes often involve significant expense and yield
unpredictable results. 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.
-
17 -
Despite
the protective measures we employ, we still face the risk that:
|
·
|
agreements
may be breached;
|
|
|
·
|
agreements
may not provide adequate remedies for the applicable type of
breach;
|
|
·
|
our
trade secrets or proprietary know-how may otherwise become
known;
|
|
|
·
|
our
competitors may independently develop similar technology;
or
|
|
·
|
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 members of our executive management team and our
directors, as well as our scientific advisory board members, consultants and
collaborating scientists. Many of these people have been involved with us
for many years, have played integral roles in our progress and we believe that
they 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.
In
August 2009, Robert J. Capetola, Ph.D., resigned his position with us as
President and Chief Executive Officer and a member of our Board of
Directors. Our Board elected W. Thomas Amick, our Chairman of the Board,
to act as Chief Executive Officer on an interim basis. Mr. Amick, who is
otherwise employed by another biotech company as its Chief Executive
Officer, is able to devote only a portion of his time to his
duties as our Chief Executive Officer. Until such time as
we employ a full-time Chief Executive Officer, our dependency on the
remaining members of our management team to exhibit strong leadership skills and
effectively manage our operations is increased. While we expect that, once we
have secured sufficient strategic and financial resources to support the
continuing development of our KL4
surfactant technology and support our operations, we will seek to attract
candidates to lead our management team, there can be no assurances that we will
be successful in that endeavor.
As
of December 31, 2009, we had employment agreements with 12 officers that expired
in May 2010. These agreements provided for automatic one-year renewal at
the end of each term, unless otherwise terminated by either party. In
February 2010, we provided notice of non-renewal with respect to all but the
agreements that we maintain with the following officers: Chief Financial
Officer, General Counsel, and the senior officers in charge of Manufacturing,
Corporate Development, and Human Resources. The employment of the officers whose
agreements was not renewed were not terminated and they remain as at-will
employees and, in lieu of the benefits previously provided under their
employment agreements, will be entitled to certain severance benefits. The loss
of services from these executives could significantly adversely affect our
ability to develop and market our products and obtain necessary regulatory
approvals.
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 lawsuits brought by their former employers. While
we attempt to provide competitive compensation packages to attract and retain
key personnel, many of our competitors have greater resources and more
experience than we, 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:
-
18 -
|
·
|
developing
products;
|
|
|
·
|
undertaking
preclinical testing and human clinical
trials;
|
|
·
|
obtaining
FDA and other regulatory approvals or products; and
|
|
|
·
|
manufacturing
and marketing products.
|
Accordingly,
our competitors may succeed in obtaining patent protection, receiving FDA or
comparable foreign approval or commercializing products before us. If we
commence commercial product sales, we will compete against companies with
greater marketing and manufacturing capabilities that 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
drug 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 frequently aggressively seek 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, if approved, 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 annual 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
locally-authorized 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
drug product candidates; however, such insurance is expensive and may not be
available when we need it.
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:
|
·
|
uninsured
expenses related to defense or payment of substantial monetary awards to
claimants;
|
|
|
·
|
a
decrease in demand for our drug product
candidates;
|
|
·
|
damage
to our reputation; and
|
|
|
·
|
an
inability to complete clinical trial programs or to commercialize our drug
product candidates, if approved.
|
Moreover,
the existence of a product liability claim could affect the market price of our
common stock.
-
19 -
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 increasingly challenge the
price and examine 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 our drugs, 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 drug products, 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.
Provisions
of our Restated Certificate of Incorporation, as amended, our Amended and
Restated By-Laws, our 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 Amended and Restated Certificate of Incorporation, as amended, our
Amended and Restated By-Laws, 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.
-
20 -
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 may be subject to claims asserting violations of securities
laws. Even if such actions are found to be without merit, the potential
impact of such actions, which generally seek unquantified damages and attorneys’
fees and expenses, is uncertain. 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. 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 in
certain cases 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 applied for and issued, the risk
increases that our patents or patent applications for our KL4
surfactant 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 to invalidate our patents, obtain substantial
damages or enjoin us from conducting research and development
activities.
FORWARD-LOOKING
STATEMENTS
This
prospectus and the documents incorporated by reference herein and therein,
including in “Risk Factors,” contain “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The forward-looking statements are only
predictions and provide our current expectations or forecasts of future events
and financial performance and may be identified by the use of forward-looking
terminology, including the terms “believes,” “estimates,” “anticipates,”
“expects,” “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, including the period of time for which our existing
resources will enable us to fund our operations; plans regarding our efforts to
gain U.S. regulatory approval for our lead product, Surfaxin®
(lucinactant) for the prevention of Respiratory Distress Syndrome in premature
infants; the possibility, timing and outcome of submitting regulatory filings
for our products under development; our research and development programs for
our KL4
surfactant technology and our capillary aerosolization technology platform,
including planning for and timing of any clinical trials and potential
development milestones; the development of financial, clinical,
manufacturing and distribution plans related to the potential commercialization
of our drug products, if approved; and plans regarding potential strategic
alliances and other collaborative arrangements with pharmaceutical companies and
others to develop, manufacture and market our products.
We
intend that all forward-looking statements be subject to the safe-harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are subject to many risks and uncertainties that
could cause actual results to differ materially from any future results
expressed or implied by the forward-looking statements. We caution you therefore
against relying on any of these forward-looking statements. They are neither
statements of historical fact nor guarantees or assurances of future
performance. Examples of the risks and uncertainties include, but are not
limited to:
-
21 -
|
•
|
risks
related generally to our efforts to gain regulatory approval, in the
United States and elsewhere, for our drug product candidates, including
our lead products that we are developing to address Respiratory
Distress Syndrome (RDS) in premature infants: Surfaxin®
(lucinactant) for the prevention of RDS, Surfaxin LS™ (our lyophilized
KL4 surfactant) and
Aerosurf® (our
initial aerosolized KL4 surfactant);
|
|
•
|
the
risk that we and the U.S. Food and Drug Administration (FDA) or other
regulatory authorities will not be able to agree on matters raised during
the regulatory review process, or that we may be required to conduct
significant additional activities to potentially gain approval of our
product candidates, if ever;
|
|
•
|
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, 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-filing activities, required for approval of any drug or combination
drug-device products that we may develop, whether independently, with
strategic development partners or pursuant to collaboration
arrangements;
|
|
•
|
the
risk that the FDA will not be satisfied with the results of either our
efforts to optimize and revalidate the BAT or the side-by-side studies
that we are conducting as part of our comprehensive preclinical program to
address the open CMC issue, which is needed to gain regulatory approval
for Surfaxin and advance our KL4 surfactant
pipeline;
|
|
•
|
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 preclinical studies and other efforts, and
potentially multiple clinical trials, which may be subject to potentially
significant delays or regulatory holds, or which may fail, and which must
be conducted using sophisticated and extensive analytical methodologies,
including an acceptable biological activity test, if required, as well as
other quality control release and stability tests to satisfy the
requirements of the regulatory
authorities;
|
|
•
|
risks
relating to our ability to develop and manufacture drug products and
drug-device combination products based on our capillary aerosolization
technology for clinical studies and, if approved, for commercialization of
our products;
|
|
•
|
risks
relating to the transfer of our manufacturing technology to third-party
contract manufacturers and
assemblers;
|
|
•
|
the
risk that we, our contract manufacturers or any of our third-party
suppliers may encounter problems or delays in manufacturing or assembling
drug products, drug product substances, capillary aerosolization devices
and related components and other materials on a timely basis or in an
amount sufficient to support our development efforts and, if our products
are approved, commercialization;
|
|
•
|
the
risk that we may be unable to identify potential strategic partners or
collaborators with whom we can develop and, if approved, commercialize our
products in a timely manner, if at
all;
|
|
•
|
the
risk that we or our strategic partners or collaborators will not be able
to attract or maintain qualified
personnel;
|
|
•
|
the
risk that, if approved, market conditions, the competitive landscape or
otherwise may make it difficult to launch and profitably sell our
products;
|
-
22 -
|
•
|
the
risk that we may not be able to raise additional capital or enter into
strategic alliances or collaboration agreements (including strategic
alliances for development or commercialization of our drug products and
combination drug-device products);
|
|
•
|
risks
that the unfavorable credit environment will adversely affect our ability
to fund our activities, that our share price will fall below the price
level necessary for us to access capital under our new
Committed Equity Financing Facility (CEFF) (as of June 7, 2010, it is
below the level necessary to access our previous two CEFFs), that our
previous two CEFFs may expire before we are able to access the full dollar
amount potentially available thereunder, and that additional equity
financings could result in substantial equity
dilution;
|
|
•
|
the
risk that we will be unable to regain compliance with the minimum bid
price requirement of The NASDAQ Capital Market by November 29, 2010, or
maintain compliance with the other listing requirements of The NASDAQ
Capital Market, which could cause our stock to be delisted from Nasdaq and
cause our stock price to decline;
|
|
•
|
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;
|
|
•
|
the
risks that we may be unable to maintain and protect the patents and
licenses related to our products and that other companies may develop
competing therapies and/or
technologies;
|
|
•
|
the
risk that we may become involved in securities, product liability and
other litigation;
|
|
•
|
risks
related to reimbursement and health care reform that may adversely affect
us;
|
|
•
|
the
risk that the FDA may not approve Surfaxin®
or may subject the marketing of Surfaxin®
to onerous requirements that significantly impair marketing
activities;
|
|
•
|
the
risk that we may identify unforeseen problems that have not yet been
discovered or the FDA could in the future impose additional requirements
to gain approval of Surfaxin®;
and
|
|
•
|
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.
The
forward-looking statements contained in this prospectus or the documents
incorporated by reference herein speak only of their respective dates. Factors
or events that could cause our actual results to differ may emerge from time to
time and it is not possible for us to predict them all. Except to the extent
required by applicable laws, rules or regulations, we do not undertake to
publicly announce revisions to any of the forward-looking statements in this
prospectus or the documents incorporated by reference herein or therein, whether
as a result of new information, future events or otherwise.
-
23 -
USE
OF PROCEEDS
Except
as described in any prospectus supplement or post-effective amendment, we will
retain broad discretion over the use of the net proceeds from the sale of our
securities offered hereby and the net proceeds from the sales of securities
offered by this prospectus will be used to meet working capital requirements
for: (i) development of our SRT pipeline programs, including Surfaxin, life
cycle development of Surfaxin for other respiratory conditions prevalent in the
Neonatal Intensive Care Unit (NICU) and Pediatric Intensive Care Unit (PICU),
and Aerosurf for neonatal and pediatric conditions; (ii) efforts intended to
gain regulatory approval to market and sell, and preparing for the potential
commercial launch in the United States of, Surfaxin for the prevention of RDS in
premature infants; (iii) 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 (iv) seeking collaboration agreements and strategic partnerships
in the international and domestic markets for the development and potential
commercialization of our neonatal and pediatric pipeline for Surfaxin and
Aerosurf™ and for the development and potential commercialization of our SRT for
respiratory conditions and disorders affecting adult patients. We
expect, from time to time, to evaluate the acquisition of businesses, products
and technologies for which a portion of the net proceeds may be
used.
The
amounts and timing of the expenditures may vary significantly depending on
numerous factors, such as the progress of our research and development efforts,
technological advances and the competitive environment for Surfaxin and our
other SRT drug candidates and their intended uses. Pending the application of
the net proceeds, we intend to invest the proceeds in short-term,
interest-bearing instruments or other investment-grade securities.
RATIO
OF EARNINGS TO FIXED CHARGES
Our
earnings were insufficient to cover fixed charges in each of the years in the
five-year period ended December 31, 2009 and in the three-month period ended
March 31, 2010. Our fixed charges do not include any dividend requirements with
respect to preferred stock because, as of the date of this prospectus and for
the five preceding fiscal years, we have had no preferred stock
outstanding.
We
compute the ratio of earnings to fixed charges by dividing (i) earnings (loss),
which consists of net income from continuing operations before income taxes plus
fixed charges and amortization of capitalized interest less interest capitalized
during the period and adjusted for undistributed earnings in equity investments,
by (ii) fixed charges, which consist of interest expense, capitalized interest
and the interest portion of rental expense under operating leases estimated to
be representative of the interest factor.
|
Fiscal
Year Ended December 31,
|
Three Months
Ended
March 31,
|
|||||||||||||||||||||||
|
2005
|
2006
|
2007
|
2008
|
2009
|
2010
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Ratio
of earnings to fixed charges
(1)
|
||||||||||||||||||||||||
|
Coverage
deficiency
|
$ | (58,904 | ) | $ | (46,333 | ) | $ | (40,005 | ) | $ | (39,106 | ) | $ | (30,240 | ) | $ | (7,288 | ) | ||||||
|
(1)
|
Adjusted
earnings, as described above, were insufficient to cover fixed charges in
each period. We have not included a ratio of earnings to combined fixed
charges and preferred stock dividends because we do not have any preferred
stock outstanding.
|
-
24 -
DESCRIPTION
OF DEBT SECURITIES
The
following description, together with the additional information we include in
any applicable prospectus supplements, summarizes the material terms and
provisions of the debt securities that we may offer under this prospectus. While
the terms we have summarized below will apply generally to any future debt
securities we may offer under this prospectus, we will describe the particular
terms of any debt securities that we may offer in more detail in the applicable
prospectus supplement. The terms of any debt securities we offer under a
prospectus supplement may differ from the terms we describe below. However, no
prospectus supplement shall fundamentally change the terms that are set forth in
this prospectus or offer a security that is not registered and described in this
prospectus at the time of its effectiveness. As of March 31, 2010, we had $ 11.4
million in outstanding indebtedness including accrued interest. This amount does
not yet reflect the restructuring of our loan with PharmaBio on April 28,
2010, which is described in further detail under "Risk Factors — The terms
of our indebtedness may impair our ability to conduct our
business."
We
will issue the senior debt securities under the senior indenture that we will
enter into with the trustee named in the senior indenture. We will issue the
subordinated debt securities under the subordinated indenture that we will enter
into with the trustee named in the subordinated indenture. We have filed forms
of these documents as exhibits to the registration statement which includes this
prospectus. We use the term “indentures” in this prospectus to refer to both the
senior indenture and the subordinated indenture.
The
indentures will be qualified under the Trust Indenture Act of 1939. We use the
term “trustee” to refer to either the senior trustee or the subordinated
trustee, as applicable.
The
following summaries of material provisions of the senior debt securities, the
subordinated debt securities and the indentures are subject to, and qualified in
their entirety by reference to, all the provisions of the indenture applicable
to a particular series of debt securities. Except as we may otherwise indicate,
the terms of the senior indenture and the subordinated indenture are
identical.
General
Debt
securities may be issued in separate series without limitation as to aggregate
principal amount. We may specify a maximum aggregate principal amount for the
debt securities of any series.
We
are not limited as to the amount of debt securities we may issue under the
indentures. The prospectus supplement will set forth:
· whether
the debt securities will be senior or subordinated;
· the
offering price;
· the
title;
· any
limit on the aggregate principal amount;
· the
person who shall be entitled to receive interest, if other than the record
holder on the record date;
· the
date the principal will be payable;
· the
interest rate, if any, the date interest will accrue, the interest payment dates
and the regular record dates;
· the
place where payments may be made;
· any
mandatory or optional redemption provisions;
· if
applicable, the method for determining how the principal, premium, if any, or
interest will be calculated by reference to an index or
formula;
-
25 -
· if
other than U.S. currency, the currency or currency units in which principal,
premium, if any, or interest will be payable and whether we or the holder may
elect payment to be made in a different currency;
· the
portion of the principal amount that will be payable upon acceleration of stated
maturity, if other than the entire principal amount;
· if
the principal amount payable at stated maturity will not be determinable as of
any date prior to stated maturity, the amount which will be deemed to be the
principal amount;
· any
defeasance provisions if different from those described below under
“Satisfaction and Discharge; Defeasance;”
· any
conversion or exchange provisions;
· any
obligation to redeem or purchase the debt securities pursuant to a sinking
fund;
· whether
the debt securities will be issuable in the form of a global
security;
· any
subordination provisions, if different from those described below under
“Subordinated Debt Securities;”
· any
deletions of, or changes or additions to, the events of default or covenants;
and
· any
other specific terms of such debt securities.
Unless
otherwise specified in the prospectus supplement:
· the
debt securities will be registered debt securities; and
· registered
debt securities denominated in U.S. dollars will be issued in denominations of
$1,000 or an integral multiple of $1,000.
Debt
securities may be sold at a substantial discount below their stated principal
amount, bearing no interest or interest at a rate which at the time of issuance
is below market rates.
Exchange
and Transfer
Debt
securities may be transferred or exchanged at the office of the security
registrar or at the office of any transfer agent designated by us.
We
will not impose a service charge for any transfer or exchange, but we may
require holders to pay any tax or other governmental charges associated with any
transfer or exchange.
In
the event of any potential redemption of debt securities of any series, we will
not be required to:
· issue,
register the transfer of, or exchange, any debt security of that series during a
period beginning at the opening of business 15 days before the day of mailing of
a notice of redemption and ending at the close of business on the day of the
mailing; or
· register
the transfer of or exchange any debt security of that series selected for
redemption, in whole or in part, except the unredeemed portion being redeemed in
part.
We
may initially appoint the trustee as the security registrar. Any transfer agent,
in addition to the security registrar, initially designated by us will be named
in the prospectus supplement. We may designate additional transfer agents or
change transfer agents or change the office of the transfer agent. However, we
will be required to maintain a transfer agent in each place of payment for the
debt securities of each series.
-
26 -
Global
Securities
The
debt securities of any series may be represented, in whole or in part, by one or
more global securities. Each global security will:
· be
registered in the name of a depositary that we will identify in a prospectus
supplement;
· be
deposited with the depositary or nominee or custodian; and
· bear
any required legends.
No
global security may be exchanged in whole or in part for debt securities
registered in the name of any person other than the depositary or any nominee
unless:
· the
depositary has notified us that it is unwilling or unable to continue as
depositary or has ceased to be qualified to act as
depositary;
· an
event of default is continuing; or
· any
other circumstances described in a prospectus supplement.
As
long as the depositary, or its nominee, is the registered owner of a global
security, the depositary or nominee will be considered the sole owner and holder
of the debt securities represented by the global security for all purposes under
the indenture. Except in the above limited circumstances, owners of beneficial
interests in a global security:
· will
not be entitled to have the debt securities registered in their
names,
· will
not be entitled to physical delivery of certificated debt securities,
and
· will
not be considered to be holders of those debt securities under the
indentures.
Payments
on a global security will be made to the depositary or its nominee as the holder
of the global security. Some jurisdictions have laws that require that certain
purchasers of securities take physical delivery of such securities in definitive
form. These laws may impair the ability to transfer beneficial interests in a
global security.
Institutions
that have accounts with the depositary or its nominee are referred to as
“participants.” Ownership of beneficial interests in a global security will be
limited to participants and to persons that may hold beneficial interests
through participants. The depositary will credit, on its book-entry registration
and transfer system, the respective principal amounts of debt securities
represented by the global security to the accounts of its
participants.
Ownership
of beneficial interests in a global security will be shown on and effected
through records maintained by the depositary, with respect to participants’
interests, or any participant, with respect to interests of persons held by
participants on their behalf.
Payments,
transfers and exchanges relating to beneficial interests in a global security
will be subject to policies and procedures of the depositary.
The
depositary policies and procedures may change from time to time. Neither we nor
the trustee will have any responsibility or liability for the depositary’s or
any participant’s records with respect to beneficial interests in a global
security.
-
27 -
Payment
and Paying Agent
The
provisions of this paragraph will apply to debt securities unless otherwise
indicated in the prospectus supplement. Payment of interest on a debt security
on any interest payment date will be made to the person in whose name the debt
security is registered at the close of business on the regular record date.
Payment on debt securities of a particular series will be payable at the office
of a paying agent or paying agents designated by us. However, at our option, we
may pay interest by mailing a check to the record holder. The corporate trust
office will be designated as our sole paying agent.
We
may also name any other paying agents in the prospectus supplement. We may
designate additional paying agents, change paying agents or change the office of
any paying agent. However, we will be required to maintain a paying agent in
each place of payment for the debt securities of a particular
series.
All
moneys paid by us to a paying agent for payment on any debt security which
remain unclaimed at the end of two years after such payment was due will be
repaid to us. Thereafter, the holder may look only to us for such
payment.
Consolidation,
Merger and Sale of Assets
We
may not consolidate with or merge into any other person, in a transaction in
which we are not the surviving corporation, or convey, transfer or lease our
properties and assets substantially as an entirety to, any person,
unless:
· the
successor, if any, is a U.S. corporation, limited liability company,
partnership, trust or other entity;
· the
successor assumes our obligations on the debt securities and under the
indenture;
· immediately
after giving effect to the transaction, no default or event of default shall
have occurred and be continuing; and
· certain
other conditions are met.
If
the debt securities are convertible for our other securities or securities of
other entities, the person with whom we consolidate or merge or to whom we sell
all of our property must make provisions for the conversion of the debt
securities into securities which the holders of the debt securities would have
received if they had converted the debt securities before the consolidation,
merger or sale.
Events
of Default
Unless
we inform you otherwise in the prospectus supplement, the indenture will define
an event of default with respect to any series of debt securities as one or more
of the following events:
(1)
failure to pay principal of or any premium on any debt security of that series
when due and payable;
(2)
failure to pay any interest on any debt security of that series when it becomes
due and payable, and continuation of that failure for a period of 90 days
(unless the entire amount of such payment is deposited by us with the trustee or
paying agent prior to the expiration of the 90-day period);
(3)
failure to deposit any sinking fund payment, when and as due in respect of any
debt security of that series;
(4)
failure to perform or breach of any other covenant or warranty by us in the
indenture (other than a covenant or warranty that has been included in the
indenture solely for the benefit of a series of debt securities other than the
series), which failure continues uncured for a period of 90 days after we
receive the notice required in the indenture;
(5)
our bankruptcy, insolvency or reorganization; and
(6)
any other event of default with respect to debt securities of that series that
is described in the applicable prospectus supplement accompanying this
prospectus.
An
event of default of one series of debt securities is not necessarily an event of
default for any other series of debt securities.
-
28 -
If
an event of default, other than an event of default described in clause (5)
above, shall occur and be continuing, either the trustee or the holders of at
least 25% in aggregate principal amount of the outstanding securities of that
series may declare the principal amount of the debt securities of that series to
be due and payable immediately.
If
an event of default described in clause (5) above shall occur, the principal
amount of all the debt securities of that series will automatically become
immediately due and payable. Any payment by us on the subordinated debt
securities following any such acceleration will be subject to the subordination
provisions described below under “Subordinated Debt Securities.”
After
acceleration the holders of a majority in aggregate principal amount of the
outstanding securities of that series may, under certain circumstances, rescind
and annul such acceleration if all events of default, other than the non-payment
of accelerated principal, or other specified amount, have been cured or
waived.
Other
than the duty to act with the required care during an event of default, the
trustee will not be obligated to exercise any of its rights or powers at the
request of the holders unless the holders shall have offered to the trustee
reasonable indemnity. Generally, the holders of a majority in aggregate
principal amount of the outstanding debt securities of any series will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the trustee or exercising any trust or power conferred on
the trustee.
A
holder will not have any right to institute any proceeding under the indentures,
or for the appointment of a receiver or a trustee, or for any other remedy under
the indentures, unless:
(1)
the holder has previously given to the trustee written notice of a continuing
event of default with respect to the debt securities of that
series;
(2)
the holders of at least 25% in aggregate principal amount of the outstanding
debt securities of that series have made a written request and have offered
reasonable indemnity to the trustee to institute the proceeding;
and
(3)
the trustee has failed to institute the proceeding and has not received
direction inconsistent with the original request from the holders of a majority
in aggregate principal amount of the outstanding debt securities of that series
within 90 days after the original request.
Holders
may, however, sue to enforce the payment of principal, premium or interest on
any debt security on or after the due date or to enforce the right, if any, to
convert any debt security without following the procedures listed in (1) through
(3) above.
We
will furnish the trustee an annual statement by our officers as to whether or
not we are in default in the performance of the indenture and, if so, specifying
all known defaults.
Modification
and Waiver
We
and the trustee may make modifications and amendments to the indentures with the
consent of the holders of a majority in aggregate principal amount of the
outstanding securities of each series affected by the modification or
amendment.
However,
neither we nor the trustee may make any modification or amendment without the
consent of the holder of each outstanding security of that series affected by
the modification or amendment if such modification or amendment
would:
· change
the stated maturity of any debt security;
· reduce
the principal, premium, if any, or interest on any debt
security;
· reduce
the principal of an original issue discount security or any other debt security
payable on acceleration of maturity;
· reduce
the rate of interest on any debt security;
· change
the currency in which any debt security is payable;
-
29 -
· impair
the right to enforce any payment after the stated maturity or redemption
date;
· waive
any default or event of default in payment of the principal of, premium or
interest on any debt security;
· waive
a redemption payment or modify any of the redemption provisions of any debt
security;
· adversely
affect the right to convert any debt security in any material respect;
or
· change
the provisions in the indenture that relate to modifying or amending the
indenture.
Satisfaction
and Discharge; Defeasance
We
may be discharged from our obligations on the debt securities of any series that
have matured or will mature or be redeemed within one year if we deposit with
the trustee enough cash to pay all the principal, interest and any premium due
to the stated maturity date or redemption date of the debt
securities.
Each
indenture will contain a provision that permits us to elect:
· to
be discharged from all of our obligations, subject to limited exceptions, with
respect to any series of debt securities then outstanding;
and/or
· to
be released from our obligations under the following covenants and from the
consequences of an event of default resulting from a breach of these covenants:
(1) the subordination provisions under a subordinated indenture; and (2)
covenants as to payment of taxes and maintenance of corporate
existence.
To
make either of the above elections, we must deposit in trust with the trustee
enough money to pay in full the principal, interest and premium on the debt
securities. This amount may be made in cash and/or U.S. government obligations.
As a condition to either of the above elections, we must deliver to the trustee
an opinion of counsel that the holders of the debt securities will not recognize
income, gain or loss for Federal income tax purposes as a result of the
action.
If
any of the above events occurs, the holders of the debt securities of the series
will not be entitled to the benefits of the indenture, except for the rights of
holders to receive payments on debt securities or the registration of transfer
and exchange of debt securities and replacement of lost, stolen or mutilated
debt securities.
Notices
Notices
to holders will be given by mail to the addresses of the holders in the security
register.
Governing
Law
The
indentures and the debt securities will be governed by, and construed under, the
law of the State of New York.
Regarding
the Trustee
The
indentures will limit the right of the trustee, should it become a creditor of
us, to obtain payment of claims or secure its claims.
The
trustee will be permitted to engage in certain other transactions. However, if
the trustee, acquires any conflicting interest, and there is a default under the
debt securities of any series for which they are trustee, the trustee must
eliminate the conflict or resign.
Subordinated
Debt Securities
Payment
on subordinated debt securities will, to the extent provided in the indenture,
be subordinated in right of payment to the prior payment in full of all of our
senior indebtedness. Subordinated debt securities also are effectively
subordinated to all debt and other liabilities, including trade payables and
lease obligations, if any, of our subsidiaries.
-
30 -
Upon
any distribution of our assets upon any dissolution, winding up, liquidation or
reorganization, the payment of the principal of and interest on subordinated
debt securities will be subordinated in right of payment to the prior payment in
full in cash or other payment satisfactory to the holders of senior indebtedness
of all senior indebtedness. In the event of any acceleration of the subordinated
debt securities because of an event of default, the holders of any senior
indebtedness would be entitled to payment in full in cash or other payment
satisfactory to such holders of all senior indebtedness obligations before the
holders of subordinated debt securities are entitled to receive any payment or
distribution. The indentures will require us or the trustee to promptly notify
holders of designated senior indebtedness if payment of subordinated debt
securities is accelerated because of an event of default.
We
may not make any payment on subordinated debt securities, including upon
redemption at the option of the holder of any subordinated debt securities or at
our option, if:
· a
default in the payment of the principal, premium, if any, interest, rent or
other obligations in respect of designated senior indebtedness occurs and is
continuing beyond any applicable period of grace, which is called a “payment
default”; or
· a
default other than a payment default on any designated senior indebtedness
occurs and is continuing that permits holders of designated senior indebtedness
to accelerate its maturity, and the trustee receives notice of such default,
which is called a “payment blockage notice from us or any other person permitted
to give such notice under the indenture, which is called a “non-payment
default”.
We
may resume payments and distributions on subordinated debt
securities:
· in
the case of a payment default, upon the date on which such default is cured or
waived or ceases to exist; and
· in
the case of a non-payment default, the earlier of the date on which such
nonpayment default is cured or waived or ceases to exist and 179 days after the
date on which the payment blockage notice is received by the trustee, if the
maturity of the designated senior indebtedness has not been
accelerated.
No
new period of payment blockage may be commenced pursuant to a payment blockage
notice unless 365 days have elapsed since the initial effectiveness of the
immediately prior payment blockage notice and all scheduled payments of
principal, premium and interest, including any liquidated damages, on the notes
that have come due have been paid in full in cash. No non-payment default that
existed or was continuing on the date of delivery of any payment blockage notice
shall be the basis for any later payment blockage notice unless the non-payment
default is based upon facts or events arising after the date of delivery of such
payment blockage notice.
If
the trustee or any holder of the notes receives any payment or distribution of
our assets in contravention of the subordination provisions on subordinated debt
securities before all senior indebtedness is paid in full in cash, property or
securities, including by way of set-off, or other payment satisfactory to
holders of senior indebtedness, then such payment or distribution will be held
in trust for the benefit of holders of senior indebtedness or their
representatives to the extent necessary to make payment in full in cash or
payment satisfactory to the holders of senior indebtedness of all unpaid senior
indebtedness.
In
the event of our bankruptcy, dissolution or reorganization, holders of senior
indebtedness may receive more, ratably, and holders of subordinated debt
securities may receive less, ratably, than our other creditors (including our
trade creditors). This subordination will not prevent the occurrence of any
event of default under the indenture.
Unless
we inform you otherwise in the prospectus supplement, we will not be prohibited
from incurring debt, including senior indebtedness, under any indenture relating
to subordinated debt securities. We may from time to time incur additional debt,
including senior indebtedness.
We
are obligated to pay reasonable compensation to the trustee and to indemnify the
trustee against certain losses, liabilities or expenses incurred by the trustee
in connection with its duties relating to subordinated debt securities. The
trustee’s claims for these payments will generally be senior to those of
noteholders in respect of all funds collected or held by the
trustee.
-
31 -
Certain
Definitions
“indebtedness”
means:
(1)
all indebtedness, obligations and other liabilities for borrowed money,
including overdrafts, foreign exchange contracts, currency exchange agreements,
interest rate protection agreements, and any loans or advances from banks, or
evidenced by bonds, debentures, notes or similar instruments, other than any
account payable or other accrued current liability or obligation incurred in the
ordinary course of business in connection with the obtaining of materials or
services;
(2)
all reimbursement obligations and other liabilities with respect to letters of
credit, bank guarantees or bankers’ acceptances;
(3)
all obligations and liabilities in respect of leases required in conformity with
generally accepted accounting principles to be accounted for as capitalized
lease obligations on our balance sheet;
(4)
all obligations and liabilities, contingent or otherwise, as lessee under leases
for facility equipment (and related assets leased together with such equipment)
and under any lease or related document (including a purchase agreement,
conditional sale or other title retention or synthetic lease agreement) in
connection with the lease of real property or improvement thereon (or any
personal property included as part of any such lease) which provides that such
Person is contractually obligated to purchase or cause a third party to purchase
the leased property or pay an agreed upon residual value of the leased property,
including the obligations under such lease or related document to purchase or
cause a third party to purchase such leased property (whether or not such lease
transaction is characterized as an operating lease or a capitalized lease in
accordance with GAAP) or pay an agreed upon residual value of the leased
property to the lessor;
(5)
all obligations with respect to an interest rate or other swap, cap or collar
agreement or other similar instrument or agreement or foreign currency hedge,
exchange, purchase agreement or other similar instrument or
agreement;
(6)
all direct or indirect guaranties or similar agreements in respect of, and our
obligations or liabilities to purchase, acquire or otherwise assure a creditor
against loss in respect of, indebtedness, obligations or liabilities of others
of the type described in (1) through (5) above;
(7)
any indebtedness or other obligations described in (1) through (6) above secured
by any mortgage, pledge, lien or other encumbrance existing on property which is
owned or held by us; and
(8)
any and all refinancings, replacements, deferrals, renewals, extensions and
refundings of, or amendments, modifications or supplements to, any indebtedness,
obligation or liability of the kind described in clauses (1) through (7)
above.
“senior
indebtedness” means the principal, premium, if any, interest, including any
interest accruing after bankruptcy, and rent or termination payment on or other
amounts due on our current or future indebtedness, whether created, incurred,
assumed, guaranteed or in effect guaranteed by us, including any deferrals,
renewals, extensions, refundings, amendments, modifications or supplements to
the above. However, senior indebtedness does not include:
· indebtedness
that expressly provides that it shall not be senior in right of payment to
subordinated debt securities or expressly provides that it is on the same basis
or junior to subordinated debt securities;
· our
indebtedness to any of our majority-owned subsidiaries; and
· subordinated
debt securities.
-
32 -
DESCRIPTION
OF PREFERRED STOCK
We
currently have authorized 5,000,000 shares of preferred stock, par value $.001
per share. As of the date of this prospectus, we do not have any shares of
preferred stock outstanding. Under our Restated Certificate of Incorporation,
our Board of Directors is authorized to issue shares of our preferred stock from
time to time, in one or more classes or series, without stockholder approval.
Prior to the issuance of shares of each series, the Board of Directors is
required by the General Corporation Law of the State of Delaware and our
Restated Certificate of Incorporation to adopt resolutions and file a
Certificate of Designation with the Secretary of State of the State of Delaware,
fixing for each such series the designations, powers, preferences, rights,
qualifications, limitations and restrictions of the shares of such series. Any
exercise of our Board of Directors of its rights to do so may affect the rights
and entitlements of the holders of our common stock as set forth
below.
Our
Board of Directors could authorize the issuance of shares of preferred stock
with terms and conditions which could have the effect of discouraging a takeover
or other transaction which holders of some, or a majority, of such shares might
believe to be in their best interests or in which holders of some, or a
majority, of such shares might receive a premium for their shares over the
then-market price of such shares.
General
Subject
to limitations prescribed by the General Corporation Law of the State of
Delaware, our Restated Certificate of Incorporation and our Amended and Restated
By-Laws (“By-Laws”), our Board of Directors is authorized to fix the number of
shares constituting each series of preferred stock and the designations, powers,
preferences, rights, qualifications, limitations and restrictions of the shares
of such series, including such provisions as may be desired concerning voting,
redemption, dividends, dissolution or the distribution of assets, conversion or
exchange, and such other subjects or matters as may be fixed by resolution of
the Board of Directors. Each series of preferred stock that we offer under this
prospectus will, when issued, be fully paid and nonassessable and will not have,
or be subject to, any preemptive or similar rights.
The
applicable prospectus supplement(s) will describe the following terms of the
series of preferred stock in respect of which this prospectus is being
delivered:
· the
title and stated value of the preferred stock;
· the
number of shares of the preferred stock offered, the liquidation preference per
share and the purchase price of the preferred stock;
· the
dividend rate(s), period(s) and/or payment date(s) or the method(s) of
calculation for dividends;
· whether
dividends shall be cumulative or non-cumulative and, if cumulative, the date
from which dividends on the preferred stock shall
accumulate;
· the
procedures for any auction and remarketing, if any, for the preferred
stock;
· the
provisions for a sinking fund, if any, for the preferred
stock;
· the
provisions for redemption, if applicable, of the preferred
stock;
· any
listing of the preferred stock on any securities exchange or
market;
· the
terms and conditions, if applicable, upon which the preferred stock will be
convertible into common stock or another series of our preferred stock,
including the conversion price (or its manner of calculation) and conversion
period;
· the
terms and conditions, if applicable, upon which preferred stock will be
exchangeable into our debt securities, including the exchange price, or its
manner of calculation, and exchange period;
· voting
rights, if any, of the preferred stock; a discussion of any material and/or
special United States federal income tax considerations applicable to the
preferred stock;
· whether
interests in the preferred stock will be represented by depositary
shares;
-
33 -
· the
relative ranking and preferences of the preferred stock as to dividend rights
and rights upon liquidation, dissolution or winding up of our
affairs;
· any
limitations on issuance of any series of preferred stock ranking senior to or on
a parity with the preferred stock as to dividend rights and rights upon
liquidation, dissolution or winding up of our affairs; and
· any
other specific terms, preferences, rights, limitations or restrictions on the
preferred stock.
Unless
otherwise specified in the prospectus supplement, the preferred stock will, with
respect to dividend rights and rights upon liquidation, dissolution or winding
up of Discovery rank:
· senior
to all classes or series of our common stock, and to all equity securities
issued by us the terms of which specifically provide that such equity securities
rank junior to the preferred stock with respect to dividend rights or rights
upon the liquidation, dissolution or winding up of us;
· on
a parity with all equity securities issued by us that do not rank senior or
junior to the preferred stock with respect to dividend rights or rights upon the
liquidation, dissolution or winding up of us; and
· junior
to all equity securities issued by us the terms of which do not specifically
provide that such equity securities rank on a parity with or junior to the
preferred stock with respect to dividend rights or rights upon the liquidation,
dissolution or winding up of us (including any entity with which we may be
merged or consolidated or to which all or substantially all of our assets may be
transferred or which transfers all or substantially all of our
assets).
As
used for these purposes, the term “equity securities” does not include
convertible debt securities.
Transfer
Agent and Registrar
The
transfer agent and registrar for any series of preferred stock will be set forth
in the applicable prospectus supplement.
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 380,000,000 shares of common stock, par value $0.001
per share. As of May 31, 2010, there were 158,064,779 shares of common stock
outstanding, which does not include:
· 15,685,845
shares of common stock issuable upon exercise of options outstanding as of May
31, 2010, at a weighted average exercise price of $3.77 per
share;
· 27,846,740
shares of common stock issuable upon exercise of warrants outstanding as of May
31, 2010, at a weighted average exercise price of $1.42;
· 12,767,564
shares of common stock reserved for potential future issuance pursuant to the
May 2008 CEFF;
· 7,117,622
shares of common stock reserved for potential future issuance pursuant to the
December 2008 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;
-
34 -
· 1,922,113
shares of common stock available for future grant under our 2007 Long-Term
Incentive Plan; and
· 367,928
shares of common stock reserved for potential future issuance pursuant to a
401(k) Plan, as of May 31, 2010.
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 Capital Market under the symbol
“DSCO.
Stockholder
Rights Plan
The
summary description of the Rights set out herein does not purport to be
complete, and is qualified in its entirety by reference to the terms and
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:
· 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
· 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”).
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.
-
35 -
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.
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:
· before
becoming an interested stockholder, our Board of Directors approves either the
business combination or the transaction in which the stockholder becomes an
interested stockholder;
· upon
consummation of the transaction in which the stockholder becomes an interested
stockholder, the interested stockholder owns at least 85% of our voting stock
outstanding at the time the transaction commenced, subject to exceptions;
or
· on
or after the date a stockholder becomes an interested stockholder, the business
combination is both approved by our Board of Directors and authorized at an
annual or special meeting of our stockholders by the affirmative vote of at
least two-thirds of the outstanding voting stock not owned by the interested
stockholder.
Number of
Directors; Removal
Our
By-Laws provide that our Board of Directors shall consist of at least three
directors and may consist of such larger number as may be determined, from
time-to-time, by the Board of Directors. Our By-laws provide that directors may
be removed with or without cause by the affirmative vote of holders of a
majority of the total voting power of all outstanding securities.
This
provision and the Board of Directors’ right to issue shares of our preferred
stock from time to time, in one or more classes or series without stockholder
approval are intended to enhance the likelihood of continuity and stability in
the composition of the policies formulated by our Board of Directors. These
provisions are also intended to discourage some tactics that may be used in
proxy fights.
Transfer Agent
and Registrar
The
Transfer Agent and Registrar for our common stock is Continental Stock Transfer
& Trust Company.
-
36 -
DESCRIPTION
OF WARRANTS
Outstanding
Warrants
As
of May 31, 2010, 27,846,740 shares of common stock were issuable upon the
exercise of outstanding warrants, at a weighted average exercise price of
$1.42.
We
may issue, in one or more series, debt warrants to purchase debt securities, as
well as equity warrants to purchase preferred stock or common stock. The
warrants may be issued independently or together with any securities and may be
attached to or separate from the securities. If the warrants are issued pursuant
to warrant agreements, we will so specify in the prospectus supplement relating
to the warrants being offered pursuant to the prospectus supplement. While the
following the terms described below will apply generally to any warrants we may
offer, we will describe the particular terms of any series of warrants in the
applicable prospectus supplement. The terms of any warrants offered under a
prospectus supplement for a particular series of warrants may specify different
or additional terms than those specified below.
Debt
Warrants
The
applicable prospectus supplement will describe the terms of debt warrants
offered, the warrant agreement relating to the debt warrants and the debt
warrant certificates representing the debt warrants, including the
following:
· the
title of the debt warrants;
· the
aggregate number of the debt warrants;
· the
price or prices at which the debt warrants will be issued;
· the
designation, aggregate principal amount and terms of the debt securities
purchasable upon exercise of the debt warrants, and the procedures and
conditions relating to the exercise of the debt warrants;
· the
designation and terms of any related debt securities with which the debt
warrants are issued, and the number of the debt warrants issued with each debt
security;
· the
principal amount of debt securities purchasable upon exercise of each debt
warrant;
· the
date on which the right to exercise the debt warrants will commence, and the
date on which this right will expire;
· the
maximum or minimum number of debt warrants which may be exercised at any
time;
· a
discussion of any material federal income tax considerations;
and
· any
other terms of the debt warrants and terms, procedures and limitations relating
to the exercise of debt warrants.
Debt
warrant certificates will be exchangeable for new debt warrant certificates of
different denominations, and debt warrants may be exercised at the corporate
trust office of the warrant agent or any other office indicated in the
prospectus supplement, by delivering the properly completed and duly executed
warrant certificate and paying the required amount to the warrant agent in
immediately available funds. Prior to the exercise of their debt warrants,
holders of debt warrants will not have any of the rights of holders of the debt
securities purchasable upon exercise and will not be entitled to payment of
principal of or any premium, if any, or interest on the debt securities
purchasable upon exercise.
Equity
Warrants
The
applicable prospectus supplement will describe the following terms of equity
warrants offered:
-
37 -
· the
title of the equity warrants;
· the
securities (i.e., preferred stock or common stock) for which the equity warrants
are exercisable;
· the
price or prices at which the equity warrants will be issued;
· if
applicable, the designation and terms of the preferred stock or common stock
with which the equity warrants are issued, and the number of equity warrants
issued with each share of preferred stock or common stock;
and
· any
other terms of the equity warrants, including terms, procedures and limitations
relating to the exchange and exercise of equity warrants.
Holders
of equity warrants will not be entitled, by virtue of being such holders, to
vote, consent, receive dividends, receive notice as stockholders with respect to
any meeting of stockholders for the election of our directors or any other
matter, or to exercise any rights whatsoever as our stockholders.
The
exercise price payable and the number of shares of common stock or preferred
stock purchasable upon the exercise of each equity warrant will be subject to
adjustment in certain events, including the issuance of a stock dividend to
holders of common stock or preferred stock or a stock split, reverse stock
split, combination, subdivision or reclassification of common stock or preferred
stock. In lieu of adjusting the number of shares of common stock or preferred
stock purchasable upon exercise of each equity warrant, we may elect to adjust
the number of equity warrants. No adjustments in the number of shares
purchasable upon exercise of the equity warrants will be required until
cumulative adjustments require an adjustment of at least 1% thereof. We may, at
our option, reduce the exercise price at any time. No fractional shares will be
issued upon exercise of equity warrants, but we will pay the cash value of any
fractional shares otherwise issuable. Notwithstanding the foregoing, in case of
any consolidation, merger, or sale or conveyance of our property as an entirety
or substantially as an entirety, the holder of each outstanding equity warrant
shall have the right to the kind and amount of shares of stock and other
securities and property, including cash, receivable by a holder of the number of
shares of common stock or preferred stock into which the equity warrant was
exercisable immediately prior to the transaction.
Exercise
of Warrants
Each
warrant will entitle the holder to purchase for cash such principal amount of
securities or shares of stock at such exercise price as shall in each case be
set forth in, or be determinable as set forth in, the prospectus supplement
relating to the warrants offered thereby. Warrants may be exercised at any time
up to the close of business on the expiration date set forth in the prospectus
supplement relating to the warrants offered thereby. After the close of business
on the expiration date, unexercised warrants will become void.
The
warrants may be exercised as set forth in the prospectus supplement relating to
the warrants offered. Upon receipt of payment and the taking of other action
specified in the applicable prospectus supplement, we will, as soon as
practicable, forward the securities purchasable upon exercise. If less than all
of the warrants represented by such warrant certificate are exercised, a new
warrant certificate will be issued for the remaining warrants.
Each
warrant agent will act solely as our agent under the applicable warrant
agreement and will not assume any obligation or relationship of agency or trust
with any holder of any warrant. A single bank or trust company may act as
warrant agent for more than one issue of warrants. A warrant agent will have no
duty or responsibility in case of any default by us under the applicable warrant
agreement or warrant, including any duty or responsibility to initiate any
proceedings at law or otherwise, or to make any demand upon us. Any holder of a
warrant may, without the consent of the related warrant agent or the holder of
any other warrant, enforce by appropriate legal action its right to exercise,
and receive the securities purchasable upon exercise of, its
warrants.
Warrant
issued to Kingsbridge
A
description of the warrant issued to Kingsbridge pursuant to the registration
statement of which this prospectus is a part in connection with our committed
equity financing facility (CEFF) is contained in the section “Plan of
Distribution” and is incorporated herein by reference.
-
38 -
PLAN
OF DISTRIBUTION
We
may sell the securities being offered by us in this prospectus pursuant to
underwritten public offerings, negotiated transactions, block trades or any
combination of such methods. We may sell the securities to or through
underwriters, dealers, agents or directly to one or more purchasers. We and our
agents reserve the right to accept and to reject in whole or in part any
proposed purchase of securities. A prospectus supplement or post-effective
amendment, which we will file each time we effect an offering of any securities,
will provide the names of any underwriters, dealers or agents, if any, involved
in the sale of such securities, and any applicable fees, commissions, or
discounts to which such persons shall be entitled to in connection with such
offering.
We
and our agents, dealers and underwriters, as applicable, may sell the securities
being offered by us in this prospectus from time to time in one or more
transactions at:
· a
fixed price or prices, which may be changed;
· market
prices prevailing at the time of sale;
· prices
related to such prevailing market prices;
· varying
prices determined at the time of sale; or
· negotiated
prices.
We
may determine the price or other terms of the securities offered under this
prospectus by use of an electronic auction. We will describe how any auction
will determine the price or any other terms, how potential investors may
participate in the auction and the nature of the underwriters’ obligations in
the applicable prospectus supplement or amendment.
We
may solicit directly offers to purchase securities. We may also designate agents
from time to time to solicit offers to purchase securities. Any agent that we
designate, who may be deemed to be an underwriter as that term is defined in the
Securities Act, may then resell such securities to the public at varying prices
to be determined by such agent at the time of resale.
We
may engage in at the market offerings of our common stock. An at the market
offering is an offering of our common stock at other than a fixed price to or
through a market maker. We shall name any underwriter that we engage for an at
the market offering in a post-effective amendment to the registration statement
containing this prospectus. We shall also describe any additional details of our
arrangement with such underwriter, including commissions or fees paid, or
discounts offered, by us and whether such underwriter is acting as principal or
agent, in the related prospectus supplement.
If
we use underwriters to sell securities, we will enter into an underwriting
agreement with the underwriters at the time of the sale to them, which agreement
shall be filed as an exhibit to the related prospectus supplement. Underwriters
may also receive commissions from purchasers of the securities. Underwriters may
also use dealers to sell securities. In such an event, the dealers may receive
compensation in the form of discounts, concessions or commissions from the
underwriters and/or commissions from the purchasers for whom they may act as
agents.
Underwriters,
dealers, agents and other persons may be entitled, under agreements that may be
entered into with us, to indemnification by us against certain civil
liabilities, including liabilities under the Securities Act or to contribution
with respect to payments which they may be required to make in respect of such
liabilities. Underwriters and agents may engage in transactions with, or perform
services for, us in the ordinary course of business.
If
so indicated in the applicable prospectus supplement, we may authorize
underwriters, dealers or other persons to solicit offers by certain institutions
to purchase the securities offered by us under this prospectus pursuant to
contracts providing for payment and delivery on a future date or dates. The
obligations of any purchaser under these contracts will be subject only to those
conditions described in the applicable prospectus supplement, and the prospectus
supplement will set forth the price to be paid for securities pursuant to those
contracts and the commissions payable for solicitation of the
contracts.
-
39 -
Any
underwriter may engage in over-allotment, stabilizing and syndicate short
covering transactions and penalty bids in accordance with Regulation M of the
Exchange Act. Over-allotment involves sales in excess of the offering size,
which create a short position. Stabilizing transactions involve bids to purchase
the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate short covering transactions involve purchases of
securities in the open market after the distribution has been completed in order
to cover syndicate short positions. Penalty bids permit the underwriters to
reclaim selling concessions from dealers when the securities originally sold by
such dealers are purchased in covering transactions to cover syndicate short
positions. These transactions may cause the price of the securities sold in an
offering to be higher than it would otherwise be. These transactions, if
commenced, may be discontinued by the underwriters at any time.
Our
common stock is quoted on Nasdaq Capital Market under the symbol “DSCO.” The
other securities are not listed on any securities exchange or other stock market
and, unless we state otherwise in the applicable prospectus supplement, we do
not intend to apply for listing of the other securities on any securities
exchange or other stock market. Any underwriters to whom we sell securities for
public offering and sale may make a market in the securities that they purchase,
but the underwriters will not be obligated to do so and may discontinue any
market making at any time without notice. Accordingly, we give you no assurance
as to the development or liquidity of any trading market for the
securities.
The
anticipated date of delivery of the securities offered hereby will be set forth
in the applicable prospectus supplement relating to each offering.
In
order to comply with certain state securities laws, if applicable, the
securities may be sold in such jurisdictions only through registered or licensed
brokers or dealers. In certain states, the securities may not be sold unless the
securities have been registered or qualified for sale in such state or an
exemption from regulation or qualification is available and is complied with.
Sales of securities must also be made by us in compliance with all other
applicable state securities laws and regulations.
We
shall pay all expenses of the registration of the securities.
Committed
Equity Financing Facility (CEFF)
On
June 11, 2010, we entered into our fifth Committed Equity Financing Facility
(CEFF) with Kingsbridge Capital Limited (Kingsbridge), a private investment
firm. Specifically, we entered into a Common Stock Purchase
Agreement, which entitles us to sell, and obligates Kingsbridge to purchase,
from time to time over a period of three years, subject to certain conditions
and restrictions, shares of our common stock for cash consideration of up to an
aggregate of the lesser of $35 million or 31,597,149 shares, representing 19.99%
of the shares of our common stock outstanding as of such date (but in no event
more than the number of shares that we may issue under the
CEFF without breaching our obligations under the rules and
regulations of The NASDAQ Capital Market®
and the principal trading market at the time, including those relating to
stockholder approval.)
As
consideration for the execution and delivery of the Common Stock Purchase
Agreement, we also issued, pursuant to the registration statement of which this
prospectus forms a part, a Warrant to Kingsbridge to purchase up to 1,250,000
shares of our common stock at a price of $0.4459 per share, which is fully
exercisable (in whole or in part) beginning December 11, 2010 and for a period
of five years thereafter. The Warrant is generally exercisable for
cash except, in certain circumstances the Warrant may be exercised on a cashless
basis. In addition, the holder of the Warrant may not exercise the
Warrant to the extent that the shares to be received pursuant to the exercise,
when aggregated with all other shares beneficially owned by such holder, would
result in the holder owning more than 9.9% of the common stock outstanding on
the exercise date or our being required to file any notification or report under
the Hart Scott Rodino Antitrust Improvements Act of 1976, as
amended. The exercise price of the Warrant is subject to
anti-dilution adjustments, including upon reclassification, consolidation,
merger, mandatory share exchange, sale of substantially all assets, subdivision
or combination of shares, issuance of stock dividends, issuance of liquidating
dividends and spin-offs. In case of a failure by Kingsbridge,
reasonably within the control of Kingsbridge, to accept a properly made draw
down notice under the CEFF, the Warrant permits us to demand surrender of the
Warrant or any remaining portion of the Warrant, shares underlying the Warrant
or cash from the holder under certain circumstances as described in the
Warrant.
-
40 -
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
the registration statement to which this prospectus relates. Through this
prospectus, Kingsbridge may offer to the public for sale 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.
Under
the CEFF, for a period of 36 months from the date of execution of the Common
Stock Purchase Agreement, 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. To
initiate a draw down, we will issue to Kingsbridge a “draw down notice”
containing among other information the total draw down amount, the first day of
the draw down pricing period, which will consist of eight consecutive trading
days, and the “threshold price,” or the minimum price at which a purchase may be
completed on any trading day. The threshold price may be either (i)
90% of the closing price of our common stock on the trading day immediately
preceding the first trading day of the draw down pricing period or (ii) a price
that we determine, in our sole discretion, but not less than $0.20 per
share. The purchase price of the shares to be purchased in a draw
down will be at a discount ranging from 4.375% to 17.5% of the volume-weighted
average price (VWAP) of our common stock for each of the eight consecutive
trading days in the draw down pricing period. The discount on each
trading day will be determined as follows:
|
VWAP*
|
%
of VWAP (Applicable Discount)
|
|
|
Equal
to or exceeds $6.00
|
4.375
|
|
|
Equal
to or exceeds $5.00 but is less than $6.00
|
4.750
|
|
|
Equal
to or exceeds $4.00 but is less than $5.00
|
5.250
|
|
|
Equal
to or exceeds $3.00 but is less than $4.00
|
5.750
|
|
|
Equal
to or exceeds $2.00 but is less than $3.00
|
6.000
|
|
|
Equal
to or exceeds $1.25 but is less than $2.00
|
7.500
|
|
|
Equal
to or exceeds $0.75 but is less than $1.25
|
8.500
|
|
|
Equal
to or exceeds $0.50 but is less than $0.75
|
9.500
|
|
|
Equal
to or exceeds $0.25 but is less than $0.50
|
15.000
|
|
|
Equal
to or exceeds $0.20 but is less than $0.25
|
17.500
|
* As
defined in the Common Stock Purchase Agreement, “VWAP” means the volume-weighted
average price per share (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 or another mutually agreed
recognized trading platform.
If
the daily VWAP of our common stock falls below a threshold price on any trading
day during a draw down pricing period, the Common Stock Purchase Agreement
provides that any such trading day will be disregarded in calculating the number
of shares of common stock to be issued in respect of the draw down pricing
period and the total draw down amount shall be reduced by one eighth for each
such day. However, at its election, Kingsbridge may buy up to the pro-rata
portion of shares allocated to any day that is disregarded at a purchase price
determined by reference to the threshold price instead of the VWAP, less the
discount specified in the table above.
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, Kingsbridge will not be required, but may elect, to
purchase the pro-rata portion of shares of common stock allocated to that
day.
Our
ability to require Kingsbridge to purchase our common stock is subject to
various limitations. Each draw down is limited to the lesser of $15
million or 3.5% of our market capitalization as of the date on which the draw
down notice is delivered. 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 a purchase
price that is below $0.20 per share (before applicable
discount). Accordingly, there is no assurance that we will be able to
access the CEFF, if ever, at such times and in amounts that are necessary to
fund our activities.
-
41 -
The
Common Stock Purchase Agreement also provides that, in connection with each draw
down, we may in our discretion include in our draw down notice a request that
Kingsbridge purchase an amount that is in addition to the amount that
Kingsbridge is otherwise obligated under the Common Stock Purchase Agreement to
purchase in connection with such draw down pricing period (a
supplemental amount). If we designate a supplemental amount, we may
also designate a separate threshold price with respect to such supplemental
amount, subject to a minimum price per share of $0.20. The supplemental
amount in each draw down pricing period is not subject to a dollar limitation,
except that, when aggregated with all other amounts drawn by us under the Common
Stock Purchase Agreement, the supplemental amount may not exceed the total
commitment amount available under the agreement. If Kingsbridge
agrees to purchase any supplemental amount, in whole or in part, we will sell to
Kingsbridge that number of shares of our common stock that equals the
supplemental amount, or portion thereof designated by Kingsbridge, at a price
equal to the greater of (i) the daily VWAP of our common stock on the trading
day with respect to which Kingsbridge notifies us of its election to exercise
its option or (ii) the supplemental amount threshold price designated by us, in
either case less a discount calculated in the same manner specified in the table
above.
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 (i) contains provisions that adjust the
conversion price of such convertible security solely for stock splits,
dividends, distributions or similar events or pursuant to anti-dilution
provisions or (ii) is issued in connection with debt financing to support
research and development activities and conditioned upon us meeting certain
developmental milestones and of any security issued in a secured debt
financing is permitted.
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 or waived:
|
|
·
|
Each
of our representations and warranties in the Common Stock Purchase
Agreement must be true and correct in all material respects as of the date
when made and as of the date of the applicable draw down notice as though
made at that time, except for representations and warranties that are
expressly made as of a particular
date.
|
|
|
·
|
We
must have performed, satisfied and complied in all material respects with
all covenants, agreements and conditions required to be performed,
satisfied or complied with by us under the Common Stock Purchase Agreement
and the Warrant.
|
|
|
·
|
We
must have complied in all respects with all applicable federal, state and
local governmental laws, rules, regulations and ordinances in connection
with the execution, delivery and performance of the Common Stock Purchase
Agreement and the consummation of the transactions it contemplates except
for any failures to so comply that would not reasonably be expected to
have a material adverse effect on
us.
|
|
|
·
|
The
registration statement that includes this prospectus must be effective
under the Securities Act and neither we nor Kingsbridge shall have
received notice that the SEC has issued or intends to issue a stop order
with respect to the registration statement or that the SEC otherwise has
suspended or withdrawn the effectiveness of the registration statement, or
intends or has threatened to do so and no other suspension of the use or
withdrawal of the effectiveness of the registration statement shall
exist.
|
|
|
·
|
We
must not have knowledge of any event that could reasonably be expected to
have the effect of causing the registration statement to be suspended or
otherwise ineffective as of the settlement date for the purchase of shares
under the CEFF.
|
|
|
·
|
Trading
in our common stock shall not have been suspended by the SEC, The NASDAQ
Capital Market (or other principal market on which our common stock is
traded) or the Financial Industry Regulatory Authority and trading in
securities generally on The NASDAQ Capital Market (or other principal
market on which our common stock is traded) shall not have been suspended
or limited.
|
|
|
·
|
No
statute, rule, regulation, executive order, decree, ruling or injunction
shall have been enacted, entered, promulgated or endorsed or, to our
knowledge, threatened 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.
|
-
42 -
|
|
·
|
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.
|
|
|
·
|
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.
|
|
|
·
|
We
must generally be current on any and all invoices submitted to us
regarding fees and expenses of Kingsbridge, except for such fees, or
portion thereof, that we dispute in good
faith.
|
|
|
·
|
Prior
to delivery of the first draw down notice, Kingsbridge must have received
an opinion from our outside legal
counsel.
|
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
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, for not more than 30 days. If we deliver a blackout
notice in the five trading days following the settlement of a draw down, 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 and the date the prospectus again becomes
available.
Kingsbridge
may terminate the CEFF upon one business day’s notice to us if we enter into a
transaction prohibited by the Common Stock Purchase Agreement without
Kingsbridge’s prior written consent or if a material adverse effect relating to
our business continues for ten trading days after we receive notice from
Kingsbridge of the material adverse effect. 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 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.
In
addition to our issuance of shares of common stock to Kingsbridge pursuant to
the Common Stock Purchase Agreement and of the Warrant issued to Kingsbridge as
consideration for the execution of the Common Stock Purchase Agreement, the
registration statement to which this prospectus relates also covers the sale of
those shares and the shares issuable upon exercise of the Warrant, from time to
time by Kingsbridge to the public.
As
described above, the number of shares to be issued by us in connection with any
draw down pricing period, and the aggregate purchase price for these shares,
will not be known until the draw down pricing period is complete. Accordingly,
we do not expect that we will publicly announce the issuance by us of a draw
down notice to Kingsbridge, if any, including a request to have Kingsbridge
purchase a supplemental amount of shares of our common stock during a draw down
pricing period, until the completion of the draw down pricing period. Following
completion of the draw down pricing period, we will file with the Securities and
Exchange Commission (the “SEC”) a prospectus supplement to this prospectus
covering such sale of shares.
The
shares of common stock issued under the Common Stock Purchase Agreement may be
sold in one or more of the following manners:
-
43 -
|
|
·
|
ordinary
brokerage transactions and transactions in which the broker solicits
purchasers; or
|
|
|
·
|
a
block trade in which the broker or dealer so engaged will attempt to sell
the shares as agent, but may position and resell a portion of the block as
principal to facilitate the
transaction.
|
In
addition, Kingsbridge and any unaffiliated broker-dealer will be subject to
liability under the federal securities laws and must comply with the
requirements of the Securities Act and the Exchange Act, including, without
limitation, Rule 10b-5 and Regulation M under the Exchange Act. These rules and
regulations may limit the timing of purchases and sales of shares of common
stock by Kingsbridge or any unaffiliated broker-dealer. Under these rules and
regulations, Kingsbridge and any unaffiliated broker-dealer:
|
|
·
|
may
not engage in any stabilization activity in connection with our common
stock;
|
|
|
·
|
must
furnish each broker which offers shares of our common stock covered by the
prospectus that is a part of our registration statement with the number of
copies of such prospectus and any prospectus supplement which are required
by each broker; and
|
|
|
·
|
may
not bid for or purchase any of our common stock or attempt to induce any
person to purchase any of our common stock other than as permitted under
the Exchange Act.
|
These
restrictions may affect the marketability of the shares of common stock
purchased and sold by Kingsbridge and any unaffiliated
broker-dealer.
We
and Kingsbridge have agreed to indemnify and hold each other and each person who
controls us and Kingsbridge, respectively, harmless against certain liabilities,
including certain liabilities under the Securities Act. We have agreed to pay up
to $45,000 of Kingsbridge’s reasonable attorneys’ fees and expenses (exclusive
of disbursements and out-of-pocket expenses) incurred by Kingsbridge in
connection with the preparation, negotiation, execution and delivery of the
Common Stock Purchase Agreement and related transaction documentation. We have
also agreed to pay (i) certain fees and expenses incurred by Kingsbridge in
connection with any amendments, modifications or waivers of the Common Stock
Purchase Agreement and (ii) as compensation for all other ongoing due diligence
of our company, legal and transaction expenses of Kingsbridge, a fee equal to
1.85% of the gross proceeds of each individual draw down. We may also have to
pay a fee of $15,000 for any calendar quarter during which we elect not to
deliver a draw down notice under the CEFF. Further, if we issue a
draw down notice and fail to cause delivery of the shares to Kingsbridge within
two trading days of the applicable settlement date, we have agreed to pay
Kingsbridge as liquidated damages (prorated over the initial 30 days following
the settlement date) equal to 2% of the payment required to be made by
Kingsbridge with respect to such shares and an amount that when taken together
with the liquidated damages, compensates Kingsbridge for any actual loss
incurred as a result of failure to deliver.
EXPERTS
Ernst
& Young LLP, independent registered public accounting firm, has audited our
consolidated financial statements included in our Annual Report on Form 10-K for
the year ended December 31, 2009, and the effectiveness of our internal control
over financial reporting as of December 31, 2009, as set forth in their reports,
which are incorporated by reference in this prospectus and elsewhere in the
registration statement. Our financial statements are incorporated by reference
in reliance on Ernst & Young LLP’s reports, given on their authority as
experts in accounting and auditing.
LEGAL
MATTERS
If
and when the securities being registered hereunder are issued, the validity of
such issuance will be passed upon for us by Sonnenschein Nath & Rosenthal
LLP, New York, New York.
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.
-
44 -
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:
1. Our
Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed on
March 10, 2010, as amended by our Annual Report on Form 10-K/A, filed on April
30, 2010;
2. Our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, filed on May
10, 2010;
3. Our
Current Reports on Form 8-K filed with the SEC on February 16, 2010, February
18, 2010, February 26, 2010, March 15, 2010 (excluding the matters in Item 2.02
and Exhibit 99.1 therein, which are not incorporated by reference herein), April
28, 2010 (excluding the matters in Item 2.02 and Exhibit 99.1 therein, which are
not incorporated by reference herein), April 29, 2010, May 21, 2010, June 4,
2010, June 9, 2010, June 9, 2010 and June 14, 2010; and
4. The
description of our common stock contained in our Registration Statement on Form
8-A filed with the SEC on July 13, 1995.
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.
-
45 -
$150,000,000
Discovery
Laboratories, Inc.
Debt
Securities, Preferred Stock and Common Stock,
Debt
Warrants and Equity Warrants
No
dealer, salesperson or other person is authorized to provide you with
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. We are offering to
sell, and seeking offers to buy, only the securities of Discovery Laboratories,
Inc. covered by this prospectus, and only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date, regardless of the time of delivery of
this prospectus or of any sale of the shares.
June
11, 2010
Annex A
DISCOVERY LABORATORIES,
INC.
Form
of Warrant To Purchase Common Stock
Warrant
No.: [_____]
Number of
Shares of Common Stock: [_________]
Date of
Issuance: [_________], 2010 (“Issuance Date”)
Discovery Laboratories, Inc., a Delaware corporation (the
“Company”), hereby certifies that, for good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, [____________], the registered holder hereof or its permitted
assigns (the “Holder”), is entitled, subject to the terms set forth
below, to purchase from the Company, at the Exercise Price (as defined below)
then in effect, upon surrender of this Warrant to Purchase Common Stock
(including any Warrants to Purchase Common Stock issued in exchange, transfer or replacement hereof, the
“Warrant”), at any time or times on or after the
date hereof (the “Exercisability Date”), but not after 11:59 p.m., New York
time, on the Expiration Date (as defined below), [_________________]
[(_______)]1 fully paid nonassessable shares of Common Stock (as
defined below) (the “Warrant Shares”). Except as otherwise
defined herein, capitalized terms in this Warrant shall have the meanings set
forth in Section
15. This Warrant
is the Warrant to purchase Common Stock (this “Warrant”) issued pursuant to (i) Sections 1 and 2 of that certain Underwriting Agreement
(the “Underwriting Agreement”), dated as of [_________], 2010 (the
“Pricing Date”), by and among the Company Lazard Capital Markets LLC and Boenning & Scattergood, Inc., as
underwriters and (ii) the
Company’s Registration Statement on Form S-3
(File number 333-151654) (the “Registration Statement”).
1 Insert a
number of shares equal to [ ]% of the number of shares of common
stock purchased under the Underwriting Agreement.
1. EXERCISE OF
WARRANT.
(a) Mechanics of
Exercise. Subject to the terms and conditions hereof, this
Warrant may be exercised by the Holder on any day on or after the Exercisability
Date, in whole or in part, by (i) delivery of a written notice, in the form
attached hereto as Exhibit A (the
“Exercise Notice”), of the Holder’s election to exercise this Warrant and
(ii) (A) payment to the Company of an amount equal to the applicable
Exercise Price multiplied by the number of Warrant Shares as to which this
Warrant is being exercised (the “Aggregate Exercise Price”) in cash or by wire
transfer of immediately available funds or (B) provided the conditions for
cashless exercise set forth in Section 1(d) are
satisfied, by notifying the Company that this Warrant is being exercised
pursuant to a Cashless Exercise (as defined in Section
1(d)). The Holder shall not be required to deliver the
original Warrant in order to effect an exercise hereunder. Execution
and delivery of the Exercise Notice with respect to less than all of the Warrant
Shares shall have the same effect as cancellation of the original Warrant and
issuance of a new Warrant evidencing the right to purchase the remaining number
of Warrant Shares. On or before the first (1st)
Business Day following the date on which the Company has received each of the
Exercise Notice and the Aggregate Exercise Price (or notice of a Cashless
Exercise) (collectively, the “Exercise Delivery Documents”), the Company shall
transmit by facsimile or electronic mail an acknowledgment of receipt of the
Exercise Delivery Documents to the Holder and Continental Stock Transfer &
Trust Company (the Company’s “Transfer Agent”). On or before the
third (3rd)
Business Day following the date on which the Company has received all of the
Exercise Delivery Documents (the “Share Delivery Date”), the Company shall (X)
provided that the Transfer Agent is participating in The Depository Trust
Company (“DTC”) Fast Automated Securities Transfer Program, upon the request of
the Holder, credit such aggregate number of Warrant Shares to which the Holder
is entitled pursuant to such exercise to the Holder’s or its designee’s balance
account with DTC through its Deposit/Withdrawal At Custodian (“DWAC”) system, or
(Y) if the Transfer Agent is not participating in the DTC Fast Automated
Securities Transfer Program or the Holder does not request delivery of the
Warrant Shares via DWAC, issue and dispatch by overnight courier to the address
as specified in the Exercise Notice, a certificate, registered in the Company’s
share register in the name of the Holder or its designee, for the number of
Warrant Shares to which the Holder is entitled pursuant to such
exercise. Upon delivery of the Exercise Delivery Documents, the
Holder shall be deemed for all corporate purposes to have become the holder of
record of the Warrant Shares with respect to which this Warrant has been
exercised, irrespective of the date such Warrant Shares are credited to the
Holder’s DTC account or the date of delivery of the certificates evidencing such
Warrant Shares, as the case may be. If this Warrant is submitted in
connection with any exercise pursuant to this Section 1(a) and the
number of Warrant Shares represented by this Warrant submitted for exercise is
greater than the number of Warrant Shares being acquired upon an exercise, then
the Company shall as soon as practicable and in no event later than three
Business Days after any exercise and at its own expense, issue a new Warrant (in
accordance with Section 7(d))
representing the right to purchase the number of Warrant Shares purchasable
immediately prior to such exercise under this Warrant, less the number of
Warrant Shares with respect to which this Warrant is exercised. No
fractional shares of Common Stock are to be issued upon the exercise of this
Warrant, but rather the number of shares of Common Stock to be issued shall be
rounded down to the nearest whole number. The Company shall pay any
and all taxes which may be payable with respect to the issuance and delivery of
Warrant Shares upon exercise of this Warrant.
1 Insert a
number of shares equal to [ ]% of the number of shares of common
stock purchased under the Underwriting Agreement.
A -
1
(b) Exercise
Price. For purposes of this Warrant, “Exercise Price” means
$[___] [Note: Different for
Five-Year and Short-Term Warrants], subject to adjustment as provided
herein.
(c) Company’s Failure to Timely
Deliver Securities. If the Company shall fail for any reason
or for no reason to issue to the Holder within three (3) Business Days of
receipt of the Exercise Delivery Documents in compliance with the terms of this
Section 1, a
certificate for the number of shares of Common Stock to which the Holder is
entitled and register such shares of Common Stock on the Company’s share
register or to credit the Holder’s balance account with DTC for such number of
shares of Common Stock to which the Holder is entitled upon the Holder’s
exercise of this Warrant, and if on or after such Trading Day the Holder
purchases (in an open market transaction or otherwise) shares of Common Stock to
deliver in satisfaction of a sale by the Holder of shares of Common Stock
issuable upon such exercise that the Holder anticipated receiving from the
Company (a “Buy-In”), then the Company shall, within three (3) Business Days
after the Holder’s request and in the Holder’s discretion, either (i) pay cash
to the Holder in an amount equal to the Holder’s total purchase price (including
brokerage commissions, if any) for the shares of Common Stock so purchased (the
“Buy-In Price”), at which point the Company’s obligation to deliver such
certificate (and to issue such Warrant Shares) shall terminate, or (ii) promptly
honor its obligation to deliver to the Holder a certificate or certificates
representing such Warrant Shares and pay cash to the Holder in an amount equal
to the excess (if any) of the Buy-In Price over the product of (A) such number
of shares of Common Stock, times (B) the Closing Bid Price on the date of
exercise.
(d) Cashless
Exercise. Notwithstanding anything contained herein to the
contrary, if a registration statement covering the Warrant Shares that are the
subject of the Exercise Notice (the “Unavailable Warrant Shares”) is not
available and an exemption from registration is otherwise not available for the
resale of such Unavailable Warrant Shares, the Holder may exercise this Warrant
in whole or in part and, in lieu of making the cash payment otherwise
contemplated to be made to the Company upon such exercise in payment of the
Aggregate Exercise Price, elect instead to receive upon such exercise the “Net
Number” of shares of Common Stock determined according to the following formula
(a “Cashless Exercise”):
Net Number = (A x B) - (A x
C)
B
For purposes of the foregoing
formula:
|
|
A=
the total number of shares with respect to which this Warrant is then
being exercised.
|
|
|
B=
the arithmetic average of the Closing Sale Prices of the shares of Common
Stock for the five (5) consecutive Trading Days ending on the Trading Day
immediately preceding the date of the Exercise
Notice.
|
|
|
C=
the Exercise Price then in effect for the applicable Warrant Shares at the
time of such exercise.
|
A -
2
For sake
of clarity, in the event that neither a registration statement nor an exemption
from registration is available, there is no circumstance that requires the
Company to effect a net cash settlement of the Warrant.
(e) Rule
144. For purposes of Rule 144(d) promulgated under the
Securities Act, as in effect on the date hereof, it is intended that the Warrant
Shares issued in a Cashless Exercise shall be deemed to have been acquired by
the Holder, and the holding period for the Warrant Shares shall be deemed to
have commenced, on the date this Warrant was originally issued pursuant to the
Underwriting Agreement.
(f) Disputes. In
the case of a dispute as to the determination of the Exercise Price or the
arithmetic calculation of the Warrant Shares, the Company shall promptly issue
to the Holder the number of Warrant Shares that are not disputed, and all such
disputes shall be resolved pursuant to Section
12.
(g) Beneficial
Ownership. The Company shall not effect the exercise of this
Warrant, and the Holder shall not have the right to exercise this Warrant, to
the extent that after giving effect to such exercise, such Person (together with
such Person’s affiliates) would beneficially own in excess of 9.99% (the
“Maximum Percentage”) of the shares of Common Stock outstanding immediately
after giving effect to such exercise. For purposes of the foregoing
sentence, the aggregate number of shares of Common Stock beneficially owned by
such Person and its affiliates shall include the number of shares of Common
Stock issuable upon exercise of this Warrant with respect to which the
determination of such sentence is being made, but shall exclude shares of Common
Stock which would be issuable upon (i) exercise of the remaining, unexercised
portion of this Warrant beneficially owned by such Person and its affiliates and
(ii) exercise or conversion of the unexercised or unconverted portion of any
other securities of the Company beneficially owned by such Person and its
affiliates (including, without limitation, any convertible notes or convertible
preferred stock or warrants) subject to a limitation on conversion or exercise
analogous to the limitation contained herein. Except as set forth in
the preceding sentence, for purposes of this paragraph, beneficial ownership
shall be calculated in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended. For purposes of this Warrant, in determining
the number of outstanding shares of Common Stock, the Holder may rely on the
number of outstanding shares of Common Stock as reflected in (1) the Company’s
most recent Form 10-K, Form 10-Q, Current Report on Form 8-K or other public
filing with the Securities and Exchange Commission, as the case may be, (2) a
more recent public announcement by the Company or (3) any other notice by the
Company or the Transfer Agent setting forth the number of shares of Common Stock
outstanding. To the extent that the limitation contained in this Section 1(g) applies,
the determination of whether this Warrant is exercisable (in relation to other
securities owned by such Holder) and of which a portion of this Warrant is
exercisable shall be in the sole discretion of a Holder, and the submission of
an Exercise Notice shall be deemed to be each Holder’s determination of whether
this Warrant is exercisable (in relation to other securities owned by such
Holder) and of which portion of this Warrant is exercisable, in each case
subject to such aggregate percentage limitation, and the Company shall have no
obligation to verify or confirm the accuracy of such
determination. For any reason at any time, upon the written or
oral request of the Holder, the Company shall within two (2) Business Days
confirm to the Holder the number of shares of Common Stock then
outstanding. In any case, the number of outstanding shares of Common
Stock shall be determined after giving effect to the conversion or exercise of
securities of the Company, including this Warrant, by the Holder and its
affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. By written notice to the Company, the
Holder may from time to time increase or decrease the Maximum Percentage to any
other percentage not in excess of 9.99% specified in such notice; provided that (i) any such
increase will not be effective until the sixty-first (61st) day
after such notice is delivered to the Company, and (ii) any such increase or
decrease will apply only to the Holder. The provisions of this
paragraph shall be construed and implemented in a manner otherwise than in
strict conformity with the terms of this Section 1(g) to
correct this paragraph (or any portion hereof) which may be defective or
inconsistent with the intended beneficial ownership limitation herein contained
or to make changes or supplements necessary or desirable to properly give effect
to such limitation.
A -
3
2. ADJUSTMENT OF EXERCISE PRICE
AND NUMBER OF WARRANT SHARES. The Exercise Price and the
number of Warrant Shares shall be adjusted from time to time as
follows:
(a) Adjustment upon Subdivision
or Combination of Common Stock. If the Company at any time on
or after the Pricing Date subdivides (by any stock split, stock dividend,
recapitalization, reorganization, scheme, arrangement or otherwise) one or more
classes of its outstanding shares of Common Stock into a greater number of
shares, the Exercise Price in effect immediately prior to such subdivision will
be proportionately reduced and the number of Warrant Shares will be
proportionately increased. If the Company at any time on or after the
Pricing Date combines (by any stock split, stock dividend, recapitalization,
reorganization, scheme, arrangement or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the Exercise
Price in effect immediately prior to such combination will be proportionately
increased and the number of Warrant Shares will be proportionately
decreased. Any adjustment under this Section 2(a) shall
become effective at the close of business on the date the subdivision or
combination becomes effective.
(b) Other
Events. If any event occurs of the type contemplated by the
provisions of this Section 2 but not
expressly provided for by such provisions (including, without limitation, the
granting of stock appreciation rights, phantom stock rights or other rights with
equity features), then the Company’s Board of Directors will make an appropriate
adjustment in the Exercise Price and the number of Warrant Shares so as to
protect the rights of the Holder; provided that no such adjustment pursuant to
this Section
2(b) will increase the Exercise Price or decrease the number of Warrant
Shares as otherwise determined pursuant to this Section
2.
3. RIGHTS UPON DISTRIBUTION OF
ASSETS. If the Company shall declare or make any dividend or
other distribution of its assets (or rights to acquire its assets) to all
holders of shares of Common Stock, by way of return of capital or otherwise
(including, without limitation, any distribution of cash, stock or other
securities, property or options by way of a dividend, spin off,
reclassification, corporate rearrangement, scheme of arrangement or other
similar transaction) (a “Distribution”), at any time after the issuance of this
Warrant, then, in each such case:
(a) any
Exercise Price in effect immediately prior to the close of business on the
record date fixed for the determination of holders of shares of Common Stock
entitled to receive the Distribution shall be reduced, effective as of the close
of business on such record date, to a price determined by multiplying such
Exercise Price by a fraction of which (i) the numerator shall be the Closing Bid
Price of the shares of Common Stock on the Trading Day immediately preceding
such record date minus the value of the Distribution (as determined in good
faith by the Company’s Board of Directors) applicable to one share of Common
Stock, and (ii) the denominator shall be the Closing Bid Price of the shares of
Common Stock on the Trading Day immediately preceding such record date;
and
(b) the
number of Warrant Shares shall be increased to a number of shares equal to the
number of shares of Common Stock obtainable immediately prior to the close of
business on the record date fixed for the determination of holders of shares of
Common Stock entitled to receive the Distribution multiplied by the reciprocal
of the fraction set forth in the immediately preceding paragraph (a); provided that in the event
that the Distribution is of shares of Common Stock (or common stock) (“Other
Shares of Common Stock”) of a company whose shares of common stock are traded on
a national securities exchange or a national automated quotation system, then
the Holder may elect to receive a warrant to purchase Other Shares of Common
Stock in lieu of an increase in the number of Warrant Shares, the terms of which
shall be identical to those of this Warrant, except that such warrant shall be
exercisable into the number of shares of Other Shares of Common Stock that would
have been payable to the Holder pursuant to the Distribution had the Holder
exercised this Warrant immediately prior to such record date and with an
aggregate exercise price equal to the product of the amount by which the
exercise price of this Warrant was decreased with respect to the Distribution
pursuant to the terms of the immediately preceding paragraph (a) and the number
of Warrant Shares calculated in accordance with the first part of this paragraph
(b).
A -
4
4. PURCHASE RIGHTS; FUNDAMENTAL
TRANSACTIONS.
(a) Purchase
Rights. In addition to any adjustments pursuant to Section 2 above, if
at any time the Company grants, issues or sells any Options, Convertible
Securities or rights to purchase stock, warrants, securities or other property
pro rata to the record holders of any class of shares of Common Stock (the
“Purchase Rights”), then the Holder will be entitled to acquire, upon the terms
applicable to such Purchase Rights, the aggregate Purchase Rights which the
Holder could have acquired if the Holder had held the number of shares of Common
Stock acquirable upon complete exercise of this Warrant (without regard to any
limitations on the exercise of this Warrant) immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase Rights,
or, if no such record is taken, the date as of which the record holders of
shares of Common Stock are to be determined for the grant, issue or sale of such
Purchase Rights.
(b) Fundamental
Transactions. The Company shall not enter into or be party to
a Fundamental Transaction unless the Successor Entity assumes this Warrant in
accordance with the provisions of this Section (4)(b),
including agreements to deliver to each holder of Warrants in exchange for such
Warrants a security of the Successor Entity evidenced by a written instrument
substantially similar in form and substance to this Warrant, including, without
limitation, an adjusted exercise price equal to the value for the shares of
Common Stock reflected by the terms of such Fundamental Transaction, and
exercisable for a corresponding number of shares of capital stock equivalent to
the shares of Common Stock acquirable and receivable upon exercise of this
Warrant (without regard to any limitations on the exercise of this Warrant)
prior to such Fundamental Transaction, and satisfactory to the
Holder. Upon the occurrence of any Fundamental Transaction, the
Successor Entity shall succeed to, and be substituted for (so that from and
after the date of such Fundamental Transaction, the provisions of this Warrant
referring to the “Company” shall refer instead to the Successor Entity), and may
exercise every right and power of the Company and shall assume all of the
obligations of the Company under this Warrant with the same effect as if such
Successor Entity had been named as the Company herein. Upon
consummation of the Fundamental Transaction, the Successor Entity shall deliver
to the Holder confirmation that there shall be issued upon exercise of this
Warrant at any time after the consummation of the Fundamental Transaction, in
lieu of the shares of the Common Stock (or other securities, cash, assets or
other property) purchasable upon the exercise of the Warrant prior to such
Fundamental Transaction, such shares of stock, securities, cash, assets or any
other property whatsoever (including warrants or other purchase or subscription
rights) which the Holder would have been entitled to receive upon the happening
of such Fundamental Transaction had this Warrant been converted immediately
prior to such Fundamental Transaction, as adjusted in accordance with the
provisions of this Warrant. In addition to and not in substitution for any other
rights hereunder, prior to the consummation of any Fundamental Transaction
pursuant to which holders of shares of Common Stock are entitled to receive
securities or other assets with respect to or in exchange for shares of Common
Stock (a “Corporate Event”), the Company shall make appropriate provision to
insure that the Holder will thereafter have the right to receive upon an
exercise of this Warrant at any time after the consummation of the Fundamental
Transaction but prior to the Expiration Date, in lieu of the shares of the
Common Stock (or other securities, cash, assets or other property) purchasable
upon the exercise of the Warrant prior to such Fundamental Transaction, such
shares of stock, securities, cash, assets or any other property whatsoever
(including warrants or other purchase or subscription rights) which the Holder
would have been entitled to receive upon the happening of such Fundamental
Transaction had the Warrant been exercised immediately prior to such Fundamental
Transaction. If holders of Common Stock are given any choice as to
the securities, cash or property to be received in a Fundamental Transaction,
then the Holder shall be given the same choice as to the consideration it
receives upon any exercise of this Warrant following such Fundamental
Transaction. The provisions of this Section 4 shall apply
similarly and equally to successive Fundamental Transactions and Corporate
Events and shall be applied without regard to any limitations on the exercise of
this Warrant.
5. NONCIRCUMVENTION. The
Company hereby covenants and agrees that the Company will not, by amendment of
its Certificate of Incorporation, Bylaws or through any reorganization, transfer
of assets, consolidation, merger, scheme of arrangement, dissolution, issue or
sale of securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, and will at all
times in good faith carry out all the provisions of this Warrant and take all
action as may be required to protect the rights of the
Holder. Without limiting the generality of the foregoing, the Company
(i) shall not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the Exercise Price then in
effect, (ii) shall take all such actions as may be necessary or appropriate
in order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of this Warrant, and
(iii) shall, so long as this Warrant is outstanding, take all action necessary
to reserve and keep available out of its authorized and unissued shares of
Common Stock, solely for the purpose of effecting the exercise of this Warrant,
100% of the number of shares of Common Stock issuable upon exercise of this
Warrant then outstanding (without regard to any limitations on
exercise).
A -
5
6. WARRANT HOLDER NOT DEEMED A
STOCKHOLDER. Except as otherwise specifically provided herein,
the Holder, solely in such Person’s capacity as a holder of this Warrant, shall
not be entitled to vote or receive dividends or be deemed the holder of share
capital of the Company for any purpose, nor shall anything contained in this
Warrant be construed to confer upon the Holder, solely in such Person’s capacity
as the Holder of this Warrant, any of the rights of a stockholder of the Company
or any right to vote, give or withhold consent to any corporate action (whether
any reorganization, issue of stock, reclassification of stock, consolidation,
merger, conveyance or otherwise), receive notice of meetings, receive dividends
or subscription rights, or otherwise, prior to the issuance to the Holder of the
Warrant Shares which such Person is then entitled to receive upon the due
exercise of this Warrant. In addition, nothing contained in this
Warrant shall be construed as imposing any liabilities on the Holder to purchase
any securities (upon exercise of this Warrant or otherwise) or as a stockholder
of the Company, whether such liabilities are asserted by the Company or by
creditors of the Company.
7. REISSUANCE OF
WARRANTS.
(a) Transfer of
Warrant. If this Warrant is to be transferred, the Holder
shall surrender this Warrant to the Company together with a written assignment
of this Warrant in the form attached hereto as Exhibit B duly
executed by the Holder or its agent or attorney, whereupon the Company will
forthwith, subject to compliance with any applicable securities laws, issue and
deliver upon the order of the Holder a new Warrant (in accordance with Section 7(d)),
registered as the Holder may request, representing the right to purchase the
number of Warrant Shares being transferred by the Holder and, if less then the
total number of Warrant Shares then underlying this Warrant is being
transferred, a new Warrant (in accordance with Section 7(d)) to the Holder
representing the right to purchase the number of Warrant Shares not being
transferred.
(b) Lost, Stolen or Mutilated
Warrant. Upon receipt by the Company of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the Holder to the Company in customary form and,
in the case of mutilation, upon surrender and cancellation of this Warrant, the
Company shall execute and deliver to the Holder a new Warrant (in accordance
with Section
7(d)) representing the right to purchase the Warrant Shares then
underlying this Warrant.
(c) Exchangeable for Multiple
Warrants. This Warrant is exchangeable, upon the surrender
hereof by the Holder at the principal office of the Company, for a new Warrant
or Warrants (in accordance with Section 7(d))
representing in the aggregate the right to purchase the number of Warrant Shares
then underlying this Warrant, and each such new Warrant will represent the right
to purchase such portion of such Warrant Shares as is designated by the Holder
at the time of such surrender; provided, however, that no Warrants for
fractional shares of Common Stock shall be given.
(d) Issuance of New
Warrants. Whenever the Company is required to issue a new
Warrant pursuant to the terms of this Warrant, such new Warrant (i) shall be of
like tenor with this Warrant, (ii) shall represent, as indicated on the face of
such new Warrant, the right to purchase the Warrant Shares then underlying this
Warrant (or in the case of a new Warrant being issued pursuant to Section 7(a) or Section 7(c), the
Warrant Shares designated by the Holder which, when added to the number of
shares of Common Stock underlying the other new Warrants issued in connection
with such issuance, does not exceed the number of Warrant Shares then underlying
this Warrant), (iii) shall have an issuance date, as indicated on the face of
such new Warrant, which is the same as the Issuance Date, and (iv) shall have
the same rights and conditions as this Warrant.
A -
6
8. NOTICES. The
Company shall provide the Holder with prompt written notice of all actions taken
pursuant to this Warrant, including in reasonable detail a description of such
action and the reason therefor. Whenever notice is required to be
given under this Warrant, unless otherwise provided herein, such notice shall be
given in writing, will be mailed (a) if within the domestic United States by
first-class registered or certified airmail, or nationally recognized overnight
express courier, postage prepaid, or by facsimile or (b) if delivered from
outside the United States, by International Federal Express or facsimile, and
(c) will be deemed given (i) if delivered by first-class registered or certified
mail domestic, three business days after so mailed, (ii) if delivered by
nationally recognized overnight carrier, one business day after so mailed, (iii)
if delivered by International Federal Express, two business days after so mailed
and (iv) if delivered by facsimile, upon electronic confirmation of receipt, and
will be delivered and addressed as follows:
|
|
(a)
|
if to the Company,
to:
|
Discovery
Laboratories, Inc.
2600
Kelly Road
Warrington,
Pennsylvania 18976
Attention: John
G. Cooper
Facsimile:
215-488-9301
with copies
to:
Sonnenschein
Nath & Rosenthal LLP
Two World
Financial Center
New York,
New York 10281
Attention: Ira
L. Kotel, Esq.
Facsimile:
212-768-6800
(b) if to the Holder, at
its address on the Exercise Notice in the form attached as Exhibit A hereto, or
at such other address or addresses as may have been furnished to the Company in
writing.
9. AMENDMENT AND
WAIVER. Except as otherwise provided herein, the provisions of
this Warrant may be amended only with the written consent of the Company and the
Holder, and the Company may take any action herein prohibited, or omit to
perform any act herein required to be performed by it, only with the written
consent of the Holder.
10. GOVERNING
LAW. This Warrant shall be governed by and construed and
enforced in accordance with, and all questions concerning the construction,
validity, interpretation and performance of this Warrant shall be governed by,
the internal laws of the State of New York, without giving effect to any choice
of law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York.
11. CONSTRUCTION;
HEADINGS. This Warrant shall be deemed to be jointly drafted
by the Company and the Holder and shall not be construed against any person as
the drafter hereof. The headings of this Warrant are for convenience
of reference and shall not form part of, or affect the interpretation of, this
Warrant.
12. DISPUTE
RESOLUTION. In the case of a dispute as to the determination
of the Exercise Price or the arithmetic calculation of the Warrant Shares, the
Company shall submit the disputed determinations or arithmetic calculations via
facsimile or electronic mail within two (2) Business Days of receipt of the
Exercise Notice giving rise to such dispute, as the case may be, to the
Holder. If the Holder and the Company are unable to agree upon such
determination or calculation of the Exercise Price or the Warrant Shares within
three Business Days of such disputed determination or arithmetic calculation
being submitted to the Holder, then the Company shall, within two (2) Business
Days submit via facsimile or electronic mail (a) the disputed determination of
the Exercise Price to an independent, reputable investment bank selected by the
Company and approved by the Holder or (b) the disputed arithmetic calculation of
the Warrant Shares to the Company’s independent, outside
accountant. The Company shall cause at its expense the investment
bank or the accountant, as the case may be, to perform the determinations or
calculations and notify the Company and the Holder of the results no later than
ten Business Days from the time it receives the disputed determinations or
calculations. Such investment bank’s or accountant’s determination or
calculation, as the case may be, shall be binding upon all parties absent
demonstrable error.
A -
7
13. REMEDIES, OTHER OBLIGATIONS,
BREACHES AND INJUNCTIVE RELIEF. The remedies provided in this
Warrant shall be cumulative and in addition to all other remedies available
under this Warrant, at law or in equity (including a decree of specific
performance and/or other injunctive relief), and nothing herein shall limit the
right of the Holder to pursue actual damages for any failure by the Company to
comply with the terms of this Warrant.
14. TRANSFER. Subject
to compliance with any applicable securities laws, this Warrant may be offered
for sale, sold, transferred or assigned without the consent of the
Company.
15. CERTAIN
DEFINITIONS. For purposes of this Warrant, the following terms
shall have the following meanings:
(a) “Bloomberg”
means Bloomberg Financial Markets.
(b) “Business
Day” means any day other than Saturday, Sunday or other day on which commercial
banks in The City of New York are authorized or required by law to remain
closed.
(c) “Change
of Control” means any Fundamental Transaction other than (A) any reorganization,
recapitalization or reclassification of the Common Stock, in which holders of
the Company’s voting power immediately prior to such reorganization,
recapitalization or reclassification continue after such reorganization,
recapitalization or reclassification to hold publicly traded securities and,
directly or indirectly, the voting power of the surviving entity or entities
necessary to elect a majority of the members of the board of directors (or their
equivalent if other than a corporation) of such entity or entities, or (B)
pursuant to a migratory merger effected solely for the purpose of changing the
jurisdiction of incorporation of the Company.
(d) “Closing
Bid Price” and “Closing Sale Price” means, for any security as of any date, the
last closing bid price and last closing trade price, respectively, for such
security on the Principal Market, as reported by Bloomberg, or, if the Principal
Market begins to operate on an extended hours basis and does not designate the
closing bid price or the closing trade price, as the case may be, then the last
bid price or the last trade price, respectively, of such security prior to
4:00:00 p.m., New York time, as reported by Bloomberg, or, if the Principal
Market is not the principal securities exchange or trading market for such
security, the last closing bid price or last trade price, respectively, of such
security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last closing bid price or last trade price, respectively, of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no closing bid price or last
trade price, respectively, is reported for such security by Bloomberg, the
average of the bid prices, or the ask prices, respectively, of any market makers
for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly
the National Quotation Bureau, Inc.). If the Closing Bid Price or the
Closing Sale Price cannot be calculated for a security on a particular date on
any of the foregoing bases, the Closing Bid Price or the Closing Sale Price, as
the case may be, of such security on such date shall be the fair market value as
determined by the Board of Directors of the Company in the exercise of its good
faith judgment. All such determinations to be appropriately adjusted
for any stock dividend, stock split, stock combination or other similar
transaction during the applicable calculation period.
A -
8
(e) “Common
Stock” means (i) the Company’s shares of Common Stock, par value $0.001 per
share, and (ii) any share capital into which such Common Stock shall have
been changed or any share capital resulting from a reclassification of such
Common Stock.
(f) RESERVED
(g) “Convertible
Securities” means any stock or securities (other than Options) directly or
indirectly convertible into or exercisable or exchangeable for shares of Common
Stock.
(h) “Eligible
Market” means the Principal Market, The New York Stock Exchange, Inc., The
American Stock Exchange, The NASDAQ Global Select Market or The NASDAQ Capital
Market.
(i) “Expiration
Date” means the date [for
Five-Year Warrant, insert five (5) years] [for Short-Term Warrant,
insert nine (9) months] following the Issuance Date or, if such date
falls on a day other than a Business Day or on which trading does not take place
on the Principal Market (a “Holiday”), the next date that is not a
Holiday.
(j) “Fundamental
Transaction” means that the Company shall, directly or indirectly, in one or
more related transactions, (i) consolidate or merge with or into (whether or not
the Company is the surviving corporation) another Person, or (ii) sell, assign,
transfer, convey or otherwise dispose of all or substantially all of the
properties or assets of the Company to another Person, or (iii) allow another
Person to make a purchase, tender or exchange offer that is accepted by the
holders of more than the 50% of the outstanding shares of Common Stock (not
including any shares of Common Stock held by the Person or Persons making or
party to, or associated or affiliated with the Persons making or party to, such
purchase, tender or exchange offer), or (iv) consummate a stock purchase
agreement or other business combination (including, without limitation, a
reorganization, recapitalization, spin-off or scheme of arrangement) with
another Person whereby such other Person acquires more than the 50% of the
outstanding shares of Common Stock (not including any shares of Common Stock
held by the other Person or other Persons making or party to, or associated or
affiliated with the other Persons making or party to, such stock purchase
agreement or other business combination), (v) reorganize, recapitalize or
reclassify its Common Stock, or (vi) any “person” or “group” (as these terms are
used for purposes of Sections 13(d) and 14(d) of the Exchange Act) is or shall
become the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of 50% of the aggregate ordinary voting power
represented by issued and outstanding Common Stock.
(k) “Options”
means any rights, warrants or options to subscribe for or purchase shares of
Common Stock or Convertible Securities.
(l) “Parent
Entity” of a Person means an entity that, directly or indirectly, controls the
applicable Person and whose common stock or equivalent equity security is quoted
or listed on an Eligible Market, or, if there is more than one such Person or
Parent Entity, the Person or Parent Entity with the largest public market
capitalization as of the date of consummation of the Fundamental
Transaction.
A -
9
(m) “Person”
means an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization, any other
entity and a government or any department or agency thereof.
(n) “Principal
Market” means The NASDAQ Capital Market.
(o) RESERVED
(p) “Successor
Entity” means the Person (or, if so elected by the Holder, the Parent Entity)
formed by, resulting from or surviving any Fundamental Transaction or the Person
(or, if so elected by the Holder, the Parent Entity) with which such Fundamental
Transaction shall have been entered into.
(q) “Trading
Day” means any day on which the Common Stock are traded on the Principal Market,
or, if the Principal Market is not the principal trading market for the Common
Stock, then on the principal securities exchange or securities market on which
the Common Stock are then traded; provided that “Trading Day”
shall not include any day on which the Common Stock are scheduled to trade on
such exchange or market for less than 4.5 hours or any day that the Common Stock
are suspended from trading during the final hour of trading on such exchange or
market (or if such exchange or market does not designate in advance the closing
time of trading on such exchange or market, then during the hour ending at
4:00:00 p.m., New York time).
(r) “Weighted
Average Price” means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market during
the period beginning at 9:30:01 a.m., New York City time, and ending at 4:00:00
p.m., New York City time, as reported by Bloomberg through its “Volume at Price”
function or, if the foregoing does not apply, the dollar volume-weighted average
price of such security in the over-the-counter market on the electronic bulletin
board for such security during the period beginning at 9:30:01 a.m., New York
City time, and ending at 4:00:00 p.m., New York City time, as reported by
Bloomberg, or, if no dollar volume-weighted average price is reported for such
security by Bloomberg for such hours, the average of the highest closing bid
price and the lowest closing ask price of any of the market makers for such
security as reported in the “pink sheets” by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.). If the Weighted Average Price
cannot be calculated for such security on such date on any of the foregoing
bases, the Weighted Average Price of such security on such date shall be the
fair market value as mutually determined by the Company and the
Holder. If the Company and the Holder are unable to agree upon the
fair market value of such security, then such dispute shall be resolved pursuant
to Section 12
with the term “Weighted Average Price” being substituted for the term “Exercise
Price.” All such determinations shall be appropriately adjusted for any share
dividend, share split or other similar transaction during such
period.
[Signature
Page Follows]
A -
10
IN WITNESS WHEREOF, the
Company has caused this Warrant to Purchase Common Stock to be duly executed as
of the Issuance Date set out above.
|
DISCOVERY
LABORATORIES, INC.
|
|||
|
By:
|
|||
| Name: | Name | ||
| Title: | Title | ||
EXHIBIT
A
EXERCISE
NOTICE
TO
BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS
WARRANT
TO PURCHASE COMMON STOCK
DISCOVERY
LABORATORIES, INC.
The undersigned holder hereby exercises
the right to purchase _________________ of the shares of Common Stock (“Warrant Shares”) of Discovery
Laboratories, Inc, a Delaware corporation (the “Company”), evidenced by the
attached Warrant to Purchase Common Stock (the “Warrant”). Capitalized
terms used herein and not otherwise defined shall have the respective meanings
set forth in the Warrant.
1. Form of Exercise
Price. The Holder intends that payment of the Exercise Price shall be
made as:
|
|
____________
|
a
“Cash
Exercise” with respect to _________________ Warrant Shares;
and/or
|
|
|
____________
|
a
“Cashless
Exercise” with respect to _______________ Warrant
Shares.
|
2. Payment of Exercise
Price. In the event that the holder has elected a Cash Exercise with
respect to some or all of the Warrant Shares to be issued pursuant hereto, the
holder shall pay the Aggregate Exercise Price in the sum of $___________________
to the Company in accordance with the terms of the Warrant.
3. Delivery of Warrant
Shares. The Company shall deliver __________ Warrant Shares in the
name of the undersigned holder or in the name of ______________________ in
accordance with the terms of the Warrant to the following DWAC Account Number or
by physical delivery of a certificate to:
| Date: | , |
| Name of Registered Holder | |||||
| By: | |||||
|
Name:
|
|
||||
|
Title:
|
|||||
ACKNOWLEDGMENT
The Company hereby acknowledges this
Exercise Notice and hereby directs Continental Stock Transfer & Trust
Company to issue the above indicated number of shares of Common Stock in
accordance with the Transfer Agent Instructions dated
[ ], 2010 from the Company and acknowledged and agreed to
by Continental Stock Transfer & Trust Company.
|
DISCOVERY
LABORATORIES, INC.
|
|||
|
By:
|
|||
| Name: | Name | ||
| Title: | Title | ||
ASSIGNMENT
FORM
(To
assign the foregoing warrant, execute
this form
and supply required information.
Do not
use this form to exercise the warrant.)
FOR VALUE
RECEIVED, [____] all of or [_______] shares of the foregoing Warrant and all
rights evidenced thereby are hereby assigned to
| whose address is |
| Dated: | , |
|
Holder’s
Signature:
|
||||
|
Holder’s
Address:
|
||||
| Signature Guaranteed: |
NOTE: The
signature to this Assignment Form must correspond with the name as it appears on
the face of the Warrant, without alteration or enlargement or any change
whatsoever, and must be guaranteed by a bank or trust
company. Officers of corporations and those acting in a fiduciary or
other representative capacity should file proper evidence of authority to assign
the foregoing Warrant.
Shares of Common
Stock
Series I Warrants to
Purchase Shares
of Common Stock
Series II Warrants to
Purchase Shares
of Common Stock
PROSPECTUS
SUPPLEMENT
LAZARD CAPITAL
MARKETS
BOENNING &
SCATTERGOOD, INC.
June ,
2010