| ARADIGM CORP Item 1A Risk Factors Except for historical information contained herein, the discussion in this Report on Form 10-K contains forward-looking statements, including, without limitation, statements regarding timing and results of clinical trials, the establishment of corporate partnering arrangements, the anticipated commercial introduction of our products and the timing of our cash requirements |
| These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements |
| Potential risks and uncertainties include, without limitation, those mentioned in this report and in particular the factors described below |
| You must evaluate us in light of the uncertainties and complexities present in an early-stage company |
| All of our potential products are in an early stage of research or development |
| Our potential drug delivery products require extensive research, development and pre-clinical and clinical testing |
| Because none of our products has yet received approval by the FDA, we cannot assure you that our research and development efforts will be successful, any of our potential products will be proven safe and effective or regulatory clearance or approval to sell any of our potential products will be obtained |
| We cannot assure you that any of our potential products can be manufactured in commercial quantities or at an acceptable cost or marketed successfully |
| Failure to achieve commercial feasibility, demonstrate safety, achieve clinical efficacy, obtain regulatory approval or successfully market products will negatively impact our business |
| We will need additional capital and our ability to find additional funding is uncertain |
| Our operations to date have consumed substantial and increasing amounts of cash |
| We expect the negative cash flow from operations to continue in the foreseeable future |
| We will need to commit substantial funds to develop our technology and proposed products |
| We will have to continue to conduct costly and time-consuming research and preclinical and clinical testing to develop, refine and commercialize our technology and proposed products |
| Our future capital requirements will depend on many factors, including: • progress in researching and developing our technology, our drug delivery systems and potential applications; • our ability to establish and maintain favorable collaborative arrangements with others; • progress with preclinical studies and clinical trials; • time and costs to obtain regulatory approvals; • costs of development and the rate at which we expand our production technologies; • costs of preparing, filing, prosecuting, maintaining and enforcing patent claims; and • our need to acquire licenses or other rights to technology |
| Since inception, we have financed our operations primarily through private placements and public offerings of our capital stock, proceeds from equipment lease financings, contract research funding and interest earned on investments |
| We believe that our existing cash and cash equivalent balances at December 31, 2005, funding commitments from corporate development partners, and interest earned on our investments should be sufficient to meet our needs for at least the next 12 months |
| However, there can be no assurances that these sources of funding will be sufficient, that our cash requirements will not change or that funding commitments from our corporate development partners will not be amended or terminated |
| 21 _________________________________________________________________ [75]Table of Contents We will need to raise additional capital to fund our capital spending and operations before we become profitable |
| During 2006, we will be seeking additional funding through collaborations, borrowing arrangements and/ or through public or private equity financing, although additional equity financing will be needed to avoid a shareholders’ equity deficit |
| We cannot assure you that additional financing can be obtained on acceptable terms, or at all |
| Dilution to shareholders may result if funds are raised by issuing additional equity securities |
| If adequate funds are not available during the first half of 2006, we will be required to delay, to reduce the scope of, or to eliminate one or more of our research and development programs, or to obtain funds through arrangements with collaborative partners or other sources that may require us to relinquish rights to certain of our technologies or products that we would not otherwise relinquish, and to reduce personnel related costs |
| We have a history of losses and anticipate future losses |
| We have never been profitable, and through December 31, 2005, we have incurred a cumulative deficit of approximately dlra274dtta8 million and our shareholders’ equity is only dlra7dtta2 million |
| We have not had any product sales and do not anticipate receiving any revenue from product sales in 2006 |
| We expect to continue to incur substantial losses over at least the next several years as we: • expand our research and development efforts; • expand our preclinical and clinical testing activities; • pursue additional applications for our existing delivery platforms; • expand our manufacturing efforts; and • plan and build our commercial production capabilities |
| To achieve and sustain profitability, we must, alone or with others, develop, obtain regulatory approval for, manufacture, market and sell products using our drug delivery platforms |
| We cannot assure investors that we will generate sufficient product or contract research revenue to become profitable or to sustain profitability |
| We may not be able to develop our products successfully |
| Many of our products are at an early stage of development |
| Before we can begin to sell our products commercially, we will need to invest in substantial additional development and conduct clinical testing |
| In order to further develop many of our products, we will need to address engineering and design issues |
| We cannot assure you that we will be successful in addressing these designs, engineering and manufacturing issues |
| Additionally, we will need to formulate and package drugs for delivery by our AERx and Intraject systems |
| We cannot assure you that we will be able to do this successfully |
| Even if our delivery technologies have been successfully developed and are commercially feasible for a range of large and small molecule drugs, we cannot assure you that such applications will be commercially acceptable |
| For our delivery systems to be commercially viable, we will need to demonstrate that drugs delivered by our systems: • are safe and effective; • will not be subject to physical or chemical instability over time and under differing storage conditions; and • do not suffer from other problems that would affect commercial viability |
| While our development efforts are at different stages for different products, we cannot assure you that we will successfully develop any products |
| We may also abandon some or all of our proposed products |
| If we cannot develop potential products in a timely manner, our business will be impaired |
| 22 _________________________________________________________________ [76]Table of Contents We may not be able to commercialize products successfully |
| Our success in commercializing our products depends on many factors, including acceptance by health care professionals and patients |
| Their acceptance of our products will largely depend on our ability to demonstrate our products’ ability to compete with alternate delivery systems with respect to: • safety; • efficacy • ease of use; and • price |
| There can be no assurance that our products will be competitive with respect to these factors or that our partners will be able to successfully market any of them in a timely manner |
| We depend on collaborative partners and need additional collaborative partners |
| Our commercialization strategy depends on our ability to enter into agreements with collaborative partners |
| In addition, our development partners could terminate their agreements and we have no assurance that we will receive any development and milestone payments |
| If we do not receive development funds or achieve milestones set forth in the agreements, or if any of our development partners breach or terminate their agreement, our business will be impaired |
| The development and commercialization of the AERx iDMS will be delayed if Novo Nordisk fails to conduct these activities in a timely manner or at all |
| Under the terms of our current agreements with Novo Nordisk, Novo Nordisk and its affiliates assumed broad control and responsibility with respect to: • development and commercialization of the AERx diabetes management products; and • management and operation of the manufacturing facility for the AERx iDMS We will also need to enter into agreements with other corporate partners to conduct the clinical trials, manufacturing, marketing and sales necessary to commercialize other potential products on our AERx and Intraject systems |
| In addition, our ability to apply our delivery systems to any proprietary drugs will depend on our ability to establish and maintain corporate partnerships or other collaborative arrangements with the holders of proprietary rights to such drugs |
| We cannot assure you that we will be able to establish such additional corporate partnerships or collaborative arrangements on favorable terms or at all, or that our existing or future corporate partnerships or collaborative arrangements will be successful |
| We can not assure you that our existing or future corporate partners or collaborators will not pursue alternative technologies or develop alternative products either on their own or in collaboration with others, including our competitors |
| We could have disputes with our existing or future corporate partners or collaborators |
| Any such disagreements could lead to delays in the research, development or commercialization of any potential products or could result in time-consuming and expensive litigation or arbitration, which may not be resolved in our favor |
| If any of our corporate partners or collaborators do not develop or commercialize any product to which it has obtained rights from us, our business could be impaired |
| We have limited manufacturing experience |
| We have validated only a single clinical manufacturing facility for our single dosage forms for our AERx delivery system, and responsibility for and control of this facility has transferred to NNDT We have limited future access to the NNDT manufacturing facility |
| 23 _________________________________________________________________ [77]Table of Contents Either our development partners or we will have to invest significant amounts to attempt to provide for the high-volume manufacturing required for multiple products, and much of this spending will occur before our products are approved |
| There can be no assurance that: • the design requirements of our pulmonary and subcutaneous systems will make it feasible for us to develop it beyond the current prototype; • manufacturing and quality control problems will not arise as we attempt to scale-up; or • any scale-up can be achieved in a timely manner or at a commercially reasonable cost |
| Failure to address these issues could delay or prevent late-stage clinical testing and commercialization of our products |
| We have limited capacity to manufacture key components of our drug delivery systems |
| Under the terms of a Contract Manufacturing Agreement we have entered into with NNDT, NNDT agreed to supply devices and dosage forms to us for development of our other AERx systems |
| This agreement expires at the end of 2007, and there can be no assurance that we will be able to extend this agreement at satisfactory terms or that we will be able to find a replacement supplier at satisfactory terms |
| We may decide to invest in additional clinical manufacturing facilities in order to internally produce critical components of our drug delivery systems including the disposable nozzles, assemble the disposable unit-dose packets and fill the drug into the unit-dose packets |
| We intend to use contract manufacturers to produce key components, assemblies and subassemblies in the clinical and commercial manufacturing of our delivery devices |
| There can be no assurance that we will be able to enter into or maintain satisfactory contract manufacturing arrangements |
| Certain components of our products may be available, at least initially, only from single sources |
| There can be no assurance that we could find alternate suppliers for any of these components |
| A delay of or interruption in production resulting from any supply problem could have a material adverse effect on our business |
| We rely on a small number of vendors and contract manufacturers to supply us with specialized equipment, tools and components |
| We rely on a small number of vendors and contract manufacturers to supply us with specialized equipment, tools and components for use in our development and manufacturing processes |
| There can be no assurances that these vendors will continue to supply us with such specialized equipment, tools and components, nor can there be any assurances that we could find alternative sources for such specialized equipment and tools |
| A delay or interruption in development or manufacturing resulting from our inability to acquire the equipment, tools and components we need could have a material adverse effect on our business |
| We depend upon proprietary technology and the status of patents and proprietary technology is uncertain |
| Our business and competitive position is dependent upon our ability to protect our proprietary technology and avoid infringing on the proprietary rights of others |
| We have conducted original research on a number of aspects relating to pulmonary drug delivery |
| While we cannot assure you that any of our patents will provide a significant commercial advantage, these patents are intended to provide protection for important aspects of our technology, including methods for aerosol generation, devices used to generate aerosols, breath control, compliance monitoring certain pharmaceutical formulations, design of dosage forms and their manufacturing, and testing methods |
| In addition, we are maintaining as trade secrets some of the key elements of our manufacturing technologies; particularly those associated with production of disposable unit-dose packets for the AERx system |
| In connection with our acquisition of assets from the Weston Medical Group in May 2003, we acquired certain proprietary technologies and other intellectual property relating to the Intraject subcutaneous delivery system |
| While we have continued to develop the technologies relating to the Intraject system, we cannot assure you that our efforts to protect the proprietary technologies and other intellectual property that we have 24 _________________________________________________________________ [78]Table of Contents acquired from Weston Medical Group will provide adequate protection or significant commercial advantage |
| To date we have been unable to secure a partner for commercial-scale production of any application of the Intraject system, and there can be no assurance that we will be able to secure such a partner |
| Our success will depend to a significant extent on our ability to obtain and enforce patents, maintain trade secret protection and operate without infringing on the proprietary rights of third parties |
| Because the field of needle-free drug delivery is crowded and a substantial number of patents have been issued and because patent positions can be highly uncertain and frequently involve complex legal and factual questions, the breadth of claims obtained in any application or the enforceability of our patents cannot be predicted |
| Commercialization of pharmaceutical products can also be subject to substantial delays as a result of the time required for product development, testing and regulatory approval |
| We also seek to protect some of these inventions through foreign counterpart applications in selected other countries |
| Statutory differences in patentable subject matter may limit the protection we can obtain on some of our inventions outside of the United States |
| For example, methods of treating humans are not patentable in many countries outside of the United States |
| These and other issues may limit the patent protection we will be able to secure outside of the United States |
| The coverage claimed in a patent application can be significantly reduced before a patent is issued, either in the United States or abroad |
| Consequently, we do not know whether any of our pending or future patent applications will result in the issuance of patents or, to the extent patents have been issued or will be issued, whether these patents will be subjected to further proceedings limiting their scope, will provide significant proprietary protection or competitive advantage, or will be circumvented or invalidated |
| Furthermore, patents already issued to us or our pending applications may become subject to dispute, and any disputes could be resolved against us |
| For example, Eli Lilly and Company has brought an action against us seeking to have one or more employees of Eli Lilly named as co-inventors on one of our patents |
| In addition, because patent applications in the United States are currently maintained in secrecy until patents issue, and patent applications in certain other countries generally are not published until more than 18 months after they are first filed, and because publication of discoveries in scientific or patent literature often lags behind actual discoveries, we cannot be certain that we were the first creator of inventions covered by pending patent applications or that we were the first to file patent applications on such inventions |
| Our policy is to require our officers, employees, consultants and advisors to execute proprietary information and invention and assignment agreements upon commencement of their relationships with us |
| We cannot assure you, however, that these agreements will provide meaningful protection for our inventions, trade secrets or other proprietary information in the event of unauthorized use or disclosure of such information |
| We also execute confidentiality agreements with outside collaborators and consultants |
| However, disputes may arise as to the ownership of proprietary rights to the extent that outside collaborators or consultants apply technological information developed independently by them or others to our projects, or apply our technology to other projects, and we cannot assure you that any such disputes would be resolved in our favor |
| We may incur substantial costs if we are required to defend ourselves in patent suits brought by third parties |
| These legal actions could seek damages and seek to enjoin testing, manufacturing and marketing of the accused product or process |
| In addition to potential liability for significant damages, we could be required to obtain a license to continue to manufacture or market the accused product or process and we cannot assure you that any license required under any such patent would be made available to us on acceptable terms, if at all |
| Litigation may also be necessary to enforce our patents against others or to protect our know-how or trade secrets |
| Such litigation could result in substantial expense, and we cannot assure you that any litigation would be resolved in our favor |
| Sumatriptan is currently marketed under the trade name Imitrex in oral, nasal and injectable forms and the injectable form is covered by a series of patents, the first of which is scheduled to come off patent in 2006 in Europe and 2007 in the United States |
| There is an additional US patent relating to the injectable form of sumatriptan that does not expire until 2009, though this patent has been challenged by multiple parties and 25 _________________________________________________________________ [79]Table of Contents may be invalidated |
| There can be no assurance that this patent will be invalidated, and if not, under certain circumstances we will be unable to enter the US market with Intraject sumatriptan until 2009 |
| We may not obtain regulatory approval for our products on a timely basis, or at all |
| All medical devices and new drugs, including our products under development, are subject to extensive and rigorous regulation by the federal government, principally the FDA, and by state and local government agencies |
| Such regulations govern the development, testing, manufacture, labeling, storage, approval, advertising, promotion, sale and distribution of such products |
| Medical devices or drug products that are marketed abroad are also subject to regulation by foreign governments |
| The process for obtaining FDA approvals for drug products is generally lengthy, expensive and uncertain |
| Securing FDA approvals often requires applicants to submit extensive clinical data and supporting information to the FDA Even if granted, the FDA can withdraw product clearances and approvals for failure to comply with regulatory requirements or upon the occurrence of unforeseen problems following initial marketing |
| The activities required before a new drug product may be marketed in the United States include pre-clinical and clinical testing and submission of a new drug application with the FDA Preclinical tests include laboratory evaluation of product chemistry and other characteristics and animal studies to assess the potential safety and efficacy of the product as formulated |
| Clinical testing involves the administration of the drug to healthy human volunteers or to patients under the supervision of a qualified principal investigator, usually a physician, pursuant to a FDA-reviewed protocol |
| Human clinical trials typically are conducted in three sequential phases, but the phases may overlap |
| Phase 1 trials consist of testing the product in a small number of patients or normal volunteers, primarily for safety, at one or more dosage levels, as well as characterization of a drug’s pharmacokinetic and/or pharmacodynamic profile |
| In Phase 2 clinical trials, in addition to safety, the efficacy of the product is usually evaluated in a patient population |
| Phase 3 trials typically involve additional testing for safety and clinical efficacy in an expanded population at geographically disperse sites |
| All of the phases of clinical studies must be conducted in conformance with FDA’s bioresearch monitoring regulations |
| We cannot assure you that we will be able to obtain necessary regulatory approvals on a timely basis, if at all, for any of our potential products |
| Even if granted, regulatory approvals may include significant limitations on the uses for which products may be marketed |
| Moreover, we cannot assure you that any required approvals, once obtained, will not be withdrawn or that we will remain in compliance with other regulatory requirements |
| If we, or manufacturers of our components, fail to comply with applicable FDA and other regulatory requirements, we, and they, are subject to sanctions, including: • warning letters; • fines; • product recalls or seizures; • injunctions; • refusals to permit products to be imported into or exported out of the United States; • withdrawals of previously approved marketing applications; and • criminal prosecutions |
| Manufacturers of drugs also are required to comply with the applicable GMP requirements, which relate to product testing, quality assurance and maintaining records and documentation |
| We cannot assure you that we will be able to comply with the applicable GMP and other FDA regulatory requirements for manufacturing as we expand our manufacturing operations, which would impair our business |
| In addition, to market our products in foreign jurisdictions, Aradigm and our partners must obtain required regulatory approvals from foreign regulatory agencies and comply with extensive regulations regarding safety and quality |
| We cannot assure you that we will obtain regulatory approvals in such 26 _________________________________________________________________ [80]Table of Contents jurisdictions or that we will not incur significant costs in obtaining or maintaining any foreign regulatory approvals |
| If approvals to market our products are delayed, if we fail to receive these approvals, or if we lose previously received approvals, our business would be impaired |
| Because certain of our clinical studies involve narcotics, we are registered with the DEA and our facilities are subject to inspection and DEA export, import, security, and production quota requirements |
| We cannot assure you that we will not be required to incur significant costs to comply with DEA regulations in the future or that such regulations will not otherwise harm our business |
| The results of preclinical and clinical testing are uncertain |
| Before we can file for regulatory approval for the commercial sale of our potential AERx and Intraject products, the FDA will require extensive preclinical and clinical testing to demonstrate their safety and efficacy |
| We have tested prototype patient-operated versions of our AERx and Intraject delivery systems on a limited number of individuals in Phase 1 and Phase 2 clinical trials and have initiated a Phase 3 clinical trial for the AERx iDMS If we do not or cannot complete current trials or progress to more advanced clinical trials, we may not be able to commercialize our AERx or Intraject products |
| Completing clinical trials in a timely manner depends on, among other factors, the enrollment of patients |
| Our ability to recruit patients depends on a number of factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the study and the existence of competitive clinical trials |
| Delays in planned patient enrollment in our current or future clinical trials may result in increased costs, program delays or both |
| Although we believe the limited data we have regarding our potential products is encouraging, the results of initial preclinical and clinical testing do not necessarily predict the results that we will get from subsequent or more extensive preclinical and clinical testing |
| Furthermore, we cannot assure you that clinical trials of these products will demonstrate that these products are safe and effective to the extent necessary to obtain regulatory approvals |
| Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials |
| If we cannot adequately demonstrate that any therapeutic product we are developing is safe and effective, regulatory approval of that product would be delayed or prevented, which would impair our business |
| We are also developing applications of our delivery platforms for the delivery of other compounds |
| These applications are in early stages of development and we do not yet know the degree of testing and development that will be needed to obtain necessary marketing approvals from the FDA and other regulatory agencies |
| We cannot assure you that these applications will prove to be viable or that any necessary regulatory approvals will be obtained in a timely manner, if at all |
| In addition, the FDA may require us to provide clinical data beyond what is currently planned to demonstrate that the chronic administration of drugs delivered via the lung for systemic effect is safe |
| We cannot assure you that we will be able to present such data in a timely manner, or at all |
| We are in a highly competitive market and our competitors may develop alternative therapies |
| We are in competition with pharmaceutical, biotechnology and drug delivery companies, hospitals, research organizations, individual scientists and nonprofit organizations engaged in the development of alternative drug delivery systems or new drug research and testing, as well as with entities producing and developing injectable drugs |
| We are aware of a number of companies such as Alkermes Pharmaceuticals, Inc |
| and Nektar Therapeutics (formerly Inhale Therapeutic Systems, Inc |
| ) that are currently seeking to develop new products and non-invasive alternatives to injectable drug delivery, including oral delivery systems, intranasal delivery systems, transdermal systems, buccal and colonic absorption systems |
| Many of these companies and entities have greater research and development capabilities, experience, manufacturing, marketing, financial and managerial resources than we do and many of these companies may have applications for their delivery platforms that are in a more advanced stage of 27 _________________________________________________________________ [81]Table of Contents development than our applications |
| Accordingly, our competitors may succeed in developing competing technologies, obtaining FDA approval for products or gaining market acceptance more rapidly than we can |
| We depend on key personnel and must continue to attract and retain key employees |
| We depend on a small number of key management and technical personnel |
| Our success also depends on our ability to attract and retain additional highly qualified marketing, management, manufacturing, engineering and research and development personnel |
| We face intense competition in our recruiting activities and may not be able to attract or retain qualified personnel |
| Losing any of these key employees could harm our business and operations |
| We may be exposed to product liability |
| Researching, developing and commercializing medical devices and therapeutic products entail significant product liability risks |
| The use of our products in clinical trials and the commercial sale of such products may expose us to liability claims |
| These claims might be made directly by consumers or by pharmaceutical companies or others selling such products |
| Companies often address the exposure of such risk by obtaining product liability insurance |
| Although we currently have product liability insurance, there can be no assurance that we can maintain such insurance or obtain additional insurance on acceptable terms, in amounts sufficient to protect our business, or at all |
| A successful claim brought against us in excess of our insurance coverage would have a material adverse effect on our business |
| Third-party reimbursement for our products is uncertain |
| In both domestic and foreign markets, sales of our potential products depend in part on the availability of reimbursement from third-party payers such as government health administration authorities, private health insurers and other organizations |
| Third-party payers often challenge the price and cost-effectiveness of medical products and services |
| Significant uncertainty exists as to the reimbursement status of newly approved health care products |
| We cannot assure you that any of our products will be reimbursable by third-party payers |
| In addition, we cannot assure you that our products will be considered cost-effective or that adequate third-party reimbursement will be available to enable us to maintain price levels sufficient to realize a profit |
| Legislation and regulations affecting the pricing of pharmaceuticals may change before our products are approved for marketing and any such changes could further limit reimbursement |
| We use hazardous materials |
| Our operations involve use of hazardous and toxic materials, chemicals and various radioactive compounds that generate hazardous, toxic and radioactive wastes |
| Although we believe that our safety procedures for handling and disposing of such materials comply with all state and federal regulations and standards, we cannot completely eliminate the risk of accidental contamination or injury from these materials |
| In the event of such an accident, we could be held liable for any damages that result and such liability could exceed the resources of our business |
| Our stock price is likely to remain volatile |
| The market prices for securities of many companies in the drug delivery industry, including ours, have historically been highly volatile, and the market from time to time has experienced significant price and volume fluctuations unrelated to the operating performance of particular companies |
| Prices for our common stock may be influenced by many factors, including: • investor perception of us; • analyst recommendations; • fluctuations in our operating results; 28 _________________________________________________________________ [82]Table of Contents • market conditions relating to the drug delivery industry; • announcements of technological innovations or new commercial products by us or our competitors; • publicity regarding actual or potential developments relating to products under development by us or our competitors; • failure to establish new collaborative relationships; • developments or disputes concerning patent or proprietary rights; • delays in the development or approval of our product candidates; • regulatory developments in both the United States and foreign countries; • public concern as to the safety of drug delivery technologies; • period-to-period fluctuations in financial results; • future sales of substantial amounts of common stock by shareholders; or • economic and other external factors |
| In the past, class action securities litigation has often been instituted against companies following periods of volatility in the market price of their securities |
| Any such litigation instigated against us could result in substantial costs and a diversion of management’s attention and resources |
| We have implemented certain anti-takeover provisions |
| Certain provisions of our articles of incorporation and the California General Corporation Law could discourage a third party from acquiring, or make it more difficult for a third party to acquire, control of our company without approval of our board of directors |
| These provisions could also limit the price that certain investors might be willing to pay in the future for shares of our common stock |
| Certain provisions allow the board of directors to authorize the issuance of preferred stock with rights superior to those of the common stock |
| We are also subject to the provisions of Section 1203 of the California General Corporation Law which requires a fairness opinion to be provided to our shareholders in connection with their consideration of any proposed “interested party” reorganization transaction |
| We have adopted a shareholder rights plan, commonly known as a “poison pill” |
| We have also adopted an Executive Officer Severance Plan and a Form of Change of Control Agreement, both of which may provide for the payment of benefits to our officers in connection with an acquisition |
| The provisions described above, our poison pill, our severance plan and our change of control agreements, and provisions of the California General Corporation Law may discourage, delay or prevent a third party from acquiring us |