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| ARDM.OB > SEC Filings for ARDM.OB > Form 10-Q on 6-Aug-2009 | All Recent SEC Filings |
6-Aug-2009
Quarterly Report
Overview
We are an emerging specialty pharmaceutical company focused on the
development and commercialization of drugs delivered by inhalation for the
treatment of severe respiratory diseases by pulmonologists. Over the last
decade, we have invested a large amount of capital to develop drug delivery
technologies, particularly the development of a significant amount of expertise
in pulmonary drug delivery. We have also invested considerable effort into the
generation of a large volume of laboratory and clinical data demonstrating the
performance of our AERx pulmonary drug delivery platform. We have not been
profitable since inception and expect to incur additional operating losses over
at least the next several years as we expand product development efforts,
preclinical testing and clinical trial activities, and possible sales and
marketing efforts, and as we secure production capabilities from outside
contract manufacturers. To date, we have not had any significant product sales
and do not anticipate receiving any revenues from the sale of products in the
near term. As of June 30, 2009, we had an accumulated deficit of $344.5 million.
Historically, we have funded our operations primarily through public offerings
and private placements of our capital stock. Most recently, in February 2009, we
closed the sale of 44,663,071 shares of common stock in a registered direct
offering with net proceeds, after offering expenses, of $3.9 million. In the
past, we have also funded our operations through license fees and milestone
payments from collaborators, proceeds from the January 2005 restructuring
transaction with Novo Nordisk, borrowings from Novo Nordisk, sale of a
technology platform (Intraject) and interest earned on investments.
Historically, our development activities consisted primarily of
collaborations and product development agreements with third parties. The most
notable collaboration was with Novo Nordisk on the AERx® insulin Diabetes
Management System ("iDMS') for the treatment of Type I and Type II diabetes.
This program began in 1998 and included nine Phase 3 clinical trials in Type I
and Type II diabetes patients. On April 30, 2008, Novo Nordisk announced that
following recent reports of lung cancer in Type II diabetes patients treated
with Exubera*, an inhaled insulin product from Pfizer, the likelihood of
achieving a positive benefit/risk ratio for future pulmonary diabetes projects
had become more uncertain, and as a result, Novo Nordisk had decided to stop all
research and development activities in the field. In May 2008, the July 3, 2006
License Agreement between us and Novo Nordisk was terminated. Pursuant to the
July 3, 2006 License Agreement, on September 25, 2008, Novo Nordisk assigned to
us at no charge, the inhaled insulin-related patents. These patents were either
previously purchased from us in July 2006 or had originated from Novo Nordisk.
The portfolio includes both U.S. and foreign patents. We assume the
responsibility for the maintenance of this portfolio. Novo Nordisk is also
providing us with the data from the preclinical and clinical research generated
during the collaboration. We do not intend to complete the development of AERx
iDMS on our own. We are attempting to out-license or sell the assets associated
with inhaled insulin.
Over the last three years, our business has focused on opportunities for
product development for treatment of severe respiratory disease that we could
potentially develop and commercialize in the United States without a partner. In
selecting our proprietary development programs, we primarily seek drugs approved
by the United States Food and Drug Administration ("FDA") that can be
reformulated for both existing and new indications in respiratory disease. Our
intent is to use our pulmonary delivery methods and formulations to improve
their safety, efficacy and convenience of administration to patients. We believe
that this strategy will allow us to reduce cost, development time and risk of
failure, when compared to the discovery and development of new chemical
entities. It is our longer term strategy to commercialize our respiratory
product candidates with our own focused sales and marketing force addressing
pulmonary specialty doctors in the United States, where we believe that a
proprietary sales force will enhance the return to our shareholders. Where our
products can benefit a broader population of patients in the United States or in
other countries, we may enter into co-development, co-promotion or other
marketing arrangements with collaborators, thereby reducing costs and increasing
revenues through license fees, milestone payments and royalties. Our lead
development candidate is a proprietary liposomal formulation of the antibiotic
ciprofloxacin that is delivered by inhalation for the treatment of infections
associated with the severe respiratory diseases cystic fibrosis and non-cystic
fibrosis bronchiectasis. We received orphan drug designations for both of these
indications in the U.S. We recently reported the results of two successful Phase
2a trials with this product candidate in cystic fibrosis ("CF') and non-cystic
fibrosis bronchiectasis, respectively, as described below.
In June 2008, we completed a multi-center 14-day treatment Phase 2a trial in
Australia and New Zealand in 21 CF patients with once daily dosing of 6mL of
inhaled liposomal ciprofloxacin. The primary efficacy endpoint in this Phase 2a
study was the change from baseline in the sputum Pseudomonas aeruginosa colony
forming units ("CFU"), an objective measure of the reduction in pulmonary
bacterial load. Data analysis in 21 patients who completed the study
demonstrated that the CFUs decreased by a mean 1.43 log over the 14-day
treatment period (p_0.0001). Evaluation one week after study treatment was
discontinued showed that the Pseudomonas bacterial density in the lung was still
reduced from the baseline without additional antibiotic use. Pulmonary function
testing as measured by the forced expiratory volume in one second ("FEV1")
showed a significant mean increase of 6.86% from baseline after 14 days of
treatment (p=0.04).
In December 2008, we completed an open-label, four week treatment study with
once daily inhaled liposomal ciprofloxacin in patients with non-CF
bronchiectasis. The study was conducted at eight leading centers in the United
Kingdom and enrolled a total of 36 patients. The patients were randomized into
two equal size groups, one receiving 3 mL of inhaled liposomal ciprofloxacin and
the other receiving 6 mL of inhaled liposomal ciprofloxacin, once-a-day for the
four-week treatment period. The primary efficacy endpoint was the change from
baseline in the sputum of Pseudomonas aeruginosa CFUs, the standard objective
measure of the reduction in pulmonary bacterial load. The 3 mL and 6 mL doses of
inhaled liposomal ciprofloxacin in the evaluable patient population demonstrated
significant mean decreases against baseline in the CFUs over the 28-day
treatment period of 3.5 log (p<0.001) and 4.0 log (p<0.001) units, respectively.
In July 2009, we received clearance from the U.S. FDA for our inhaled
liposomal ciprofloxacin Investigational New Drug ("IND") application. The
initial clinical protocol under this IND is an international, randomized,
double- blind, placebo-controlled Phase 2b study designed to evaluate inhaled
liposomal ciprofloxacin in patients with non-cystic fibrosis bronchiectasis. We
plan in the Phase 2b study to enroll 96 patients and the primary efficacy
endpoint will be the change from baseline in the sputum of Pseudomonas
Aeruginosa colony forming units following once-daily dosing of two different
dose levels vs. placebo for a four-week treatment period. Secondary endpoints
will include quality of life measurements and improvement of outcomes with
respect to exacerbations. Lung function changes will be monitored for safety.
In August 2009, we announced that the European Medicines Agency ("EMEA")
granted Orphan Drug Designation to the Company's inhaled liposomal ciprofloxacin
drug product candidate for the treatment of lung infections associated with
cystic fibrosis. Under European guidelines, Orphan Medicinal Product Designation
provides 10 years of potential market exclusivity if the product candidate is
the first product candidate for the indication approved for marketing in the
European Union. Orphan drug designation also allows the candidate's sponsor to
seek assistance from the EMEA in optimizing the candidate's clinical development
through participation in designing the clinical protocol and preparing the
marketing application. Additionally, a drug candidate designated by the
Commission as an Orphan Medicinal Product may qualify for a reduction in
regulatory fees as well as a European Union-funded research grant. The Company
was granted previously orphan drug designations by the U.S. Food and Drug
Administration for inhaled liposomal ciprofloxacin for the management of CF and
for non-cystic fibrosis bronchiectasis.
In 2004, we executed a development agreement with Defence Research and
Development Canada, a division of the Canadian Department of National Defence,
for the development of liposomal ciprofloxacin for the treatment of biological
terrorism-related inhalation anthrax. If we apply in the future for approval of
this product candidate for the prevention and treatment of inhalation anthrax
and possibly other inhaled life-threatening bioterrorism infections, we
anticipate using safety data from the cystic fibrosis and bronchiectasis studies
to support our application. Our plan is to seek U.S. and other government
funding to complete the development of this product.
Our programs included a collaboration with Lung Rx, Inc. ("Lung Rx"), a
wholly owned subsidiary of United Therapeutics Corporation ("United
Therapeutics"), for the development of inhalation treatments for pulmonary
arterial hypertension. We conducted two collaborative research projects on
inhaled treprostinil using our AERx delivery system with United Therapeutics.
The first project was with an aqueous formulation of treprostinil. The second
project involved development of a slow-acting liposomal formulation of
treprostinil, with the view to achieving once-a-day dosing. On August 30, 2007,
we signed an Exclusive License, Development and Commercialization Agreement with
Lung Rx ("Lung Rx Agreement"), pursuant to which we granted Lung Rx, upon
payment of specified amounts, an exclusive license to develop and commercialize
inhaled treprostinil using our AERx Essence® technology for the treatment of
pulmonary arterial hypertension, or PAH, and other potential therapeutic
indications. Under the terms of the Lung Rx Agreement, we received an upfront
fee of $440,000 and an additional fee of $440,000 four months after the signing
date. These fees are nonrefundable and were included in deferred revenue in the
balance sheet at December 31, 2007. Under the terms of the Lung Rx Agreement, we
were responsible for conducting and funding the feasibility study that included
a clinical trial to compare AERx Essence to a nebulizer used in a completed
Phase 3 registration trial conducted by United Therapeutics. We began this study
in April
2008 and announced results in November 2008. At the same time, we announced
receipt of $2.75 million from Lung Rx which included the first milestone of
$2.0 million and development costs. Lung Rx was to pay a $650,000 license fee
for an exclusive license and had the right under the Lung Rx Agreement to
purchase $3.47 million of our common stock at an average closing price over a
certain trailing period within 15 days of Lung Rx's determination that the
feasibility study was successful. Lung Rx determined that, while the results of
the clinical trial warranted continuation of the development of AERx Essence
technology with treprostinil, the performance of the AERx Essence inhaler in the
clinical study was different from the nebulizer. As such, they did not pay the
license fee or purchase our stock.
On June 1, 2009, we received a written notice from United Therapeutics
seeking to terminate the Lung Rx Agreement effective July 1, 2009. Lung Rx did
not assert the existence of any technical problems with our AERx technology or
any safety or efficacy concerns. We believe that Lung Rx is not entitled to
terminate the Lung Rx Agreement and we are engaged in discussions concerning
Lung Rx's payment obligations to us under the Lung Rx Agreement. There is no
assurance that these discussions will result in a favorable outcome for the
Company. We discontinued certain business activities that we were undertaking to
support the collaboration and eliminated the positions of personnel who were
devoting all or substantially all of their time to supporting the collaboration.
We have a proprietary product candidate for smoking cessation treatment. We
have encouraging data from our first human clinical trial delivering aqueous
solutions of nicotine using the palm-sized AERx Essence system. Our randomized,
open-label, single-site Phase 1 trial evaluated arterial plasma pharmacokinetics
and subjective acute cigarette craving when one of three nicotine doses was
administered to 18 adult male smokers. Blood levels of nicotine rose much more
rapidly following a single-breath inhalation compared to published data on other
approved nicotine delivery systems. Cravings for cigarettes were measured on a
scale from 0-10 before and after dosing for up to four hours. Prior to dosing,
mean craving scores were 5.5, 5.5 and 5.0, respectively, for the three doses. At
five minutes following inhalation of the nicotine solution through the AERx
Essence device, craving scores were reduced to 1.3, 1.7 and 1.3, respectively,
and did not return to pre-dose baseline during the four hours of monitoring.
Nearly all subjects reported an acute reduction in craving or an absence of
craving immediately following dosing. No serious adverse reactions were reported
in the study.
We believe these results provide the foundation for further research with the
AERx Essence device as a means toward smoking cessation. We are seeking
collaborations with government, non-government and commercial organizations to
further develop this product candidate.
In August 2006, we sold all of our assets related to the Intraject
needle-free injector technology platform and products, including 12 United
States patents along with foreign counterparts, to Zogenix, Inc., a private
company. Zogenix is responsible for further development and commercialization
efforts of Intraject (now rebranded under the name DosePro*). We received a
$4.0 million initial payment from Zogenix, and we will be entitled to a
$4.0 million milestone payment upon initial U. S. commercialization, and royalty
payments upon any commercialization of products in the U.S. and other countries,
including the European Union, that may be developed and sold using the DosePro
technology. In December 2007, Zogenix submitted a New Drug Application ("NDA")
with the U.S. FDA for the migraine drug sumatriptan using the needle-free
injector DosePro ("Sumavel* DosePro"). The NDA was accepted for filing by the
FDA in March 2008. The same month, Zogenix entered into a license agreement to
grant exclusive rights in the European Union to Desitin Pharmaceuticals, GmbH to
develop and commercialize Sumavel DosePro in the European Union.
On July 16, 2009, Zogenix announced that it was granted approval by the FDA
of the Sumavel DosePro (sumatriptan injection) needle-free delivery system for
the treatment of acute migraine and cluster headache. On August 3, 2009, Zogenix
and Astellas Pharma US, Inc. ("Astellas") announced that they had entered into
an exclusive co-promotion agreement in the U.S. for the Sumavel DosePro
needle-free delivery system. Sumavel DosePro is expected to be commercially
available in January 2010. Under the announced terms of the agreement, Zogenix
and Astellas will collaborate on the promotion and marketing of Sumavel DosePro
with Zogenix focusing their sales activities primarily on the neurology market
while Astellas will focus mostly on primary care physicians. Zogenix will have
responsibility for manufacturing and distribution of the product.
Critical Accounting Policies and Estimates
We consider certain accounting policies related to revenue recognition,
impairment of long-lived assets, exit/disposal activities, research and
development, income taxes and stock-based compensation to be critical accounting
policies that require the use of significant judgments and estimates relating to
matters that are inherently uncertain and may result in materially different
results under different assumptions and conditions. The preparation of financial
statements in conformity with United States generally accepted accounting
principles requires us to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes to the financial
statements. These estimates include useful lives for property and equipment and
related depreciation calculations, estimated amortization periods for payments
received from product development and license agreements as
they relate to revenue recognition, and assumptions for valuing options,
warrants and other stock-based compensation. Our actual results could differ
from these estimates.
Revenue Recognition
Contract revenues consist of revenue from grants, collaboration agreements
and feasibility studies. We recognize revenue under the provisions of the SEC's
Staff Accounting Bulletin 104, Topic 13, Revenue Recognition Revised and Updated
("SAB 104") and Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements
with Multiple Deliverables ("EITF 00-21"). Revenue for arrangements not having
multiple deliverables, as outlined in EITF 00-21, is recognized once costs are
incurred and collectability is reasonably assured. Under some agreements our
collaborators have the right to withhold reimbursement of costs incurred until
the work performed under the agreement is mutually agreed upon. For these
agreements, we recognize revenue upon acceptance of the work and confirmation of
the amount to be paid by the collaborator.
Deferred revenue includes the portion of all refundable and nonrefundable
research billings and payments that have been received, but not earned. In
accordance with contract terms, milestone payments from collaborative research
agreements are considered reimbursements for costs incurred under the agreements
and, accordingly, are recognized as revenue either upon completion of the
milestone effort, when payments are contingent upon completion of the effort, or
are based on actual efforts expended over the remaining term of the agreement
when payments precede the required efforts. Costs of contract revenues are
approximate to or are greater than such revenues, and are included in research
and development expenses. We defer refundable development and license fee
payments until specific performance criteria are achieved. Refundable
development and license fee payments are generally not refundable once specific
performance criteria are achieved and accepted.
Collaborative license and development agreements often require us to provide
multiple deliverables, such as a license, research and development, product
steering committee services and other performance obligations. These agreements
are accounted for in accordance with EITF 00-21. Under EITF 00-21, delivered
items are evaluated to determine whether such items have value to our
collaborators on a stand-alone basis and whether objective reliable evidence of
fair value of the undelivered items exists. Deliverables that meet these
criteria are considered a separate unit of accounting. Deliverables that do not
meet these criteria are combined and accounted for as a single unit of
accounting. The appropriate revenue recognition criteria are identified and
applied to each separate unit of accounting.
Impairment of Long-Lived Assets
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, we review for impairment whenever events or changes in
circumstances indicate that the carrying amount of property and equipment may
not be recoverable. Determination of recoverability is based on an estimate of
undiscounted future cash flows resulting from the use of the asset and its
eventual disposition. In the event that such cash flows are not expected to be
sufficient to recover the carrying amount of the assets, we write down the
assets to their estimated fair values and recognize the loss in the statements
of operations.
Accounting for Costs Associated with Exit or Disposal Activities
In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities ("SFAS 146"), we recognize a liability for the cost
associated with an exit or disposal activity that is measured initially at its
fair value in the period in which the liability is incurred, except for a
liability for one-time termination benefits that is incurred over time.
According to SFAS 146, costs to terminate an operating lease or other contracts
are (a) costs to terminate the contract before the end of its term or (b) costs
that will continue to be incurred under the contract for its remaining term
without economic benefit to the entity. In periods subsequent to initial
measurement, changes to the liability are measured using the credit-adjusted
risk-free rate that was used to measure the liability initially.
Research and Development
Research and development expenses consist of costs incurred for
company-sponsored, collaborative and contracted research and development
activities. These costs include direct and research-related overhead expenses.
Research and development expenses under collaborative and government grants
approximate the revenue recognized under such agreements. We expense research
and development costs as such costs are incurred.
Income Taxes
We make certain estimates and judgments in determining income tax expense for
financial statement purposes. These estimates and judgments occur in the
calculation of certain tax assets and liabilities, which arise from differences
in the timing of recognition of revenue and expense for tax and financial
statement purposes. As part of the process of preparing our financial
statements, we are required to estimate our income taxes in each of the
jurisdictions in which we operate. This process involves us estimating our
current tax exposure under the most recent tax laws and assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included in our balance sheets.
We assess the likelihood that we will be able to recover our deferred tax
assets. We consider all available evidence, both positive and negative,
including our historical levels of income and losses, expectations and risks
associated with estimates of future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for a valuation
allowance. If we do not consider it more likely than not that we will recover
our deferred tax assets, we will record a valuation allowance against the
deferred tax assets that we estimate will not ultimately be recoverable. At
June 30, 2009 and December 31, 2008, we believed that the amount of our deferred
income taxes would not be ultimately recovered. Accordingly, we recorded a full
valuation allowance for deferred tax assets. However, should there be a change
in our ability to recover our deferred tax assets, we would recognize a benefit
to our tax provision in the period in which we determine that it is more likely
than not that we will recover our deferred tax assets.
Stock Based Compensation
We follow the fair value method of accounting for stock-based compensation
arrangements in accordance with SFAS No. 123(R), Share-Based Payment ("SFAS
123(R)"). We adopted SFAS 123(R) effective January 1, 2006 using the modified
prospective method of transition. Under SFAS 123(R), the estimated fair value of
share-based compensation, including stock options and restricted stock awards
and purchases of common stock by our employees under the Employee Stock Purchase
Plan is recognized as compensation expense.
We used the Black-Scholes option-pricing model to estimate the fair value of
share-based awards as of the grant date. The Black-Scholes model, by its design,
is highly complex, and dependent upon key data inputs estimated by management.
We use a lattice model to estimate the expected term as an input into the
Black-Scholes option pricing model. We determine expected volatility using the
historical method, which is based on the daily historical daily trading data of
our common stock over the expected term of the option.
Recent Accounting Pronouncements
See Note 2 to the accompanying unaudited condensed financial statements
included in Part I, Item 1 of this Quarterly Report on Form 10-Q for information
on recent accounting pronouncements.
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