10-Q: INSPIRE PHARMACEUTICALS INC
(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results - of Operations -
CAUTIONARY STATEMENT
The discussion below contains forward-looking statements regarding our financial condition and results of operations that are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted within the United States. The preparation of these financial statements requires Inspire management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Inspire evaluates its estimates on an ongoing basis. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
We operate in a highly competitive environment that involves a number of risks, some of which are beyond our control. Statements contained in Management's Discussion and Analysis of Financial Conditions and Results of Operations which are not historical facts are, or may constitute, forward looking statements. Forward looking statements involve known and unknown risks that could cause our actual results to differ materially from expected results. These risks are discussed in the section entitled "Other Information - Risk Factors" as well as in our Annual Report on Form 10-K for the year ended December 31, 2001. Although we believe the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
Inspire Pharmaceuticals, Inc.
(a development stage company)
OVERVIEW
We were incorporated in October 1993 and commenced operations in March 1995 following our first substantial financing. Since that time, we have been engaged in the discovery and development of novel pharmaceutical products that treat diseases which are characterized by deficiencies in the body's innate defense mechanisms of mucosal hydration and mucociliary clearance as well as other diseases. Our technologies are based in part on exclusive license agreements with The University of North Carolina at Chapel Hill for rights to certain developments from the founders' laboratories.
To date, we have devoted substantially all of our efforts to discovery and clinical development of our product candidates as well as establishing strategic partnerships for the development and potential marketing of our products when approved. Currently, we have six product candidates in clinical development. We have not derived any commercial revenues from product sales and we do not expect to receive sales revenues for at least the next several years.
We have incurred significant operating losses since our inception and, as of March 31, 2002, we had an accumulated deficit of $75.8 million. We have primarily financed our operations through proceeds received from the sale of equity securities including private sales of preferred stock and the sale of common stock in our initial public offering, as well as revenues received under corporate collaborations. We operate in a single business segment and do not have any foreign operations.
In June 2001, we entered into a joint license, development and marketing agreement with Allergan, Inc. ("Allergan") to develop and commercialize INS365 Ophthalmic and Allergan's Restasis(R). Under the agreement, we may receive up to $39 million in up-front and milestone payments. We will also receive royalty payments on sales, if any, of INS365 Ophthalmic in the United States and on Allergan's Restasis(R) worldwide, excluding most Asian markets. The agreement also provides for potential co-promotion by Inspire of INS365 Ophthalmic and Restasis(R) and one or more of Allergan's other marketed products in the United States.
In September 2000, we entered into a License Agreement with Kirin Brewing Co., Ltd. Pharmaceutical Division ("Kirin") for the development and commercialization of INS316 Diagnostic. Under the agreement we granted Kirin an exclusive license to commercialize INS316 Diagnostic in most of Asia. Under the terms of the agreement, we received an upfront payment in cash and may receive milestone payments based on clinical success and regulatory approval. We may also receive royalties on net sales of licensed products.
In December 1999, we entered into a collaboration with Genentech, Inc. to develop treatments for respiratory disorders, pursuant to which we received in excess of $16 million in equity and cash payments prior to the termination of the agreement in November 2001. Upon termination, Genentech, Inc. returned to us all rights for the use of INS365 Respiratory and our other related P2Y2 agonists at no charge.
In December 1998, we entered into a Development, License and Supply Agreement with Santen Pharmaceutical Co., Ltd. ("Santen") for the development of INS365 Ophthalmic for the therapeutic treatment of ocular surface diseases. We are obligated to supply Santen with its requirements of INS365 Ophthalmic in bulk drug substance form for all preclinical studies, clinical trials and commercial requirements at agreed-upon prices. Under the agreement, we received an up-front equity investment of $1.5 million for shares of our stock. In addition, if all milestones are met, we could receive additional payments of up to $4.75 million, as well as royalties on net sales of licensed products. We have not received any milestone payments to date under the agreement.
In September 1998, we entered into a Joint Development, License and Supply Agreement with Kissei Pharmaceutical Co., Ltd. ("Kissei") for the development of INS365 Respiratory for therapeutic lower respiratory applications in Japan. Pursuant to the agreement with Kissei, we received an up-front payment of $4.5 million, which included the purchase of shares of our stock. In addition, if all milestones under the agreement are met, we would receive additional payments of up to $13 million. We will also receive royalties on net sales of licensed products. To date, we have received $2.1 million in milestone payments.
Inspire Pharmaceuticals, Inc.
(a development stage company)
SIGNIFICANT ACCOUNTING POLICIES
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Revenue Recognition
We recognize revenue under our collaborative research and development agreements when we have performed services under such agreements or when we or our collaborative partner has met a contractual milestone triggering a payment to us. Non-refundable fees received at the initiation of collaborative agreements for which we have an ongoing research and development commitment are deferred and recognized ratably over the period of ongoing research and clinical development commitment. We are also entitled to receive milestone payments under our collaborative research and development agreements based upon achievement of development milestones by us or our collaborative partners. We recognize milestone payments as revenues ratably over the remaining period of our research and clinical development commitment. The recognition period begins at the date the milestone is achieved and acknowledged by the collaborative partner, which is generally at the date payment is received from the collaborative partner, and ends on the date that we have fulfilled our research and clinical development commitment. This period is based on estimates by management and the progress towards milestones in our collaborative agreements. The estimate is subject to revision as our development efforts progress and we gain knowledge regarding required additional development. Revisions in the commitment period are made in the period that the facts related to the change first become known. This may cause our revenue to fluctuate from period to period.
Taxes
Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. We record valuation allowances because of uncertainties related to our ability to utilize deferred tax assets, primarily consisting of certain net operating losses carried forward, before they expire. The valuation allowance is based on estimates of taxable income in each of the jurisdictions in which we operate and the period over which our deferred tax assets will be recoverable. In the event the actual results differ from these estimates or we adjust these estimates in future periods we may need to establish an additional valuation allowance which could materially impact our financial position and results of operations.
RESULTS OF OPERATIONS
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Three Months Ended March 31, 2002 and 2001
Revenues
Our revenues were derived from collaborative research and development agreements with strategic partners. Revenues were $1.1 million for the three months ended March 31, 2002, compared to $1.4 million for the same period in 2001, a decrease of 21%. Revenues in each year are primarily derived from collaborative research and development agreements with strategic partners. During the three months ended March 31, 2002, revenues were related to an upfront payment received from Allergan, Inc. in the third quarter of 2001 and the upfront payment received from Kirin Brewery Co., Ltd. in the fourth quarter of 2000. Revenues in the same period in 2001 were related to milestone payments received from Kirin Brewery Co., Ltd., Kissei Pharmaceuticals and Genentech, Inc. Milestone payments from our collaborative partners are recognized over the period of ongoing research and development commitment period under the applicable collaborative research and development agreements with the respective company.
Research and Development Expenses
Research and development expenses include all direct costs, including salaries for our research and development personnel, consulting fees, clinical trial costs, sponsored research and clinical trials insurance, and other fees and costs related to the development of product candidates. Costs associated with obtaining and maintaining patents on our drug compounds, and license initiation and continuation fees, are evaluated based on the stage of development of the
Inspire Pharmaceuticals, Inc.
(a development stage company)
related drug compound and whether the underlying compound has an alternative
use. Costs of these types incurred for drug compounds not yet approved by the
FDA and for which no alternative use exists are recorded as research and
development expense. In the event the drug compound has been approved by the FDA
or an alternative use exists for the drug compound, patent costs and license
costs are capitalized and amortized over the expected life of the related drug
compound. Milestone payments are recognized when the underlying requirement is
met by us.
Research and development expenses were $4.7 million for the three months ended March 31, 2002, compared to $6.8 million for the same period in 2001, a decrease of 31%. The decrease in research and development expenses was due to our efforts to focus resources on our higher priority programs. On January 29, 2002, we announced that we would refocus our efforts on our higher priority clinical programs in the ophthalmology and respiratory areas. The programs of primary focus were indications for dry eye, lung cancer diagnostics, upper respiratory disorders and cystic fibrosis.
For the three months ended March 31, 2002, the research and development costs were related to patent activities, research costs, preclinical testing, toxicology studies, clinical supplies, clinical development activities, and personnel costs necessary to perform and/or manage these activities. We expect to incur increases in expenses in future periods as later phases of development typically involve an increase in the scope of studies and the number of patients treated.
Our research and development expenses from inception through March 31, 2002 were $74.9 million. Of this amount, we have spent the following amounts on external pre-clinical and clinical development of the indicated product candidates: $2.8 million on INS316 Diagnostic; $13.2 million on INS365 Ophthalmic; $5.8 million on INS365 Respiratory; $3.3 million on INS37217 Respiratory for cystic fibrosis; $1.2 million on INS37217 Intranasal and $1.6 million on INS37217 Ophthalmic. The balance of our historic research and development expenses, $47 million, includes internal personnel costs of our discovery and development programs, internal and external general research related to the development of our technology, and internal and external expenses of other drug discovery programs and development programs. We cannot reasonably predict future research and development expenses for these programs; however, historical trends indicate that expenses tend to increase in later phases of development.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs, facilities costs, business development costs and professional expenses, such as legal and accounting fees. General and administrative expenses were $1.4 million for the three month ended March 31, 2002, compared to $1.2 for the same period in 2001, an increase of 17%. Our general and administrative expenses consist primarily of personnel and related costs for general corporate functions, including business development, finance, accounting, legal, human resources, facilities and information systems. The increase in general and administrative expenses from year to year resulted primarily from increases in administrative personnel costs, and increases in insurance and additional professional services, including legal, accounting and public relations services, to support our strategic business collaborations and operations as a publicly traded company.
Other Income (Expense), Net
Other income (expense), net consists of interest income earned on cash deposits and short-term investments, reduced by interest expense on notes payable, capital lease obligations, losses on sales of property and equipment and amortization of debt issuance costs. Other income (expense), net was $254,000 for the period ended March 31, 2002, compared to $1.4 million for the same period in 2001, a decrease of 82%. The decrease was due to lower interest income earned from lower average cash and investment balances partially offset by interest expense related to leased equipment.
LIQUIDITY AND CAPITAL RESOURCES
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Historically, we have financed our operations through the sale of equity securities, including private sales of preferred stock and the sale of common stock in our initial public offering.
Inspire Pharmaceuticals, Inc.
(a development stage company)
As of March 31, 2002, cash and cash equivalents totaled $34.6 million, an
increase of $4.6 million as compared to December 31, 2001. The increase in cash
and cash equivalents resulted from the net proceeds of investment grade
securities of $8.3 million, the issuance of common stock of $12,000, partially
offset by $3.5 million in cash used by operations, purchase of property, plant
and equipment of $135,000 and the payment of capital lease obligations of
$101,000.
Cash used by operations of $3.5 million in the three months ended March 31, 2002, represented a net loss of $4.8 million, non-cash expenses of $483,000, a decrease in other receivables of $76,000 and a decrease in prepaid expenses of $80,000, partially offset by, an increase in interest receivable of $5,000, an increase in other assets of $16,000, a decrease in accounts payable of $425,000 and a decrease in accrued expenses of $803,000, and an increase in deferred revenue of $1.9 million.
Cash provided by investing activities for the three months ended March 31, 2002 consisted of the proceeds of investment grade securities, net of purchases totaling $8.3 million and the purchase of property and equipment totaling $135,000.
Cash used from financing activities for the three months ended March 31, 2002 was comprised of the issuance of common stock of $12,000 offset by the payment of lease obligations of $101,000.
We will not generate revenues, other than license and milestone payments, from the sale of our products unless or until we or our licensees receive marketing clearance from the FDA and appropriate governmental agencies in other countries. We cannot predict the timing of any potential marketing clearance nor can assurances be given that the FDA or such agencies will approve any of our products.
IMPACT OF INFLATION
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Although it is difficult to predict the impact of inflation on our costs and revenues in connection with our products, we do not anticipate that inflation will materially impact our cost of operation or the profitability of our products when marketed.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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In July 2001, the Financial Accounting Standards Board ("FASB") issued FASB Statements Nos. 141 ("SFAS 141"), "Business Combinations" and 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 141 eliminates pooling-of-interests accounting prospectively and provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. SFAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. SFAS 141 and SFAS 142 are effective for all business combinations completed after June 30, 2001. The Company adopted SFAS 142 as of January 1, 2002, as required, and as of July 1, 2001 for goodwill and intangible assets acquired after June 30, 2001. Adoption of SFAS 141 and SFAS 142 has not had any impact on the Company's financial position or results of operations
In August 2001, the FASB issued FASB Statement 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations." The objectives of SFAS 143 are to establish accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS 143 is not expected to have any impact on the Company's financial position or results of operations.
In October 2001, the FASB issued FASB Statement No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." The Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of Business, and
Inspire Pharmaceuticals, Inc.
(a development stage company)
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
provisions of SFAS 144 are required to be applied to fiscal years beginning
after December 15, 2001. The adoption of SFAS 144 has not had any impact on the
Company's financial position or results of operations.
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Received by Edgar Online May 14, 2002
CIK Code: 0001040416
Accession Number: 0001021408-02-006893
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STOCK SYMBOLS: [(isph)]
