File Pursuant to Rule 424(b)(4)

Registration No. 333-162782

 

6,550,000 Shares

 

 

ALIMERA SCIENCES, INC.

 

Common Stock

 

 

 

 

This is an initial public offering of shares of common stock of Alimera Sciences, Inc. All of the shares of common stock are being sold by the company. The initial public offering price is $11.00.

 

Prior to this offering, there has been no public market for the common stock. Our common stock has been approved for listing on the Nasdaq Global Market under the symbol “ALIM.”

 

Investing in the common stock involves risks. See “Risk Factors” beginning on page 7 to read about factors you should consider before buying shares of the common stock.

 

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. Any representation to the contrary is a criminal offense.

 

 

 

 

 

 

 

To the extent that the underwriters sell more than 6,550,000 shares of common stock, the underwriters have the option to purchase up to an additional 982,500 shares from the company at the initial public offering price less the underwriting discount.

 

 

 

 

The underwriters expect to deliver the shares against payment on or about April 27, 2010.

 

 

 

 

The date of this prospectus is April 22, 2010.

 

 

Iluvien^®

(fluocinolone acetonide intravitreal insert)

 

 

Iluvien is currently in clinical development. Iluvien has not been approved by the U.S. Food and

Drug Administration and therefore Alimera Sciences, Inc. has not generated any revenues

from the commercial sale of Iluvien as of the date of this prospectus.

 

TABLE OF CONTENTS

 

 

 

Through and including May 17, 2010 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This obligation is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but 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.

 

PROSPECTUS SUMMARY

	•	Pursue FDA Approval for Iluvien.  In December 2009 we received the month 24 clinical readout from our FAME Study. Based upon our analysis of this data, we plan to file an NDA in the United States for the low dose of Iluvien in the second quarter of 2010, followed by registration filings in certain European countries and Canada.
	•	Maximize the Commercial Success of Iluvien.  If approved by the FDA, we intend to market and sell Iluvien to the approximately 1,600 retinal specialists practicing in the approximately 900 retina centers in the United States and Canada and to seek a commercialization partner for sales and marketing activities outside North America.
	•	Assess the Effectiveness of Iluvien for Additional Retinal Diseases.  Iluvien is being studied in three Phase 2 clinical trials with retinal specialists to assess its safety and efficacy in the treatment of dry AMD, wet AMD and RVO.
	•	Develop Our Existing Ophthalmic Product Pipeline.  We have acquired exclusive, worldwide licenses of rights under patent applications for two classes of NADPH oxidase inhibitors from Emory University and are evaluating the use of these compounds in the treatment of dry AMD. We plan to evaluate the

		use of NADPH oxidase inhibitors in the treatment of other diseases of the eye, including wet AMD and diabetic retinopathy.

	•	Expand Our Ophthalmic Product Pipeline.  We believe there are further unmet needs in the treatment of ophthalmic diseases. Toward that end, we intend to leverage management’s expertise and its broad network of relationships in continuing to evaluate in-licensing and acquisition opportunities for compounds and technologies with applications in diseases affecting the eye.

	•	We are dependent on the success of our product candidates and specifically on the success of Iluvien, our only product candidate currently in clinical development, and if we are not successful in commercializing Iluvien, or are significantly delayed in doing so, our business will be materially harmed and we may need to curtail or cease operations;
	•	We face heavy government regulation, and approval of Iluvien and our other product candidates from the FDA and from similar entities in other countries is uncertain, in particular the FDA may have a different interpretation of our clinical data than that presented in our NDA, which could result in the FDA not granting marketing approval for Iluvien;
	•	Even if approved, the demonstration of Iluvien’s safety and efficacy, its cost-effectiveness, its potential advantages over other therapies, the reimbursement policies of government and third-party payors with respect to Iluvien, and the effectiveness of our marketing and distribution capabilities may impact the degree of Iluvien’s acceptance in the market;
	•	We are dependent upon our ability, and the ability of our licensors, to obtain and maintain protection for the intellectual property incorporated into our products and the value of our technology and products will be adversely affected if we or our licensors are unable to obtain or maintain such protection; and
	•	We do not expect to generate revenues from our product candidates until the first quarter of 2011 and although we anticipate that the proceeds from this offering will fund our operations through the projected commercialization of Iluvien as early as the first quarter of 2011, we cannot be sure that this offering will be completed, that Iluvien will be approved by the FDA in the fourth quarter of 2010 or that, if approved, future sales of Iluvien will generate revenues sufficient to fund our operations beyond the first quarter of 2011, or ever.

 

THE OFFERING

Common stock offered by us		6,550,000 shares
Common stock to be outstanding after this offering		31,051,055 shares
Use of Proceeds		We expect to receive net proceeds from the offering of approximately $66.3 million, based on an initial public offering price of $11.00 per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses that we must pay. We intend to use the proceeds from this offering primarily to complete the clinical development and registration of Iluvien for DME, to repay indebtedness and make certain milestone payments to pSivida US, Inc., to commence the commercial launch of Iluvien, to continue to develop our product pipeline and for working capital and other general corporate purposes. See “Use of Proceeds” for additional information.
Risk Factors		You should read the “Risk Factors” section of this prospectus for a discussion of factors that you should consider carefully before deciding to invest in shares of our common stock.
Directed Share Program		At our request, the underwriters have reserved up to 1,816,491 shares of common stock offered hereby for sale at the initial public offering price to persons who are directors, officers, employees, or who are otherwise associated with us, including certain of our existing shareholders and certain specified affiliates, through a directed share program. The underwriters will receive an underwriting discount and commission of 7.00% on the sale of 12,700 shares reserved under the directed share program. The underwriters will not receive an underwriting discount or commission on the sale of 1,803,791 shares reserved under the directed share program offered to certain of our existing shareholders and certain specified affiliates. See “Underwriting.”
Nasdaq Global Market symbol		ALIM

	•	2,225,778 shares of our common stock issuable upon exercise of options outstanding as of March 31, 2010 at a weighted average price per share of $2.14;
	•	208,493 shares of our common stock issuable upon the exercise of outstanding warrants at a weighted average price of $3.37 per share, all of which are currently exercisable;
	•	494,422 shares of common stock reserved for issuance under our 2010 Employee Stock Purchase Plan that becomes effective on the effective date of this registration statement; and
	•	1,977,686 shares of common stock reserved for issuance under our 2010 Equity Incentive Plan that becomes effective on the effective date of this registration statement.

	•	the automatic conversion of all outstanding shares of our preferred stock into 22,863,696 shares of common stock upon the closing of the offering, including the conversion of certain Series A preferred stock dividends accumulated prior to November 22, 2005 into 380,301 shares of common stock;
	•	the filing of our restated certificate of incorporation and the adoption of our amended and restated bylaws to be effective upon the closing of this offering;
	•	no exercise of the underwriters’ over-allotment option to purchase additional shares; and
	•	a 3.4-for-one reverse split of our common and preferred stock effected prior to the effective date of this registration statement.

 

SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA

		Years Ended December 31,
		2005				2006				2007				2008				2009
		(In thousands, except per share data)
Operating expenses
Research and development(1)		$	2,926			$	6,736			$	8,363			$	43,764			$	15,057
General and administrative			2,595				3,028				3,184				5,058				3,407
Marketing			557				616				969				1,259				752
Total operating expenses			6,078				10,380				12,516				50,081				19,216
Interest income			223				596				1,079				585				37
Interest expense			(2	)			(2	)			(2	)			(1,514	)			(1,897	)
Decrease (increase) in fair value of preferred stock conversion feature			8				6				1				(10,454	)			(23,142	)
Loss from continuing operations			(5,849	)			(9,780	)			(11,438	)			(61,464	)			(44,218	)
Income (loss) from discontinued operations(2)			(7,790	)			(3,191	)			5,733				—				—
Net loss			(13,639	)			(12,971	)			(5,705	)			(61,464	)			(44,218	)
Beneficial conversion feature of preferred stock (see Note 9)			—				—				—				—				(355	)
Preferred stock accretion			(164	)			(243	)			(248	)			(718	)			(623	)
Preferred stock dividends			(1,546	)			(3,548	)			(4,685	)			(6,573	)			(7,225	)
Net loss attributable to common stockholders		$	(15,349	)		$	(16,762	)		$	(10,638	)		$	(68,755	)		$	(52,421	)
Net loss per share attributable to common stockholders — basic and diluted		$	(10.68	)		$	(11.66	)		$	(7.09	)		$	(45.50	)		$	(34.56	)
Weighted average common shares outstanding — basic and diluted			1,437				1,437				1,500				1,511				1,517
Pro forma net loss per share attributable to common stockholders — basic and diluted(3)																		$	(0.94	)
Pro forma weighted average common shares outstanding — basic and diluted(3)																			22,496

(1)		Includes $29.8 million of research and development expenses incurred in connection with an amendment to the pSivida license agreement in the year ended December 31, 2008. See Note 7 to the financial statements for a more detailed description of the pSivida agreement and the amendment.
(2)		Includes gains on disposal of $9.7 million and $6.0 million for the years ended December 31, 2006 and 2007, respectively. See Note 3 to the financial statements for a more detailed description of the discontinued operations.
(3)		The pro forma basic and diluted net loss per common share data for the year ended December 31, 2009 reflect the conversion, upon the closing of this offering, of our Series A, Series B, Series C and Series C-1 preferred stock (including shares of Series C-1 preferred stock issued upon the exercise of warrants in January 2010) at their respective conversion rates into our common stock, as if the conversion had occurred at the later of the beginning of the period presented or the date of issuance of such shares of preferred stock and excludes the effect of the change in fair value of the preferred stock conversion feature, preferred stock accretion and preferred stock dividends. The pro forma data does not give effect to the consummation of this offering.

		As of December 31,
																						2009
		2005				2006				2007				2008				2009				Pro Forma(1)
		(In thousands)
Cash and cash equivalents		$	22,815			$	27,157			$	20,847			$	17,875			$	4,858			$	14,858	(2)
Working capital			21,846				25,294				19,862				14,551				(4,428	)			5,572
Total assets			25,081				31,251				24,519				20,264				6,561				16,561
Long-term liabilities			57				60				31				28,217				47,909				11,208
Preferred stock			43,373				63,057				67,990				103,017				113,389				—
Additional paid-in capital			2,193				2,571				2,867				3,474				4,836				164,560
Accumulated deficit			(23,315	)			(40,077	)			(50,715	)			(119,470	)			(171,891	)			(170,282	)
Total stockholders’ deficit			(21,015	)			(37,399	)			(47,738	)			(115,887	)			(165,472	)			(5,382	)

(1)		Assumes and gives effect to the conversion of all outstanding shares of preferred stock into common stock upon the completion of this offering, including the conversion of certain Series A preferred stock dividends accumulated prior to November 22, 2005 into 380,301 shares of common stock and the conversion of 1,935,700 shares of our Series C-1 preferred stock issued upon the exercise of warrants in January 2010, the receipt of $10.0 million in proceeds in January 2010 as a result of the exercise of Series C-1 warrants, and an incremental gain of $1.6 million on the revaluation of the embedded conversion feature based on the initial public offering price of $11.00 per share immediately prior to the conversion of our Series A, Series B, Series C and Series C-1 preferred stock.

(2)		This amount does not include a $4.0 million option payment that we received in January 2010 from Bausch & Lomb Incorporated (Bausch & Lomb) upon the exercise by Bausch & Lomb of its option to extend the period during which it may continue to develop an allergy product acquired from us in 2006 by two years.

 

Investing in our common stock involves a high degree of risk. You should consider carefully the risk factors described below, together with the other information in this prospectus (including our financial statements and the related notes appearing at the end of this prospectus) before deciding to invest in shares of our common stock. If any of the events contemplated by the following discussion of risks should occur, our business, financial condition, results of operations and future prospects would likely be materially and adversely affected. As a result, the market price of our common stock could decline, and you could lose all or part of your investment.

 

Risks Related to Our Business and Industry

 

We are heavily dependent on the success of our lead product candidate, Iluvien, which is still under development. If we are unable to commercialize Iluvien, or experience significant delays in doing so, our business will be materially harmed.

 

We have invested a significant portion of our time and financial resources in the development of Iluvien, our only product candidate in clinical development. We anticipate that in the near term our ability to generate revenues will depend solely on the successful development and commercialization of Iluvien. Based on our analysis of the month 24 clinical readout from our Phase 3 pivotal clinical trials for the use of Iluvien in the treatment of diabetic macular edema, or DME (collectively, our FAME Study), we plan to file a New Drug Application (NDA) for the low dose of Iluvien in the United States in the second quarter of 2010, followed by registration filings in certain European countries and Canada. However, we may not complete our registration filings in our anticipated time frame. Even after we complete our NDA filing, the U.S. Food and Drug Administration (FDA) may not accept our submission, may request additional information from us, including data from additional clinical trials, and, ultimately, may not grant marketing approval for Iluvien. In addition, although we believe the month 24 clinical readout from our FAME Study demonstrates that Iluvien is effective in the treatment of DME, clinical data often is susceptible to varying interpretations and many companies that have believed that their products performed satisfactorily in clinical trials have nonetheless failed to obtain FDA approval for their products.

 

If we are not successful in commercializing Iluvien, or are significantly delayed in doing so, our business will be materially harmed and we may need to curtail or cease operations. Our ability to successfully commercialize Iluvien will depend, among other things, on our ability to:

 

 

We face heavy government regulation, and approval of Iluvien and our other product candidates from the FDA and from similar entities in other countries is uncertain.

 

The research, testing, manufacturing and marketing of drug products are subject to extensive regulation by U.S. federal, state and local government authorities, including the FDA, and similar entities in other countries. To obtain regulatory approval of a product, we must demonstrate to the satisfaction of the regulatory agencies that, among other things, the product is safe and effective for its intended use. In addition, we must show that the manufacturing facilities used to produce the products are in compliance with current Good Manufacturing Practice (cGMP) regulations.

The process of obtaining regulatory approvals and clearances will require us to expend substantial time and capital. Despite the time and expense incurred, regulatory approval is never guaranteed. The number of preclinical and clinical tests that will be required for regulatory approval varies depending on the drug candidate, the disease or condition for which the drug candidate is in development and the regulations applicable to that particular drug candidate. Regulatory agencies, including those in the United States, Canada, the European Union and other countries where drugs are regulated, can delay, limit or deny approval of a drug candidate for many reasons, including that:

 

 

The FDA may make requests or suggestions regarding conduct of our clinical trials, resulting in an increased risk of difficulties or delays in obtaining regulatory approval in the United States. For example, the FDA may object to the use of a sham injection in our control arm or may not approve of certain of our methods for analyzing our trial data, including how we evaluate the risk/benefit relationship. Further, we intend to market Iluvien, and may market other product candidates, outside the United States and specifically in the European Union and Canada. Regulatory agencies within these countries will require that we obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedures within these countries can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Additionally, the foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. For all of these reasons, we may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or jurisdictions or by the FDA.

 

We plan to submit an NDA in the United States for the low dose of Iluvien in the second quarter of 2010 with 24 months of clinical data from our FAME Study, followed by registration filings in certain European countries and Canada. Consistent with recommendations regarding the appropriate population for primary analysis as described in the FDA-adopted International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use (ICH) Guidance E9, “Statistical Principals for Clinical Trials,” we believe that the FDA will consider the most relevant population for determining safety and efficacy to be the full data set of all 956 patients randomized into our FAME Study, with data imputation employed using “last observation carried forward,” for data missing because of patients who discontinued the trial or are unavailable for follow-up (the Full Analysis Set). The primary efficacy endpoint was met with statistical significance for both the low dose and the high dose of Iluvien in both trials using the Full Analysis Set and we intend to submit an analysis based on this data set for the low dose to the FDA. However, our FAME Study protocol did not include the Full Analysis Set and provides that the primary assessment of efficacy will be based on another data set that excludes from the Full Analysis Set three patients who were enrolled but never treated as well as data collected for patients subsequent to their use of treatments prohibited by our FAME Study protocol (the Modified ART Data Set). Statistical significance was not achieved for either the low dose or the high dose in one trial using the Modified ART Data Set. There is no assurance that the FDA will utilize the Full Analysis Set and not the Modified ART Data Set or another data set in determining whether Iluvien is safe and effective, which could result in the FDA not granting marketing approval for Iluvien.

 

Regulatory agencies require carcinogenicity studies in animals to identify tumorigenic potential in animals to assess the relevant risk in humans. Based on month 18 readouts from our open-label Phase 2 human pharmacokinetic clinical trial (PK Study), which indicate that there is negligible systemic absorption of

fluocinolone acetonide (FA) in patients being treated with Iluvien, we expect to obtain a waiver from these regulatory agencies from the requirement to perform carcinogenicity studies. However, we may not be able to demonstrate negligible systemic absorption of FA in our PK Study beyond 18 months or may not obtain a waiver from regulatory agencies for the requirement to perform carcinogenicity studies in animals. If we are required to perform carcinogenicity studies in animals, the approval of Iluvien could be delayed by up to 36 months.

 

Any delay or failure by us to obtain regulatory approvals for our product candidates could diminish competitive advantages that we may attain and would adversely affect the marketing of our products. We have not yet received regulatory approval to market any of our product candidates in any jurisdiction.

 

Iluvien utilizes FA, a corticosteroid that has demonstrated undesirable side effects in the eye; therefore, the success of Iluvien will be dependent upon the achievement of an appropriate relationship between the benefits of its efficacy and the risks of its side-effect profile.

 

The use of corticosteroids in the eye has been associated with undesirable side effects, including increased incidence of intraocular pressure (IOP), which may increase the risk of glaucoma, and cataract formation. We have received only the month 24 clinical readout from our FAME Study and the extent of Iluvien’s long-term side effect profile is not yet known. Upon review of our NDA for the low dose of Iluvien in the treatment of DME, the FDA may conclude that our FAME Study did not demonstrate that Iluvien has sufficient levels of efficacy to outweigh the risks associated with its side-effect profile. Conversely, the FDA may conclude that Iluvien’s side-effect profile does not demonstrate an acceptable risk/benefit relationship in line with Iluvien’s demonstrated efficacy. In the event of such conclusions, we may not receive regulatory approval from the FDA or from similar regulatory agencies in other countries.

 

Even if we do receive regulatory approval for Iluvien, the FDA or other regulatory agencies may impose limitations on the indicated uses for which Iluvien may be marketed, subsequently withdraw approval or take other actions against us or Iluvien that would be adverse to our business.

 

Regulatory agencies generally approve products for particular indications. If any such regulatory agency approves Iluvien for a limited indication, the size of our potential market for Iluvien will be reduced. For example, our potential market for Iluvien would be reduced if the FDA limited the indications of use to patients diagnosed with only clinically significant DME as opposed to DME or restricted the use to patients exhibiting IOP below a certain level at the time of treatment. Product approvals, once granted, may be withdrawn if problems occur after initial marketing. If and when Iluvien does receive regulatory approval or clearance, the marketing, distribution and manufacture of Iluvien will be subject to regulation in the United States by the FDA and by similar entities in other countries. We will need to comply with facility registration and product listing requirements of the FDA and similar entities in other countries and adhere to the FDA’s Quality System Regulations. Noncompliance with applicable FDA and similar entities’ requirements can result in warning letters, fines, injunctions, civil penalties, recall or seizure of Iluvien, total or partial suspension of production, refusal of regulatory agencies to grant approvals, withdrawal of approvals by regulatory agencies or criminal prosecution. We would also need to maintain compliance with federal, state and foreign laws regarding sales incentives, referrals and other programs.

 

Iluvien may not be granted Priority Review by the FDA and, even if Iluvien receives Priority Review, Iluvien may not receive approval within the six-month review/approval cycle.

 

We believe that Iluvien may be eligible for Priority Review under FDA procedures. We will request Priority Review for Iluvien at the time we submit our NDA. Although the FDA has granted Priority Review to other products that treat retinal disease (including Visudyne, Retisert, Macugen, Lucentis and Ozurdex), Iluvien may not receive similar consideration. However, even in the event that Iluvien is designated for Priority Review, such a designation does not necessarily mean a faster regulatory review process or necessarily confer any advantage with respect to approval compared to conventional FDA procedures. Receiving Priority Review from the FDA does not guarantee approval within the six-month review/approval cycle.

Our product candidates may never achieve market acceptance even if we obtain regulatory approvals.

 

Even if we receive regulatory approvals for the sale of our product candidates, the commercial success of these products will depend, among other things, on their acceptance by retinal specialists, patients, third-party payors and other members of the medical community as a therapeutic and cost-effective alternative to competing products and treatments. The degree of market acceptance of any of our product candidates will depend on a number of factors, including the demonstration of its safety and efficacy, its cost-effectiveness, its potential advantages over other therapies, the reimbursement policies of government and third-party payors with respect to the product candidate, and the effectiveness of our marketing and distribution capabilities. If our product candidates fail to gain market acceptance, we may be unable to earn sufficient revenue to continue our business. If our product candidates are not accepted by retinal specialists, patients, third-party payors and other members of the medical community, it is unlikely that we will ever become profitable.

 

Our ability to pursue the development and commercialization of Iluvien depends upon the continuation of our license from pSivida US, Inc.

 

Our license rights to pSivida US, Inc.’s (pSivida’s) proprietary delivery device could revert to pSivida if we (i) fail twice to cure our breach of an obligation to make certain payments to pSivida following receipt of written notice thereof; (ii) fail to cure other breaches of material terms of our agreement with pSivida within 30 days after notice of such breaches or such longer period (up to 90 days) as may be reasonably necessary if the breach cannot be cured within such 30-day period; (iii) file for protection under the bankruptcy laws, make an assignment for the benefit of creditors, appoint or suffer appointment of a receiver or trustee over our property, file a petition under any bankruptcy or insolvency act or have any such petition filed against us and such proceeding remains undismissed or unstayed for a period of more than 60 days; or (iv) notify pSivida in writing of our decision to abandon our license with respect to a certain product using pSivida’s proprietary delivery device. If our agreement with pSivida were terminated, we would lose our rights to develop and commercialize Iluvien, which would materially and adversely affect our business, results of operations and future prospects.

 

We will rely on a single manufacturer for Iluvien, a single manufacturer for the Iluvien inserter and a single active pharmaceutical ingredient formulator for Iluvien’s active pharmaceutical ingredient. Our business would be seriously harmed if these third-parties are not able to satisfy our demand and alternative sources are not available.

 

We do not have in-house manufacturing capability and will depend completely on a single third-party manufacturer for the manufacture of the Iluvien insert (Alliance Medical Products, Inc. (Alliance)), a single third-party manufacturer for the manufacture of the Iluvien inserter (Flextronics International, Ltd. or an affiliate of Flextronics International, Ltd. (Flextronics)) and a single third-party manufacturer for the manufacture of Iluvien’s active pharmaceutical ingredient (FARMABIOS S.R.L./Byron Chemical Company Inc. (FARMABIOS)). Although we have finalized a long-term agreement for the manufacture of the Iluvien insert (with Alliance), we have not yet finalized long-term agreements for the manufacture of the Iluvien inserter (with Flextronics) or for the manufacture of Iluvien’s active pharmaceutical ingredient (with FARMABIOS), and if any of the third-party manufacturers are unable or unwilling to perform for any reason, we may not be able to locate alternative acceptable manufacturers or formulators, enter into favorable agreements with them or get them approved by the FDA in a timely manner. Further, all of our manufacturers rely on additional third-parties for the manufacture of component parts. Any inability to acquire sufficient quantities of Iluvien, the Iluvien inserter or the active pharmaceutical ingredient in a timely manner from these third-parties could delay commercial production of, and impact our ability to fulfill demand for, Iluvien. Any inability to acquire information necessary to file for regulatory approval from such third-parties could also prevent us from obtaining regulatory approval for Iluvien in a timely manner. In addition, all our third-party manufacturers are subject to cGMP and comparable requirements of foreign regulatory bodies, and certain of our manufacturers utilize production facilities outside the U.S. that are subject to local regulations with respect to those operations, and we do not have control over compliance with these regulations by our manufacturer. If our manufacturer fails to maintain compliance, the production of Iluvien could be interrupted, resulting in delays

and additional costs. In addition, if the facilities of our manufacturer do not pass a pre-approval plant inspection, the FDA will not grant market approval for Iluvien.

 

Materials necessary to manufacture Iluvien and our other product candidates may not be available on commercially reasonable terms, or at all, which may delay the development, regulatory approval and commercialization of our product candidates.

 

We will rely on our manufacturers to purchase materials from third-party suppliers necessary to produce Iluvien and our other product candidates for our clinical trials. Suppliers may not sell these materials to our manufacturers at the times we need them or on commercially reasonable terms. We do not have any control over the process or timing of the acquisition of these materials by our manufacturers. Moreover, we currently have not finalized any agreements for the commercial production of these materials. If our manufacturers are unable to obtain these materials for our clinical trials, product testing and potential regulatory approval of Iluvien and our other product candidates could be delayed, significantly affecting our ability to develop Iluvien and our other product candidates. If we or our manufacturers are unable to purchase these materials after regulatory approval has been obtained for Iluvien and our other product candidates, the commercial launch of Iluvien and our other product candidates would be delayed or there would be a shortage in supply, which would materially affect our ability to generate revenues from the sale of Iluvien and our other product candidates. Moreover, although we have finalized an agreement for the commercial production of the Iluvien insert, we currently have not yet finalized any agreements for the commercial production of the active pharmaceutical ingredient in Iluvien or the Iluvien inserter.

 

The manufacture and packaging of pharmaceutical products such as Iluvien are subject to the requirements of the FDA and similar foreign regulatory entities. If we or our third-party manufacturers fail to satisfy these requirements, our product development and commercialization efforts may be materially harmed.

 

The manufacture and packaging of pharmaceutical products such as Iluvien and our future product candidates are regulated by the FDA and similar foreign regulatory entities and must be conducted in accordance with the FDA’s cGMP and comparable requirements of foreign regulatory entities. There are a limited number of manufacturers that operate under these cGMP regulations which are both capable of manufacturing Iluvien and willing to do so. Failure by us or our third-party manufacturers to comply with applicable regulations, requirements, or guidelines could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our products, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect our business.

 

Changes in the manufacturing process or procedure, including a change in the location where the product is manufactured or a change of a third-party manufacturer, will require prior FDA review and/or approval of the manufacturing process and procedures in accordance with the FDA’s cGMP regulations. There are comparable foreign requirements. This review may be costly and time consuming and could delay or prevent the launch of a product. If we elect to manufacture products in our own facility or at the facility of another third-party, we would need to ensure that the new facility and the manufacturing process are in substantial compliance with cGMP regulations. The new facility will also be subject to pre-approval inspection. In addition, we have to demonstrate that the product made at the new facility is equivalent to the product made at the former facility by physical and chemical methods, which are costly and time consuming. It is also possible that the FDA may require clinical testing as a way to prove equivalency, which would result in additional costs and delay.

 

Furthermore, in order to obtain approval of our products, including Iluvien, by the FDA and foreign regulatory agencies, we need to complete testing on both the active pharmaceutical ingredient and on the finished product in the packaging that we propose for commercial sales. This includes testing of stability, identification of impurities and testing of other product specifications by validated test methods. In addition, we will be required to consistently produce Iluvien in commercial quantities and of specified quality in a reproducible manner and document our ability to do so. This requirement is referred to as process validation.

With respect to Iluvien, although we have validated the manufacturing process at pilot scale batches, some of the steps in the manufacturing processes will need to be revalidated when we begin to manufacture commercial scale batches. If the required testing or process validation is delayed or produces unfavorable results, we may have to launch the product using smaller pilot scale batches, which may impact our ability to fulfill demand for the product.

 

The FDA and similar foreign regulatory bodies may also implement new standards, or change their interpretation and enforcement of existing standards and requirements, for the manufacture, packaging, or testing of products at any time. If we are unable to comply, we may be subject to regulatory or civil actions or penalties that could significantly and adversely affect our business.

 

Any failure or delay in completing clinical trials for our product candidates could severely harm our business.

 

Preclinical studies and clinical trials required to demonstrate the safety and efficacy of our product candidates are time consuming and expensive and together take several years to complete. The completion of clinical trials for our product candidates may be delayed by many factors, including:

 

 

If we fail to successfully complete our clinical trials for any of our product candidates, we may not receive the regulatory approvals needed to market that product candidate. Therefore, any failure or delay in commencing or completing these clinical trials would harm our business materially.

 

If we are required to conduct additional clinical trials or other studies with respect to any of our product candidates beyond those that we initially contemplated, if we are unable to successfully complete our clinical trials or other studies or if the results of these trials or studies are not positive or are only modestly positive, we may be delayed in obtaining marketing approval for that product candidate, we may not be able to obtain marketing approval or we may obtain approval for indications that is not as broad as intended. Our product development costs will also increase if we experience delays in testing or approvals. Significant clinical trial delays could allow our competitors to bring products to market before we do and impair our ability to commercialize our products or potential products. If any of this occurs, our business will be materially harmed.

 

We currently have no sales or marketing organization. If we are unable to establish satisfactory sales and marketing capabilities, we may not succeed in commercializing Iluvien.

 

At present, we have no sales personnel and a limited number of marketing personnel. In anticipation of receiving FDA approval for the commercial launch of Iluvien, we plan to begin hiring additional sales and marketing personnel to establish our own sales and marketing capabilities in the United States in time for our anticipated commercial launch of Iluvien. We plan to add our first sales representatives in the fourth quarter of 2010. Therefore, at the time of our commercial launch of Iluvien, assuming regulatory approval by the FDA, our sales and marketing team will have worked together for only a limited period of time.

 

We may not be able to establish a direct sales force in a cost-effective manner or realize a positive return on this investment. In addition, we will have to compete with other pharmaceutical and biotechnology

companies to recruit, hire, train and retain sales and marketing personnel. Factors that may inhibit our efforts to commercialize our products without strategic partners or licensees include:

 

 

If appropriate regulatory approvals are obtained, we intend to commercialize Iluvien and our other product candidates in international markets through collaboration arrangements with third-parties. We have not yet entered into any agreements related to the marketing of Iluvien or any of our other product candidates in international markets and we may not be able to enter into any arrangements with respect to international collaborations on favorable terms or at all. In addition, these arrangements could result in lower levels of income to us than if we marketed our product candidates entirely on our own. If we are unable to enter into appropriate marketing arrangements for our product candidates in international markets, we may not be able to develop an effective international sales force to successfully commercialize Iluvien and our other product candidates in international markets. If we fail to enter into marketing arrangements for our products and are unable to develop an effective international sales force, our ability to generate revenue outside of North America would be limited.

 

If we are not successful in recruiting sales and marketing personnel or in building a sales and marketing infrastructure or if we do not successfully enter into appropriate collaboration arrangements with third-parties, we will have difficulty commercializing Iluvien and our other product candidates, which would adversely affect our business, operating results and financial condition.

 

In order to establish our sales and marketing infrastructure, we will need to grow the size of our organization, and we may experience difficulties in managing this growth.

 

As of March 31, 2010, we had 21 employees. As our development and commercialization plans and strategies develop, we will need to expand the size of our employee base for managerial, operational, sales, marketing, financial and other resources. Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, motivate and integrate additional employees. Also, our management may have to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. Our future financial performance and our ability to commercialize Iluvien and our other product candidates and compete effectively will depend, in part, on our ability to effectively manage any future growth.

 

Iluvien and our other potential products may not be commercially viable if we fail to obtain an adequate level of reimbursement for these products from private insurers, the Medicare program and other third-party payors which could be affected by the recently enacted U.S. healthcare reform. The market for our products may also be limited by the indications for which their use may be reimbursed or the frequency at which they may be administered.

 

The availability and levels of reimbursement by governmental and other third-party payors affect the market for products such as Iluvien and others that we may develop. These third-party payors continually attempt to contain or reduce the costs of health care by challenging the prices charged for medical products and services. In the United States, we will need to obtain approvals for payment for Iluvien from private insurers, including managed care organizations, and from the Medicare program. In recent years, through legislative and regulatory actions, the federal government has made substantial changes to various payment systems under the Medicare program. Comprehensive reforms to the U.S. healthcare system were recently enacted, including changes to the methods for, and amounts of, Medicare reimbursement. These reforms could significantly reduce payments from Medicare and Medicaid over the next ten years. Reforms or other changes

to these payment systems, including modifications to the conditions on qualification for payment, bundling payments or the imposition of enrollment limitations on new providers, may change the availability, methods and rates of reimbursements from Medicare, private insurers and other third-party payors for Iluvien and our other potential products. Some of these changes and proposed changes could result in reduced reimbursement rates for Iluvien and our other potential products, which would adversely affect our business strategy, operations and financial results.

 

We expect that private insurers will consider the efficacy, cost effectiveness and safety of Iluvien in determining whether to approve reimbursement for Iluvien and at what level. Obtaining these approvals can be a time consuming and expensive process. Our business would be materially adversely affected if we do not receive approval for reimbursement of Iluvien from private insurers on a timely or satisfactory basis. Although drugs that are not self-administered are covered by Medicare, the Medicare program has taken the position that it can decide not to cover particular drugs if it determines that they are not “reasonable and necessary” for Medicare beneficiaries. Limitations on coverage could also be imposed at the local Medicare carrier level or by fiscal intermediaries. Our business could be materially adversely affected if the Medicare program, local Medicare carriers or fiscal intermediaries were to make such a determination and deny or limit the reimbursement of Iluvien. Our business also could be adversely affected if retinal specialists are not reimbursed by Medicare for the cost of the procedure in which they administer Iluvien on a basis satisfactory to the administering retinal specialists. If the local contractors that administer the Medicare program are slow to reimburse retinal specialists for Iluvien, the retinal specialists may pay us more slowly, which would adversely affect our working capital requirements.

 

Our business could also be adversely affected if private insurers, including managed care organizations, the Medicare program or other reimbursing bodies or payors limit the indications for which Iluvien will be reimbursed to a smaller set than we believe it is effective in treating or establish a limitation on the frequency with which Iluvien may be administered that is less often than we believe would be effective.

 

In some foreign countries, particularly Canada and the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In Canada, each province has a publicly funded drug plan with each having its own formulary citing specific criteria for reimbursement and prior authorization. Each provincial government except Québec considers the clinical and cost-effectiveness recommendations of the Common Drug Review performed by the Canadian Agency for Drugs and Technologies in Health. Québec has a separate drug review process that is performed by its Medication Council. In the European Union, each country has a different reviewing body that evaluates reimbursement dossiers submitted by manufacturers of new drugs and then makes recommendations as to whether or not the drug should be reimbursed. In these countries, pricing negotiations with governmental authorities can take 12 months or longer after the receipt of regulatory approval and product launch. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our products, including Iluvien, to other available therapies. If reimbursement for our products is unavailable, limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be materially harmed.

 

We expect to experience pricing pressures in connection with the sale of Iluvien and our future products due to the potential healthcare reforms discussed above, as well as the trend toward programs aimed at reducing health care costs, the increasing influence of health maintenance organizations and additional legislative proposals.

 

We face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully than we do.

 

The development and commercialization of new drugs is highly competitive and the commercial success of Iluvien will depend on several factors, including, but not limited to, its efficacy and side effect profile, reimbursement acceptance by private insurers and Medicare, acceptance of pricing, the development of our sales and marketing organization, an adequate payment to physicians for the insertion procedure (based on a

cost assigned by the American Medical Association to the procedure, also known as a CPT code) and our ability to differentiate Iluvien from our competitors’ products. We will face competition from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide with respect to Iluvien and any products that we may develop or commercialize in the future. Our competitors may develop products or other novel technologies that are more effective, safer or less costly than any that we are developing. Our competitors may also obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours. The active pharmaceutical ingredient in Iluvien is FA, which is not protected by currently valid patents. As a result, our competitors could develop an alternative formulation or delivery mechanisms to treat diseases of the eye with FA. We do not have the right to develop and sell pSivida’s proprietary delivery device for indications for diseases outside of the eye or for the treatment of uveitis. Further, our agreement with pSivida permits pSivida to grant to any other party the right to use its intellectual property (i) to treat DME through an incision smaller than that required for a 25-gauge needle, unless using a corticosteroid delivered to the back of the eye, (ii) to deliver any compound outside the back of the eye unless it is to treat DME through an incision required for a 25-gauge or larger needle, or (iii) to deliver non-corticosteroids to the back of the eye, unless it is to treat DME through an incision required for a 25-gauge or larger needle.

 

There are no ophthalmic drug therapies approved by the FDA for the treatment of DME. Retinal specialists are currently using laser photocoagulation and off-label therapies for the treatment of DME, and may continue to use these therapies in competition with Iluvien. Additional treatments for DME are in various stages of preclinical or clinical testing. Later stage products include Lucentis, a drug sponsored by Genentech, Inc., a wholly-owned member of the Roche Group and Ozurdex, a drug sponsored by Allergan, Inc. If approved, these treatments would also compete with Iluvien. Other laser, surgical or pharmaceutical treatments for DME may also compete against Iluvien. These competitive therapies may result in pricing pressure if we receive marketing approval for Iluvien, even if Iluvien is otherwise viewed as a preferable therapy.

 

Many of our competitors have substantially greater financial, technical and human resources than we have. Additional mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated by our competitors. Competition may increase further as a result of advances made in the commercial applicability of technologies and greater availability of capital for investment in these fields.

 

We currently do not have any collaborations with third-parties. We expect to depend on collaborations to develop and commercialize our products. If we are unable to identify or enter into an agreement with any material third-party collaborator, if our collaborations with any such third-party are not scientifically or commercially successful or if our agreement with any such third-party is terminated or allowed to expire, we could be adversely affected financially or our business reputation could be harmed.

 

Our business strategy includes entering into collaborations with corporate and academic collaborators for the research, development and commercialization of additional product candidates. We currently do not have any collaborations with third-parties. Areas in which we anticipate entering into third-party collaboration arrangements include joint sales and marketing arrangements for sales and marketing of Iluvien outside of North America, and future product development arrangements. If we are unable to identify or enter into an agreement with any material third-party collaborator we could be adversely affected financially or our business reputation could be harmed. Any arrangements we do enter into may not be scientifically or commercially successful. The termination of any of these future arrangements might adversely affect our ability to develop, commercialize and market our products.

 

The success of our future collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Our collaborators will have significant discretion in determining the efforts and resources that they will apply to these collaborations. We expect that the risks which we face in connection with these future collaborations will include the following:

 

 

 

Collaborations with pharmaceutical companies and other third-parties often are terminated or allowed to expire by the other party. With respect to our future collaborations, any such termination or expiration could adversely affect us financially as well as harm our business reputation.

 

We may not be successful in our efforts to expand our portfolio of products.

 

A key element of our strategy is to commercialize a portfolio of new ophthalmic drugs in addition to Iluvien. We are seeking to do so through our internal research programs and through licensing or otherwise acquiring the rights to potential new drugs and drug targets for the treatment of ophthalmic disease.

 

A significant portion of the research that we are conducting involves new and unproven technologies. Research programs to identify new disease targets and product candidates require substantial technical, financial and human resources whether or not we ultimately identify any candidates. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for a number of reasons, including:

 

 

We may be unable to license or acquire suitable product candidates or products from third-parties for a number of reasons. In particular, the licensing and acquisition of pharmaceutical products is a competitive area. A number of more established companies are also pursuing strategies to license or acquire products in the ophthalmic field. These established companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities. Other factors that may prevent us from licensing or otherwise acquiring suitable product candidates include the following:

 

 

Additionally, it may take greater human and financial resources to develop suitable potential product candidates through internal research programs or by obtaining rights than we will possess, thereby limiting our ability to develop a diverse product portfolio.

 

If we are unable to develop suitable potential product candidates through internal research programs or by obtaining rights to novel therapeutics from third-parties, our business will suffer.

We may acquire additional businesses or form strategic alliances in the future, and we may not realize the benefits of such acquisitions.

 

We may acquire additional businesses or products, form strategic alliances or create joint ventures with third-parties that we believe will complement or augment our existing business. If we acquire businesses with promising markets or technologies, we may not be able to realize the benefit of acquiring such businesses if we are unable to successfully integrate them with our existing operations and company culture. We may have difficulty in developing, manufacturing and marketing the products of a newly acquired company that enhances the performance of our combined businesses or product lines to realize value from expected synergies. We cannot assure that, following an acquisition, we will achieve the revenues or specific net income that justifies the acquisition.

 

We face the risk of product liability claims and may not be able to obtain insurance.

 

Our business exposes us to the risk of product liability claims, which is inherent in the manufacturing, testing and marketing of drugs and related products. If the use of one or more of our products harms people, we may be subject to costly and damaging product liability claims. We have primary product liability insurance that covers our clinical trials for a $5.0 million general aggregate limit and excess product liability insurance that covers our clinical trials for an additional $5.0 million general aggregate limit. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for any of the products that we may develop. We may not be able to obtain or maintain adequate protection against potential liabilities. If we are unable to obtain insurance at acceptable cost or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may materially and adversely affect our business and financial position. These liabilities could prevent or interfere with our product development and commercialization efforts.

 

In addition, our business is exposed to the risk of product liability claims related to our sale and distribution of our over-the-counter dry eye product prior to its acquisition by Bausch & Lomb Incorporated in July 2007. Our primary product liability insurance and excess product liability insurance policies cover product liability claims related to the product. To the extent this insurance is insufficient to cover any product related claims we may be exposed to significant liabilities, which may materially and adversely affect our business and financial condition.

 

If we lose key management personnel, or if we fail to recruit additional highly skilled personnel, it will impair our ability to identify, develop and commercialize product candidates.

 

We are highly dependent on principal members of our management team, including C. Daniel Myers, our President and Chief Executive Officer, Susan Caballa, our Senior Vice President of Regulatory Affairs, and Kenneth Green, Ph.D., our Senior Vice President and Chief Scientific Officer. These executives each have significant ophthalmic and regulatory industry experience. The loss of any such executives or any other principal member of our management team, would impair our ability to identify, develop and market new products.

 

In addition, our growth will require us to hire a significant number of qualified technical, commercial and administrative personnel. There is intense competition from other companies and research and academic institutions for qualified personnel in the areas of our activities. If we cannot continue to attract and retain, on acceptable terms, the qualified personnel necessary for the continued development of our business, we may not be able to sustain our operations or grow.

 

If our contract research organizations (CROs), third-party vendors and investigators do not successfully carry out their duties or if we lose our relationships with them, our development efforts with respect to Iluvien or any of our other product candidates could be delayed.

 

We are dependent on CROs, third-party vendors and investigators for preclinical testing and clinical trials related to our discovery and development efforts with respect to Iluvien or any of our other product candidates and we will likely continue to depend on them to assist in our future discovery and development efforts. These parties are not our employees and we cannot control the amount or timing of resources that they devote to our

programs. If they fail to devote sufficient time and resources to our development programs with respect to Iluvien or any of our other product candidates or if their performance is substandard, it will delay the development and commercialization of our product candidates. The parties with which we contract for execution of clinical trials play a significant role in the conduct of the trials and the subsequent collection and analysis of data. Their failure to meet their obligations could adversely affect clinical development of our product candidates. Moreover, these parties may also have relationships with other commercial entities, some of which may compete with us. If they assist our competitors, it could harm our competitive position.

 

If we lose our relationship with any one or more of these parties, we could experience a significant delay in identifying another comparable provider and contracting for its services. We may be unable to retain an alternative provider on reasonable terms, if at all. Even if we locate an alternative provider, this provider may need additional time to respond to our needs and may not provide the same type or level of service as the original provider. In addition, any provider that we retain will be subject to current Good Laboratory Practices (cGLP) and similar foreign standards, and we do not have control over compliance with these regulations by these providers. Consequently, if these practices and standards are not adhered to by these providers, the development and commercialization of our product candidates could be delayed.

 

Our products could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements, or if we experience unanticipated problems with our products, when and if any of them is approved.

 

Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval pharmacovigilance, advertising and promotional activities for such product, will be subject to continual requirements, review and periodic inspections by the FDA and other regulatory bodies. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Later discovery of previously unknown problems with our products, manufacturer or manufacturing processes, or failure to comply with regulatory requirements, may result in:

 

 

We may be slow to adapt, or we may never adapt, to changes in existing regulatory requirements or adoption of new regulatory requirements or policies.

 

Failure to obtain regulatory approval in foreign jurisdictions would prevent us from marketing our products abroad.

 

We intend to market our products outside North America with one or more commercial partners. In order to market our products in foreign jurisdictions, we will be required to obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and jurisdictions and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Additionally, the foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. For all of these reasons, we may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or jurisdictions or by the FDA. We may not be

able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market. The failure to obtain these approvals could harm our business materially.

 

Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval or limit their marketability.

 

Undesirable side effects caused by our product candidates could interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications, and in turn prevent us from commercializing our product candidates and generating revenues from their sale. Possible side effects of Iluvien include, but are not limited to, extensive blurred vision, cataracts, eye irritation, eye pain, increased IOP, which may increase the risk of glaucoma, ocular discomfort, reduced visual acuity, visual disturbance, endophthalmitis, or long-standing vitreous floaters.

 

In addition, if any of our product candidates receives marketing approval and we or others later identify undesirable side effects caused by the product, we could face one or more of the following consequences:

 

 

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing the product candidate, which in turn could delay or prevent us from generating significant revenues from its sale.

 

Risks Related to Intellectual Property and Other Legal Matters

 

If we or our licensors are unable to obtain and maintain protection for the intellectual property incorporated into our products, the value of our technology and products will be adversely affected.

 

Our success will depend in large part on our ability or the ability of our licensors to obtain and maintain protection in the United States and other countries for the intellectual property incorporated into our products. The patent situation in the field of biotechnology and pharmaceuticals generally is highly uncertain and involves complex legal and scientific questions. We or our licensors may not be able to obtain additional issued patents relating to our technology. Our success will depend in part on the ability of our licensors to obtain, maintain (including making periodic filings and payments) and enforce patent protection for their intellectual property, in particular, those patents to which we have secured exclusive rights. Under our license with pSivida, pSivida controls the filing, prosecution and maintenance of all patents. Our licensors may not successfully prosecute or continue to prosecute the patent applications to which we are licensed. Even if patents are issued in respect of these patent applications, we or our licensors may fail to maintain these patents, may determine not to pursue litigation against entities that are infringing these patents, or may pursue such litigation less aggressively than we ordinarily would. Without protection for the intellectual property that we own or license, other companies might be able to offer substantially identical products for sale, which could adversely affect our competitive business position and harm our business prospects. Moreover, FA is an off-patent active ingredient that is commercially available in several forms including the extended release ocular implant Retisert.

 

Even if issued, patents may be challenged, narrowed, invalidated, or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection that we may have for our products. In addition, our patents and our licensors’ patents may not afford us protection against competitors with similar technology.

Litigation or third-party claims of intellectual property infringement would require us to divert resources and may prevent or delay our development, regulatory approval or commercialization of our product candidates.

 

We may not have rights under some patents or patent applications that may be infringed by our products or potential products. Third-parties may now or in the future own or control these patents and patent applications in the United States and abroad. These third-parties could bring claims against us or our collaborators that would cause us to incur substantial expenses or divert substantial employee resources from our business and, if successful, could cause us to pay substantial damages or prevent us from developing one or more product candidates. Further, if a patent infringement suit were brought against us or our collaborators, we or they could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit.

 

Several issued and pending U.S. patents claiming methods and devices for the treatment of eye diseases, including through the use of steroids, implants and injections into the eye, purport to cover aspects of Iluvien. For example, one of our potential competitors holds issued and pending U.S. patents with claims covering devices for injecting an ocular implant into a patient’s eye similar to the Iluvien inserter. There is also an issued U.S. patent with claims covering implanting a steroidal anti-inflammatory agent to treat an inflammation-mediated condition of the eye. If these or any other patents were held by a court of competent jurisdiction to be valid and to cover aspects of Iluvien, then the owners of such patents would be able to block our ability to commercialize Iluvien unless and until we obtain a license under such patents (which license might require us to pay royalties or grant a cross-license to one or more patents that we own), until such patents expire or unless we are able to redesign our product to avoid any such valid patents.

 

As a result of patent infringement claims, or in order to avoid potential claims, we or our collaborators may choose to seek, or be required to seek, a license from the third-party and would most likely be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we or our collaborators were able to obtain a license, the rights may be nonexclusive, which would give our competitors access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations if, as a result of actual or threatened patent infringement claims, we or our collaborators are unable to enter into licenses on acceptable terms. This could harm our business significantly.

 

There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference proceedings declared by the U.S. Patent and Trademark Office and opposition proceedings in the European Patent Office, regarding intellectual property rights with respect to our products and technology. The cost to us of any litigation or other proceeding, regardless of its merit, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Intellectual property litigation and other proceedings may, regardless of their merit, also absorb significant management time and employee resources.

 

If we fail to comply with our obligations in the agreements under which we license development or commercialization rights to products or technology from third-parties, we could lose license rights that are important to our business.

 

Our licenses are important to our business, and we expect to enter into additional licenses in the future. We hold a license from pSivida under intellectual property relating to Iluvien. This license imposes various commercialization, milestone payment, profit sharing, insurance and other obligations on us. We also hold a license from Dainippon Sumitomo Pharma Co., Ltd. under patents relating to Iluvien. This license imposes a milestone payment and other obligations on us. If we fail to comply with these obligations, the licensor may

have the right to terminate the applicable license, in which event we would not be able to market products, such as Iluvien, that may be covered by such license.

 

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.

 

In addition to patented technology, we rely upon unpatented proprietary technology, processes, trade secrets and know-how. Any involuntary disclosure or misappropriation by third-parties of our confidential or proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in our market. We seek to protect confidential or proprietary information in part by confidentiality agreements with our employees, consultants and third-parties. While we require all of our employees, consultants, advisors and any third-parties who have access to our proprietary know-how, information and technology to enter into confidentiality agreements, we cannot be certain that this know-how, information and technology will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. These agreements may be terminated or breached, and we may not have adequate remedies for any such termination or breach. Furthermore, these agreements may not provide meaningful protection for our trade secrets and know-how in the event of unauthorized use or disclosure. To the extent that any of our staff were previously employed by other pharmaceutical or biotechnology companies, those employers may allege violations of trade secrets and other similar claims in relation to their drug development activities for us.

 

If our efforts to protect the proprietary nature of the intellectual property related to our products are not adequate, we may not be able to compete effectively in our markets.

 

The strength of our patents in the biotechnology and pharmaceutical field involves complex legal and scientific questions and can be uncertain. In addition to the rights we have licensed from pSivida relating to our product candidates, we rely upon intellectual property we own relating to our products, including patents, patent applications and trade secrets. As of April 22, 2010, we owned one pending non-provisional U.S. utility patent application, one issued U.S. design patent and one patent Cooperation Treaty Application, relating to our inserter system for Iluvien. Our patent applications may be challenged or fail to result in issued patents and our existing or future patents may be too narrow to prevent third-parties from developing or designing around these patents.

 

As of April 22, 2010, the patent rights relating to Iluvien licensed to us from pSivida include three U.S. patents that expire between March 2019 and April 2020 and counterpart filings to these patents in a number of other jurisdictions. No patent term extension will be available for any of these U.S. patents or any of our licensed U.S. pending patent applications. After these patents expire in April 2020, we will not be able to block others from marketing FA in an insert similar to Iluvien in the U.S. Moreover, it is possible that a third-party could successfully challenge the scope (i.e., whether a patent is infringed), validity and enforceability of our licensed patents prior to patent expiration and obtain approval to market a competitive product.

 

Further, the patent applications that we license or have filed may fail to result in issued patents. Some claims in pending patent applications filed or licensed by us have been rejected by patent examiners. These claims may need to be amended and, even after amendment, a patent may not be permitted to issue. Further, the existing or future patents to which we have rights based on our agreement with pSivida may be too narrow to prevent third-parties from developing or designing around these patents. Additionally, we may lose our rights to the patents and patent applications we license in the event of a breach or termination of the license agreement. Manufacturers may also seek to obtain approval to sell a generic version of Iluvien prior to the expiration of the relevant licensed patents. If the sufficiency of the breadth or strength of protection provided by the patents we license with respect to Iluvien or the patents we pursue related to another product candidate is threatened, it could dissuade companies from collaborating with us to develop, and threaten our ability to commercialize Iluvien and our other product candidates. Further, if we encounter delays in our clinical trials, the period of time during which we could market Iluvien and our other product candidates under patent protection would be reduced.

We rely on trade secret protection and confidentiality agreements to protect certain proprietary know-how that is not patentable, for processes for which patents are difficult to enforce and for any other elements of our development processes with respect to Iluvien and our other product candidates that involve proprietary know-how, information and technology that is not covered by patent applications. While we require all of our employees, consultants, advisors and any third-parties who have access to our proprietary know-how, information and technology to enter into confidentiality agreements, we cannot be certain that this know-how, information and technology will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Further, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. If we are unable to protect or defend the intellectual property related to our technologies, we will not be able to establish or maintain a competitive advantage in our market.

 

Third-party claims of intellectual property infringement may prevent or delay our discovery, development and commercialization efforts with respect to Iluvien and our other product candidates.

 

Our commercial success depends in part on avoiding infringement of the patents and proprietary rights of third-parties. Third-parties may assert that we are employing their proprietary technology without authorization. In addition, at least several issued and pending U.S. patents claiming methods and devices for the treatment of eye diseases, including through the use of steroids, implants and injections into the eye, purport to cover aspects of Iluvien.

 

Although we are not currently aware of any litigation or other proceedings or third-party claims of intellectual property infringement related to Iluvien, the pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may in the future allege that our activities infringe their patents or that we are employing their proprietary technology without authorization. We may not have identified all the patents, patent applications or published literature that affect our business either by blocking our ability to commercialize our product, by preventing the patentability of one or more aspects of our products or those of our licensors or by covering the same or similar technologies that may affect our ability to market our product. We cannot predict whether we would be able to obtain a license on commercially reasonable terms, if at all. Any inability to obtain such a license under the applicable patents on commercially reasonable terms, or at all, may have a material adverse effect on our ability to commercialize Iluvien or other products until such patents expire.

 

In addition, third-parties may obtain patents in the future and claim that use of our product candidates or technologies infringes upon these patents. Furthermore, parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, obtain one or more licenses from third-parties or pay royalties, or we may be enjoined from further developing or commercializing our product candidates and technologies. In addition, even in the absence of litigation, we may need to obtain licenses from third-parties to advance our research or allow commercialization of our product candidates, and we have done so from time to time. We may fail to obtain future licenses at a reasonable cost or on reasonable terms, if at all. In that event, we may be unable to further develop and commercialize one or more of our product candidates, which could harm our business significantly.

 

We may become involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time consuming and unsuccessful.

 

Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any

litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

 

Interference proceedings brought by the U.S. Patent and Trademark Office may be necessary to determine the priority of inventions with respect to our patents and patent applications or those of our collaborators or licensors. An unfavorable outcome could require us to cease using the technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if a prevailing party does not offer us a license on terms that are acceptable to us. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distraction of our management and other employees. We may not be able to prevent, alone or with our licensors, misappropriation of our proprietary rights, particularly in countries where the laws may not protect those rights as fully as in the United States.

 

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.

 

Product liability lawsuits could divert our resources, result in substantial liabilities and reduce the commercial potential of our products.

 

The risk that we may be sued on product liability claims is inherent in the development of pharmaceutical products. We face a risk of product liability exposure related to the testing of our product candidates in clinical trials and will face even greater risks upon any commercialization by us of our product candidates. We believe that we may be at a greater risk of product liability claims relative to other pharmaceutical companies because our products are inserted into the eye, and it is possible that we may be held liable for eye injuries of patients who receive our product. These lawsuits may divert our management from pursuing our business strategy and may be costly to defend. In addition, if we are held liable in any of these lawsuits, we may incur substantial liabilities and may be forced to limit or forego further commercialization of one or more of our products. Although we maintain primary product liability insurance and excess product liability insurance that cover our clinical trials, our aggregate coverage limit under these insurance policies is $10.0 million, and while we believe this amount of insurance is sufficient to cover our product liability exposure, these limits may not be high enough to fully cover potential liabilities. In addition, we may not be able to obtain or maintain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims, which could prevent or inhibit the commercial production and sale of our products.

 

Legislative or regulatory reform of the health care system in the United States and foreign jurisdictions may affect our ability to sell our products profitably.

 

The U.S. government and other governments have shown significant interest in pursuing healthcare reform. Any government-adopted reform measures could adversely impact the pricing of healthcare products and services in the U.S. or internationally and the amount of reimbursement available from governmental agencies or other third party payors. The continuing efforts of the United States and foreign governments, insurance companies, managed care organizations and other payors of health care services to contain or reduce health care costs may adversely affect our ability to set prices for our products which we believe are fair, and our ability to generate revenues and achieve and maintain profitability.

 

New laws, regulations and judicial decisions, or new interpretations of existing laws, regulations and decisions, that relate to healthcare availability, methods of delivery or payment for products and services, or sales, marketing or pricing, may limit our potential revenue. The pricing and reimbursement environment may change in the future and become more challenging due to several reasons, including policies advanced by the current executive administration in the U.S., new healthcare legislation or fiscal challenges faced by government health administration authorities. Specifically, in both the U.S. and some foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the health care system in ways that could affect our ability to sell our products profitably. In the U.S., changes in federal health care policy are

being considered by Congress this year. Some of these proposed reforms could result in reduced reimbursement rates for Iluvien and our other potential products, which would adversely affect our business strategy, operations and financial results.

 

In addition, the Medicare Prescription Drug Improvement and Modernization Act of 2003 reforms the way Medicare will cover and reimburse for pharmaceutical products. This legislation could decrease the coverage and price that we may receive for our products. Other third-party payors are increasingly challenging the prices charged for medical products and services. It will be time consuming and expensive for us to go through the process of seeking reimbursement from Medicare and private payors. Our products may not be considered cost-effective, and coverage and reimbursement may not be available or sufficient to allow us to sell our products on a profitable basis. Further federal and state proposals and health care reforms are likely which could limit the prices that can be charged for the product candidates that we develop and may further limit our commercial opportunity. Our results of operations could be materially adversely affected by the proposed healthcare reforms, by the Medicare prescription drug coverage legislation, by the possible effect of such current or future legislation on amounts that private insurers will pay and by other health care reforms that may be enacted or adopted in the future.

 

In September 2007, the Food and Drug Administration Amendments Act of 2007 was enacted, giving the FDA enhanced post-marketing authority, including the authority to require post-marketing studies and clinical trials, labeling changes based on new safety information, and compliance with risk evaluations and mitigation strategies approved by the FDA. The FDA’s exercise of this authority could result in delays or increased costs during product development, clinical trials and regulatory review, increased costs to ensure compliance with post-approval regulatory requirements, and potential restrictions on the sale and/or distribution of approved products.

 

In some foreign countries, including the European Union and Canada, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take six to 12 months or longer after the receipt of regulatory approval and product launch. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. Our business could be materially harmed if reimbursement of our products is unavailable or limited in scope or amount or if pricing is set at unsatisfactory levels.

 

If we use hazardous and biological materials in a manner that causes injury or violates applicable law, we may be liable for damages.

 

Our research and development activities involve the controlled use of potentially hazardous substances, including chemical and biological materials. In addition, our operations produce hazardous waste products. Federal, state and local laws and regulations in both the United States and Canada govern the use, manufacture, storage, handling and disposal of hazardous materials. Although we believe that our procedures for use, handling, storing and disposing of these materials comply with legally prescribed standards, we may incur significant additional costs to comply with applicable laws in the future. Also, even if we are in compliance with applicable laws, we cannot completely eliminate the risk of contamination or injury resulting from hazardous materials and we may incur liability as a result of any such contamination or injury. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources. We do not have any insurance for liabilities arising from hazardous materials. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development and production efforts, which could harm our business, operating results and financial condition.

 

Risks Relating to Our Financial Results and Need for Financing

 

We have incurred operating losses in each year since our inception and expect to continue to incur substantial and increasing losses for the foreseeable future.

 

We have a limited operating history. We are not currently generating revenues and we cannot estimate with precision the extent of our future losses. We do not currently have any products that have been approved for commercial sale and we may never generate revenue from selling products or achieve profitability. We expect to continue to incur substantial and increasing losses through the anticipated commercial launch of Iluvien as early as the first quarter of 2011, particularly as we increase our research, clinical development, administrative and sales and marketing activities. As a result, we are uncertain when or if we will achieve profitability and, if so, whether we will be able to sustain it. As of December 31, 2009, we have accumulated a net deficit of $171.9 million. Our ability to achieve revenue and profitability is dependent on our ability to complete the development of our product candidates, obtain necessary regulatory approvals, and have our products manufactured and marketed. We cannot assure you that we will be profitable even if we successfully commercialize our products. Failure to become and remain profitable may adversely affect the market price of our common stock and our ability to raise capital and continue operations.

 

Fluctuations in our quarterly operating results and cash flows could adversely affect the price of our common stock.

 

We expect our operating results and cash flows to be subject to quarterly fluctuations. The revenues we generate, if any, and our operating results will be affected by numerous factors, including, but not limited to:

 

 

If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results and cash flows may, in turn, cause the price of our stock to fluctuate substantially. We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.

 

We may need additional financing in the event that we do not receive regulatory approval for Iluvien or the approval is delayed or, if approved, the future sales of Iluvien do not generate sufficient revenues to fund our operations. This financing may be difficult to obtain.

 

Since the inception of our company, we have funded our operations through the private placement of common stock, preferred stock and convertible debt, as well as by the sale of certain assets of the non-prescription business in which we were previously engaged. As of December 31, 2009, we had $4.9 million in cash and cash equivalents. Including the January 2010 receipt of $10.0 million in proceeds from the exercise of outstanding Series C-1 warrants and a $4.0 million option payment from Bausch & Lomb Incorporated upon the exercise by Bausch & Lomb Incorporated of its option to extend the period during which it may continue to develop an allergy product acquired from us in 2006 by two years; we had $18.9 million in cash and cash equivalents which we believe is sufficient to fund our operations into September 2010, but not beyond. Our need for additional financing, and current lack of a commercial product raise substantial doubt about our ability to continue as a going concern. On a pro forma as adjusted basis (based on the initial public offering price of $11.00 per share) as of December 31, 2009 we expect to have approximately $66.2 million in

cash and cash equivalents which we believe is sufficient to fund our operations through the projected commercialization of Iluvien as early as the first quarter of 2011. However, we cannot be sure that this offering will be completed, that Iluvien will be approved by the FDA in the fourth quarter of 2010 or that, if approved, future sales of Iluvien will generate revenues sufficient to fund our operations beyond the first quarter of 2011, or ever. In the event additional financing is needed, we may seek to fund our operations through the sale of equity securities, strategic collaboration agreements and debt financing. We cannot be sure that additional financing from any of these sources will be available when needed or that, if available, the additional financing will be obtained on terms favorable to us or our stockholders. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders would likely result and the terms of any new equity securities may have a preference over our common stock. If we attempt to raise additional funds through strategic collaboration agreements and debt financing, we may not be successful in obtaining collaboration agreements, or in receiving milestone or royalty payments under those agreements, or the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to commercialize our product candidates or operate as a business.

 

Risks Related to this Offering

 

Our existing stockholders will have the ability to control the outcome of matters submitted for stockholder approval and may have interests that differ from those of our other stockholders.

 

After this offering, our existing stockholders, which will include certain executive officers, key employees and directors and their affiliates, will beneficially own approximately 84.71% of our outstanding common stock (approximately 82.12% if the underwriters’ option to purchase additional shares is exercised in full) and will have the ability to control all matters requiring stockholder approval, including the election of directors. As a result, our existing stockholders would have the power to prevent a change of control in our company. The interests of our existing stockholders may differ from the interests of our stockholders who purchased their shares of our common stock in this offering, and this concentration of voting power may have the affect of delaying or impeding actions that could be beneficial to you, including actions that may be supported by our board of directors. See “Principal Stockholders” for additional information regarding the ownership of our outstanding stock by our executive officers, directors and their affiliates.

 

An active trading market for our common stock may not develop.

 

Prior to this offering, there has been no public market for our common stock. Although we anticipate that our common stock will be approved for listing on the Nasdaq Global Market (Nasdaq), an active trading market for our shares may never develop or be sustained following this offering. If the market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you or at all. In addition, an inactive market may impair our ability to raise capital by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration, which, in turn, could materially adversely affect our business.

 

The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for investors purchasing shares in this offering.

 

The initial public offering price for the shares of our common stock sold in this offering will be determined by negotiation between the representatives of the underwriters and us. This price may not reflect the market price of our common stock following this offering. Investors may not be able to sell their common stock at or above the initial public offering price. In addition, the market price of our common stock is likely to be highly volatile and may fluctuate substantially due to factors including the following (in addition to the other risk factors described in this section):

 

 

 

In addition, the stock markets, and in particular Nasdaq, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many pharmaceutical companies. These broad market and industry factors may materially harm the market price irrespective of our operating performance. As a result of these factors, after this offering you might be unable to resell your shares at or above the initial public offering price. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

 

We currently do not intend to pay dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.

 

Following the completion of this offering, we do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend on results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock. See “Dividend Policy” for additional information.

 

The actual or possible sale of our shares by our existing stockholders, who will beneficially own approximately 84.71% of our outstanding common stock following this offering, or by others could depress or reduce the market price of our common stock, or cause our shares of common stock to trade below the prices at which they would otherwise trade, or impede our ability to raise future capital.

 

The market price of our common stock could drop as a result of sales in the market by our existing stockholders of substantial amounts of our common stock after this offering or the perception that these sales could occur. These factors also could make it more difficult for us to raise funds through future offerings of our common stock.

 

In conjunction with this offering, our officers, directors and holders of substantially all of our common stock have entered into lock-up agreements with the underwriters under which they will agree not to sell or otherwise dispose of any shares of our common stock for 180 days after the completion of this offering, subject to certain exceptions, without the written consent of Credit Suisse Securities (USA) LLC and Citigroup Global Markets Inc. After these lock-up agreements expire, the shares subject to these lock-up agreements and not sold in this offering will be eligible for sale in the public market, subject in some cases to volume limitations and manner of sale requirements. These factors could also make it difficult for us to raise additional capital by selling stock. See “Shares Eligible for Future Sale” for additional information.

If you purchase shares of common stock sold in this offering, you will experience immediate and substantial dilution.

 

If you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution of $9.04 per share, based on the initial public offering price of $11.00 per share, because the price that you pay will be substantially greater than the net tangible book value per share of the shares you acquire based on the net tangible book deficit per share as of December 31, 2009. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares. You will experience additional dilution upon the exercise of stock options by employees or directors to purchase common stock under our equity incentive plans. As of December 31, 2009, we had options outstanding to purchase 2,225,778 shares of our common stock with a weighted average exercise price of $2.14 per share. In addition, as of December 31, 2009 there were warrants outstanding to purchase 248,181 shares of our common stock with a weighted average exercise price of $3.48 per share. See “Dilution” for additional information.

 

Future sales and issuances of our equity securities or rights to purchase our equity securities, including pursuant to our equity incentive plans, would result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.

 

To the extent we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. We may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or other equity securities in more than one transaction, investors may be further diluted by subsequent sales. Such sales may also result in material dilution to our existing stockholders, and new investors could gain rights superior to existing stockholders.

 

Pursuant to our 2010 Equity Incentive Plan, our board of directors is authorized to grant stock options to our employees, directors and consultants. The number of shares available for future grant under our 2010 Equity Incentive Plan increases each year by an amount equal to the lesser of 4% of all shares of our capital stock outstanding as of January 1st of each year, 2,000,000 shares, or as determined by our board of directors.

 

All of the shares of common stock sold in our initial public offering will be freely tradable without restrictions or further registration under the Securities Act, as amended, except for any shares purchased by our affiliates as defined in Rule 144 under the Securities Act. Rule 144 defines an affiliate as a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, us and would include persons such as our directors and executive officers.

 

Our management will have broad discretion over the use of the net proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

 

Our management will have broad discretion to use the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. They might not apply the net proceeds of this offering in ways that increase the value of your investment. We expect to use the net proceeds from this offering primarily to complete the development and registration of Iluvien for DME, to repay indebtedness and make certain milestone payments to pSivida, to commence the commercial launch of Iluvien, to continue to develop our product pipeline and for working capital and other general corporate purposes. Our management might not be able to yield any return on the investment and use of these net proceeds. You will not have the opportunity to influence our decisions on how to use the proceeds.

 

Anti-takeover provisions in our charter and bylaws and in Delaware law could prevent or delay acquisition bids for us that you might consider favorable and could entrench current management.

 

We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may deter, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change in control would be beneficial to our existing stockholders. See “Description of

Capital Stock — Anti-Takeover Effects of Provisions of Our Amended and Restated Certificate of Incorporation, Bylaws and Delaware Law” for additional information. In addition, our restated certificate of incorporation and bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our restated certificate of incorporation and bylaws, which will be in effect as of the closing of this offering:

 

 

See “Description of Capital Stock” for additional information regarding these and other provisions.

 

If securities or industry analysts do not publish research or reports or publish unfavorable research or reports about our business, our stock price and trading volume could decline.

 

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us, our business, our market or our competitors. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our stock, our stock price would likely decline. If one or more of these analysts ceases to cover us or fails to regularly publish reports on us, interest in our stock could decrease, which could cause our stock price or trading volume to decline.

 

Our ability to use our net operating loss carry-forwards may be limited.

 

At December 31, 2009, we had U.S. federal and state net operating loss carry-forwards (NOLs) of approximately $79.5 million and $62.7 million, respectively, which expire at various dates beginning in 2018 through 2029. Section 382 of the Internal Revenue Code limits the annual utilization of NOLs and tax credit carry-forwards following an ownership change in our company. If it is determined that significant ownership changes have occurred since we generated these NOLs, we may be subject to annual limitations on the use of these NOLs under Internal Revenue Code Section 382 (or comparable provisions of state law).

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

 

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange Commission and Nasdaq, have imposed various new requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time consuming and costly. We expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain the same or similar coverage.

 

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, we will be required to perform system and process evaluation and testing of our internal controls over financial reporting to allow management and our independent registered public accounting firm to report, commencing in our annual report on Form 10-K for the year ending December 31, 2011, on the effectiveness of our internal controls over financial reporting. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner or if we or our independent registered public accounting firm identifies deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by Nasdaq, the Securities and Exchange Commission or other regulatory authorities, which would require additional financial and management resources.

 

This prospectus contains forward-looking statements. All statements other than statements of historical fact contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

 

In some cases, we identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this prospectus are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this prospectus and are subject to a number of risks, uncertainties and assumptions described in the “Risk Factors” section and elsewhere in this prospectus. All forward-looking statements involve risks, assumptions and uncertainties. You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not occur and actual results could differ materially from those projected in our forward-looking statements. We undertake no obligation, and specifically decline any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

We estimate that the net proceeds to us of the sale of the common stock that we are offering will be approximately $66.3 million, assuming an initial public offering price of $11.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses that we must pay.

 

We anticipate using the net proceeds from this offering as follows:

 

 

 

 

 

 

Pending use of proceeds from this offering, we intend to invest the proceeds in a variety of capital preservation investments, including short-term, investment-grade and interest-bearing instruments.

 

We have never declared or paid any cash dividends on capital stock. We currently intend to retain all available funds and any future earnings for use in financing the growth of our business and do not anticipate paying any cash dividends after the offering and for the foreseeable future. Any future determination relating to dividend policy will be made at the discretion of our board of directors and will depend on our future earnings, financial condition, results of operations, capital requirements, general business conditions, future prospects, applicable Delaware law, which provides that dividends are only payable out of surplus or current net profits, and other factors that our board of directors may deem relevant.

 

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2009 (in thousands, except share data):

 

 

 

 

The following table does not include a $4.0 million option payment that we received in January 2010 from Bausch & Lomb Incorporated (Bausch & Lomb) upon the exercise by Bausch & Lomb of its option to extend the period during which it may continue to develop an allergy product acquired from us in 2006 by two years.

 

The number of shares of our common stock outstanding following this offering is based on 1,598,571 shares of our common stock outstanding as of December 31, 2009 and includes:

 

 

and excludes:

 

 

See “Management — Employee Benefit Plans,” and Note 10 of the Notes to the Financial Statements for a description of our equity benefit plans.

 

Our pro forma net tangible book value as of December 31, 2009 was approximately $(5.4) million, or approximately $(0.22) per share. Pro forma net tangible book value per share represents the amount of stockholders’ equity, divided by 24,462,267 shares of common stock outstanding after giving effect to the conversion of all outstanding shares of preferred stock (including shares of Series C-1 preferred stock issued upon the exercise of outstanding warrants in January 2010) into shares of common stock upon completion of this offering.

 

Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the net tangible book value per share of common stock immediately after completion of this offering. After giving effect to our sale of 6,550,000 shares of common stock in this offering at an initial public offering price of $11.00 per share and after deducting the underwriting discounts and commissions and estimated offering expenses, the pro forma net tangible book value as of December 31, 2009 would have been approximately $60.9 million or approximately $1.96 per share. This represents an immediate increase in net tangible book value of $2.18 per share to existing stockholders and an immediate dilution in net tangible book value of $9.04 per share to purchasers of common stock in the offering, as illustrated in the following table:

 

 

If the underwriters exercise their option to purchase additional shares of our common stock in full in this offering, the pro forma net tangible book value per share after the offering would be approximately $2.22 per share, the increase in pro forma net tangible book value per share to existing stockholders would be approximately $2.44 per share and the dilution to new investors purchasing shares in this offering would be approximately $8.78 per share.

 

The table below presents on a pro forma basis as of December 31, 2009, after giving effect to a 3.4-for-one reverse split of our common and preferred stock to be effected prior to the effective date of this registration statement and the conversion of all outstanding shares of preferred stock (including 1,935,700 shares of Series C-1 preferred stock issued and the receipt of $10.0 million in proceeds in January 2010 as a result of the exercise of Series C-1 warrants) into common stock upon completion of this offering and assuming there are no exercises of stock options or warrants outstanding on December 31, 2009 (as further described below), the differences between the existing stockholders and the purchasers of shares in the offering with respect to the number of shares purchased from us, the total consideration paid and the average price paid per share:

 

 

As of December 31, 2009, there were options outstanding to purchase a total of 2,225,778 shares of common stock at a weighted average exercise price of $2.14 per share. In addition, as of December 31, 2009, there were warrants outstanding to purchase 248,181 shares of common stock with a weighted average exercise price of $3.48 per share. To the extent outstanding options or warrants are exercised, there will be further dilution to new investors. See “Management — Employee Benefit Plans” and Note 10 of the Notes to the Financial Statements for a description of our equity benefit plans.

 

The following statements of operations data for fiscal years 2007, 2008 and 2009, and the balance sheet data as of December 31, 2008 and 2009, have been derived from our audited financial statements and related notes and are included elsewhere in this prospectus. The statement of operations data for fiscal years 2005 and 2006, and the balance sheet data as of December 31, 2005, 2006 and 2007 are derived from our audited financial statements, but are not included in this prospectus. The following selected financial data should be read together with our financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

Statement of Operations Data

 

 

 

Balance Sheet Data

 

 

 

 

 

Overview

 

We are a biopharmaceutical company that specializes in the research, development and commercialization of prescription ophthalmic pharmaceuticals. We are presently focused on diseases affecting the back of the eye, or retina, because we believe these diseases are not well treated with current therapies and represent a significant market opportunity. Our most advanced product candidate is Iluvien, which we are developing for the treatment of diabetic macular edema (DME). DME is a disease of the retina that affects individuals with diabetes and can lead to severe vision loss and blindness. We are currently conducting two Phase 3 pivotal clinical trials (collectively, our FAME Study) for Iluvien involving 956 patients in sites across the United States, Canada, Europe and India to assess the efficacy and safety of Iluvien in the treatment of DME. In December 2009 we received the month 24 clinical readout from our FAME Study. Based upon our analysis of this data, we plan to file a New Drug Application (NDA) in the United States for the low dose of Iluvien in the second quarter of 2010, followed by registration filings in certain European countries and Canada. We intend to request Priority Review of our NDA from the U.S. Food and Drug Administration (FDA). If Priority Review is granted, we can expect a response to our NDA from the FDA in the fourth quarter of 2010. If our NDA is approved, we plan to commercialize Iluvien in the United States by marketing and selling Iluvien to retinal specialists as early as the first quarter of 2011. In addition to treating DME, Iluvien is being studied in three Phase 2 clinical trials for the treatment of the dry form of age-related macular degeneration (AMD), the wet form of AMD and retinal vein occlusion (RVO). We are also conducting testing on two classes of nicotinamide adenine dinucleotide phosphate (NADPH) oxidase inhibitors, for which we have acquired exclusive, worldwide licenses from Emory University, in the treatment of dry AMD. We plan to evaluate the use of NADPH oxidase inhibitors in the treatment of other eye diseases of the eye, including wet AMD and diabetic retinopathy. We intend to seek a collaboration partner for sales and marketing activities outside North America. We currently contract with development partners or outside firms for various operational aspects of our development activities, including the preparation of clinical supplies and have no plans to establish in-house manufacturing capabilities.

 

We commenced operations in June 2003. Since our inception we have incurred significant losses. As of December 31, 2009 we have accumulated a deficit of $171.9 million. We expect to incur substantial losses through the projected commercialization of Iluvien through at least the first quarter of 2011 as we:

 

 

To date we have funded our operations through the private placement of common stock, preferred stock and convertible debt, as well as by the sale of certain assets of the non-prescription business in which we were previously engaged. As of December 31, 2009, we had $4.9 million in cash and cash equivalents. Including the January 2010 receipt of $10.0 million in proceeds from the exercise of outstanding Series C-1 warrants, and a $4.0 million option payment from Bausch & Lomb Incorporated (Bausch & Lomb) upon the exercise by Bausch & Lomb of its option to extend the period during which it may continue to develop an allergy product acquired from us in 2006 by two years, we had $18.9 million in cash and cash equivalents which we believe is sufficient to fund our operations into September 2010, but not beyond. We anticipate that the proceeds of this offering will be sufficient to fund our operations through the projected commercialization of Iluvien as early as the first quarter of 2011. However, we may need additional financing in the event that we do not receive regulatory approval for Iluvien in the fourth quarter of 2010 or the approval is delayed or, if approved, the

future sales of Iluvien do not generate sufficient revenues to fund our operations. This financing may be difficult to obtain.

 

Our Agreement with pSivida US, Inc.

 

In February 2005, we entered into an agreement with pSivida US, Inc. (pSivida) for the use of fluocinolone acetonide (FA) in pSivida’s proprietary delivery device. pSivida is a global drug delivery company committed to the biomedical sector and the development of drug delivery products. Our agreement with pSivida provides us with a worldwide exclusive license to develop and sell Iluvien, which consists of a tiny polyimide tube with membrane caps that is filled with FA in a polyvinyl alcohol matrix, for delivery to the back of the eye for the treatment and prevention of eye diseases in humans (other than uveitis). This agreement also provided us with a worldwide non-exclusive license to develop and sell pSivida’s proprietary delivery device to deliver other corticosteroids to the back of the eye for the treatment and prevention of eye diseases in humans (other than uveitis) or to treat DME by delivering a compound to the back of the eye through a direct delivery method through an incision required for a 25-gauge or larger needle. We do not have the right to develop and sell pSivida’s proprietary delivery device for indications for diseases outside of the eye or for the treatment of uveitis. Further, our agreement with pSivida permits pSivida to grant to any other party the right to use its intellectual property (i) to treat DME through an incision smaller than that required for a 25-gauge needle, unless using a corticosteroid delivered to the back of the eye, (ii) to deliver any compound outside the back of the eye unless it is to treat DME through an incision required for a 25-gauge or larger needle, or (iii) to deliver non-corticosteroids to the back of the eye, unless it is to treat DME through an incision required for a 25-gauge or larger needle.

 

We made initial license fee payments totaling $750,000 to pSivida in 2004 and additional license fee payments of $750,000 in 2005 upon the initiation of our FAME Study. Under the February 2005 agreement, we and pSivida agreed to collaborate on the development of Iluvien for DME, and share financial responsibility for the development expenses equally. Per the terms of the agreement, we each reported our monthly expenditures on a cash basis, and the party expending the lesser amount of cash during the period was required to make a cash payment to the party expending the greater amount to balance the cash expenditures. We retained primary responsibility for the development of the product, and therefore, were generally the party owed a balancing payment. Between February 2006 and December 2006, pSivida failed to make payments to us for its share of development costs totaling $2.0 million. For each payment not made, pSivida incurred a penalty of 50% of the missed payment and interest began accruing at the rate of 20% per annum on the missed payment and the penalty amount. In accordance with the terms of the agreement, pSivida was able to remain in compliance with the terms of the February 2005 agreement as long as the total amount of development payments past due did not exceed $2.0 million, and pSivida began making payments again in December 2006 in order to maintain compliance with the agreement. For financial reporting purposes we fully reserved the $2.0 million in past due development payments and all penalties and interest due with respect to such past due payment, due to the uncertainty of future collection.

 

The February 2005 agreement provided that after commercialization of Iluvien, profits, as defined in our agreement, would be shared equally. In March 2008, we and pSivida amended and restated the agreement to provide us with 80% of the net profits and pSivida with 20% of the net profits.

 

Total consideration to pSivida in connection with the execution of the March 2008 agreement was $33.8 million, which consisted of a payment of $12.0 million, the issuance of a $15.0 million note payable, and the forgiveness of $6.8 million in outstanding receivables. The $15.0 million promissory note accrues interest at 8% per annum, payable quarterly and is payable in full to pSivida upon the earlier of a liquidity event as defined in the agreement (including related and unrelated offerings of our capital stock greater than $75.0 million in the aggregate), the occurrence of an event of default under our agreement with pSivida, or September 30, 2012. If the note is not paid in full by March 31, 2010, the interest rate will increase to the lesser of 20% and the highest rate permitted by applicable law per annum effective April 1, 2010, and we will be required to begin making principal payments of $500,000 per month. The outstanding receivables forgiven represented all outstanding development payments, penalties and interest totaling $6.8 million, of which $4.0 million was reserved for financial reporting purposes prior to the date of the amendment. The

remaining $2.8 million represented a receivable for current and unbilled development payments as of the effective date of the March 2008 agreement. In connection with this transaction we recognized incremental research and development expenses of $29.8 million in March 2008 and we prospectively assumed all financial responsibility for the remaining development of Iluvien. We will owe pSivida an additional milestone payment of $25.0 million upon FDA approval of Iluvien. As a result of the amended profit sharing percentages we will only be able to recover 20% of the commercialization costs of Iluvien incurred prior to profitability, reduced from the 50% established in the February 2005 agreement.

 

Our Discontinued Non-Prescription Business

 

At the inception of our company, we were focused primarily on the development and commercialization of non-prescription over-the-counter ophthalmic products. In October 2006, due to the progress and resource requirements related to the development of Iluvien, we decided to discontinue our non-prescription business. As a result, we received proceeds of $10.0 million from the sale of our allergy products in December 2006 and $6.7 million from the sale of our dry eye product in July 2007, both to Bausch & Lomb. If one of the allergy products receives FDA approval, we are entitled to an additional $8.0 million payment from Bausch & Lomb under the sales agreement. In January 2010 we received a $4.0 million option payment from Bausch & Lomb upon the exercise by Bausch & Lomb of its option to extend the period during which it may continue to develop an allergy product acquired from us in 2006 by two years. However, there can be no assurance that Bausch & Lomb will continue the development of this allergy product, that it will receive FDA approval or that we will receive the $8.0 million payment.

 

As a result of the discontinuance of our non-prescription business, all revenues and expenses associated with our over-the-counter portfolio are included in the income (loss) from discontinued operations in the accompanying statements of operations.

 

Financial Overview

 

Revenue

 

To date we have only generated revenue from our dry eye non-prescription product. From the launch of that product in September 2004 to its sale in July 2007, we generated $4.4 million in net revenues which are included in the income (loss) from discontinued operations in the accompanying financial statements. We do not expect to generate any significant additional revenue unless or until we obtain regulatory approval of, and commercialize, our product candidates or in-license additional products that generate revenue. In addition to generating revenue from product sales, we intend to seek to generate revenue from other sources such as up-front fees, milestone payments in connection with collaborative or strategic relationships, and royalties resulting from the licensing of our product candidates and other intellectual property. We expect any revenue we generate will fluctuate from quarter to quarter as a result of the nature, timing and amount of any milestone payments we may receive from potential collaborative and strategic relationships, as well as revenue we may receive upon the sale of our products to the extent any are successfully commercialized.

 

Research and Development Expenses

 

Substantially all of our research and development expenses incurred to date related to our continuing operations have been related to the development of Iluvien. We anticipate that we will incur expenses of approximately $11.6 million and $1.8 million in 2010 and 2011, respectively, to complete the clinical development and registration of Iluvien for DME. Upon the approval of Iluvien by the FDA, we will owe an additional milestone payment of $25.0 million to pSivida.

 

We anticipate that we will incur additional research and development expenses in the future as we evaluate and possibly pursue the development of Iluvien for additional indications, or develop additional product candidates.

 

We recognize research and development expenses as they are incurred. Our research and development expenses consist primarily of:

 

 

 

 

We expense both internal and external development costs as they are incurred.

 

We expect that a large percentage of our research and development expenses in the future will be incurred in support of our current and future technical, preclinical and clinical development programs. These expenditures are subject to numerous uncertainties in terms of both their timing and total cost to completion. We expect to continue to develop stable formulations of our product candidates, test such formulations in preclinical studies for toxicology, safety and efficacy and to conduct clinical trials for each product candidate. We anticipate funding clinical trials for Iluvien ourselves, but we may engage collaboration partners at certain stages of clinical development. As we obtain results from clinical trials, we may elect to discontinue or delay clinical trials for certain product candidates or programs in order to focus our resources on more promising product candidates or programs. Completion of clinical trials by us or our future collaborators may take several years or more, the length of time generally varying with the type, complexity, novelty and intended use of a product candidate. The costs of clinical trials may vary significantly over the life of a project owing to but not limited to the following:

 

 

Our expenses related to clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Generally, these agreements set forth the scope of work to be performed at a fixed fee or unit price. Payments under the contracts depend on factors such as the successful enrollment of patients or the completion of clinical trial milestones. Expenses related to clinical trials generally are accrued based on contracted amounts applied to the level of patient enrollment and activity according to the protocol. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis.

 

None of our product candidates have received FDA or foreign regulatory marketing approval. In order to grant marketing approval, a health authority such as the FDA or foreign regulatory agencies must conclude that clinical and preclinical data establish the safety and efficacy of our product candidates with an appropriate

benefit to risk profile relevant to a particular indication, and that the product can be manufactured under current Good Manufacturing Practice (cGMP) in a reproducible manner to deliver the product’s intended performance in terms of its stability, quality, purity and potency. Until our submission is reviewed by a health authority, there is no way to predict the outcome of their review. Even if the clinical studies meet their predetermined primary endpoints, and a registration dossier is accepted for filing, a health authority could still determine that an appropriate benefit to risk relationship does not exist for the indication that we are seeking.

 

We cannot forecast with any degree of certainty which of our product candidates will be subject to future collaborations or how such arrangements would affect our development plan or capital requirements.

 

As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our development projects or when and to what extent we will receive cash inflows from the commercialization and sale of an approved product candidate.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of compensation for employees in executive and administrative functions, including finance, accounting and human resources. Other significant costs include facilities costs and professional fees for accounting and legal services, including legal services associated with obtaining and maintaining patents. After completion of this offering, we anticipate incurring a significant increase in general and administrative expenses, as we operate as a public company. These increases will likely include increased costs for insurance, costs related to the hiring of additional personnel and payments to outside consultants, lawyers and accountants. We also expect to incur significant costs to comply with the corporate governance, internal control and similar requirements applicable to public companies.

 

Marketing Expenses

 

Marketing expenses consist primarily of compensation for employees responsible for assessing the commercial opportunity of and developing market awareness and launch plans for our product candidates. Other costs include professional fees associated with developing brands for our product candidates and maintaining public relations. We expect significant increases in our marketing and selling expenses as we hire additional personnel and establish our sales and marketing capabilities in anticipation of the commercialization of our product candidates. We intend to capitalize on our management’s past experience and expertise with eye-care products by marketing and selling Iluvien to the approximately 1,600 retinal specialists practicing in the approximately 900 retina centers across the United States and Canada. We intend to seek a commercialization partner for sales and marketing activities outside North America.

 

Our plan is to develop our own specialized domestic sales and marketing infrastructure, comprised of approximately 40 people, to market Iluvien and other ophthalmic products that we acquire or develop in the future. We will begin recruiting sales representatives and regional managers with extensive ophthalmic-based-sales experience in 2010 in advance of an expected commercial launch of Iluvien as early as the first quarter of 2011. We expect that our domestic sales force will be able to access and form relationships with retinal specialists in the approximately 900 retina centers prior to the commercial launch of Iluvien.

 

Interest Income

 

Interest income consists primarily of interest earned on our cash and cash equivalents.

 

Interest Expense

 

Beginning in March 2008, we began recognizing interest on our $15.0 million note payable to pSivida at an effective interest rate of 12.64% per annum (this note is currently accruing interest at the rate of 8% per annum and will increase to 20% per annum effective April 1, 2010). Accrued interest in excess of amounts payable currently at the stated rate are included in accrued expenses and in other long-term liabilities in the accompanying balance sheets. Interest expense also includes interest on our capital leases.

Change in Fair Value of Preferred Stock Conversion Feature

 

Our Series A, Series B, Series C and Series C-1 preferred stock contain certain conversion features which are considered embedded derivatives. We account for such embedded derivative financial instruments in accordance with the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities (ASC 815). We record derivative financial instruments as assets or liabilities in our balance sheet measured at their fair value. We record the changes in fair value of such instruments as non-cash gains or losses in the statement of operations. Based upon the initial public offering price of $11.00 per share, we anticipate recognizing a gain on the revaluation of the embedded conversion feature of $1.6 million immediately prior to the conversion of our Series A, Series B, Series C and Series C-1 preferred stock at their respective conversion rates (including shares of Series C-1 preferred stock issued upon the exercise of warrants in January 2010) into 22,863,696 shares of our common stock.

 

Preferred Stock Accretion

 

Our Series A, Series B, Series C and Series C-1 preferred stock were recorded at issuance at the proceeds received net of any issuance discounts, issuance costs and the fair value of the conversion features at issuance. The difference between the amount recorded at issuance and the original issue price is accreted on a straight-line basis over a period extending from the date of issuance to the date at which the preferred stock becomes redeemable at the option of the holder.

 

Preferred Stock Dividends

 

Our Series A, Series B, Series C and Series C-1 preferred stock accrue dividends at 8% per annum which are recorded as an increase in the carrying amount of the respective preferred stock. Upon conversion of our preferred stock immediately prior to this initial public offering, $1.5 million of dividends accrued on our Series A preferred stock prior to November 17, 2005 will convert into 380,301 shares of our common stock. All other preferred dividends will be eliminated upon conversion of the underlying preferred stock. We also recognized a dividend of $355,000 to holders of our Series C-1 preferred stock during the year ended December 31, 2009 for a beneficial conversion feature associated with the Series C-1 preferred stock at issuance.

 

Basic and Diluted Net Loss Attributable to Common Stockholders per Common Share

 

We calculated net loss per share in accordance with SFAS No. 128, Earnings Per Share (ASC 260). We have determined that the Series A, Series B, Series C and Series C-1 preferred stock represent participating securities in accordance with ASC 260. However, since we operate at a loss, and losses are not allocated to the preferred stock, the two class method does not affect our calculation of earnings per share. We had a net loss for all periods presented; accordingly, the inclusion of common stock options and warrants would be anti-dilutive.

 

Dilutive common stock equivalents would include the dilutive effect of convertible securities, common stock options, warrants for convertible securities and warrants for common stock equivalents. Potentially dilutive weighted average common stock equivalents totaled approximately 14,378,628, 19,741,154 and 22,149,592 for the years ended December 31, 2007, 2008 and 2009, respectively. Potentially dilutive common stock equivalents were excluded from the diluted earnings per share denominator for all periods because of their anti-dilutive effect. Therefore, the weighted average shares used to calculate both basic and diluted earnings per share are the same.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based on our financial statements which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis,

we evaluate these estimates and judgments, including those described below. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results and experiences may differ materially from these estimates.

 

While our significant accounting policies are more fully described in Note 1 to our financial statements included within this prospectus, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we use in the preparation of our financial statements.

 

Clinical Trial Prepaid and Accrued Expenses

 

We record prepaid assets and accrued liabilities related to clinical trials associated with contract research organizations, clinical trial investigators and other vendors based upon amounts paid and the estimated amount of work completed on each clinical trial. The financial terms of agreements vary from vendor to vendor and may result in uneven payment flows. As such, if we have advanced funds exceeding our estimate of the work completed, we record a prepaid asset. If our estimate of the work completed exceeds the amount paid, an accrued liability is recorded. All such costs are charged to research and development expenses based on these estimates. Our estimates may or may not match the actual services performed by the organizations as determined by patient enrollment levels and related activities. We monitor patient enrollment levels and related activities to the extent possible through internal reviews, correspondence and discussions with our contract research organization and review of contractual terms. However, if we have incomplete or inaccurate information, we may underestimate or overestimate activity levels associated with various clinical trials at a given point in time. In this event, we could record significant research and development expenses in future periods when the actual level of activities becomes known. To date, we have not experienced material changes in these estimates. Additionally, we do not expect material adjustments to research and development expenses to result from changes in the nature and level of clinical trial activity and related expenses that are currently subject to estimation. In the future, as we expand our clinical trial activities, we expect to have increased levels of research and development costs that will be subject to estimation.

 

Research and Development Costs

 

Research and development expenditures are expensed as incurred, pursuant to SFAS No. 2, Research and Development (ASC 730). Costs to license technology to be used in our research and development that have not reached technological feasibility, defined as FDA approval for our current product candidates, and have no alternative future use are expensed when incurred. Payments to licensors that relate to the achievement of pre-approval development milestones are recorded as research and development expense when incurred.

 

Income Taxes

 

We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of its assets and liabilities in accordance with SFAS No. 109, Accounting for Income Taxes (ASC 740). We evaluate the positive and negative evidence bearing upon the realizability of our deferred tax assets on an annual basis. Significant management judgment is involved in determining the provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against net deferred tax assets. Due to uncertainties with respect to the realization of our deferred tax assets due to our history of operating losses, a valuation allowance has been established against our deferred tax asset balances to reduce the net carrying value to an amount that is more likely than not to be realized. As a result we have fully reserved against the deferred tax asset balances. The valuation allowances are based on our estimates of taxable income in the jurisdictions in which we operate and the period over which deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, a change in the valuation allowance may be needed, which could materially impact our financial position and results of operations. Our deferred tax assets primarily consist of net operating loss (NOL) carry-forwards. At December 31, 2007, 2008 and 2009 we had federal NOL carry-forwards of approximately $33.9 million, $57.5 million and $79.5 million, respectively, and state NOL carry-forwards of approximately

$24.7 million, $40.7 million and $62.7 million, respectively, that are available to reduce future income otherwise taxable. If not utilized, the federal NOL carry-forwards will expire at various dates between 2023 and 2029 and the state NOL carry-forwards will expire at various dates between 2018 and 2029. If it is determined that significant ownership changes have occurred since these NOLs were generated, we may be subject to annual limitations on the use of these NOLs under Internal Revenue Code Section 382 (or comparable provisions of state law).

 

In the event that we were to determine that we are able to realize any of our net deferred tax assets in the future, an adjustment to the valuation allowance would increase net income in the period such determination was made. We believe that the most significant uncertainty that will impact the determination of our valuation allowance will be our estimation of the extent and timing of future net income, if any.

 

We considered our income tax positions for uncertainty in accordance with ASC 740. We believe our income tax filing positions and deductions are more likely than not of being sustained on audit and do not anticipate any adjustments that will result in a material change to our financial position; therefore, we have not recorded ASC 740 liabilities. Our adoption of ASC 740 did not result in a cumulative effect adjustment to retained earnings. We will recognize accrued interest and penalties related to unrecognized tax benefits as interest expense and income tax expense, respectively, in our statements of operations. Our tax years since 2003 remain subject to examination in Georgia, Tennessee, and on the federal level. We do not anticipate any material changes to our uncertain tax positions within the next 12 months.

 

The Valuation of Our Common Stock

 

In the absence of a public trading market for our common stock, we determined a reasonable estimate of the then current fair value of our common stock based upon multiple valuation criteria and contemporaneous analyses (in each case, as adjusted to reflect a 3.4-for-one reverse split of our common and preferred stock effected prior to the effective date of this registration statement). Our board of directors exercised judgment in evaluating and assessing the foregoing based on several factors, including:

 

 

We made an initial estimate of the value of our common stock as of December 31, 2005 for the purpose of establishing the exercise price of stock-based awards granted during the year ended December 31, 2006. Our valuation methodology relied upon an application of the income approach and the market approach. The income approach involves applying appropriate risk adjusted discount rates to estimated debt free cash flows, based on forecasted revenues and costs. The projections used to estimate our value were based upon our expected operating performance over the forecast period. There is inherent uncertainty in our forecasts and projections. If different estimates or other assumptions had been used, the valuations would have been different. The market approach assessed the value of our common stock in comparison to a similar transaction,

specifically a recent sale of our preferred stock. Our analysis also included the application of discounts related to (i) the lack of marketability for our common stock, and (ii) the lack of control by our common stockholders due to the rights, privileges and preferences associated with our preferred stock. We selected a lack of marketability discount of 40% and a lack of control discount of 30%. The marketability discount was based upon restricted stock studies, studies of private placements of stock in public companies and studies of initial public offerings that primarily observed discounts ranging from 30% to 40%. We used the higher end of that range in valuing our common stock due to the historical lack of dividends being paid, restrictions on transferability, the high volatility of our peer group, concentration of ownership, and the difficulty in valuing our common stock due to the uncertainty surrounding the future results of our FAME Study. Our lack of control discount was 30%, based on a review of premiums paid in transactions to acquire control of public companies that ranged from 10% to 40%. We used the higher end of that range due to the significant rights, privileges and preferences held by our preferred stockholders.

 

As of December 31, 2005 the income approach yielded a valuation range of $0.99 to $1.43 per share for our common stock, and the market approach yielded a value of $1.33 per share based upon the sale of our Series B preferred stock in November and December of 2005. We therefore estimated a valuation of $1.33 per share, which was recommended to our board of directors for the strike price of all stock options granted during the year ended December 31, 2006. We also relied on this valuation in determining the fair value of the preferred stock conversion features of our Series A and Series B preferred stock at December 31, 2005, and at the end of each of the first three calendar quarters in the year ended December 31, 2006.

 

For purposes of valuing the conversion features of our Series A preferred stock at the time of issuance between July 2004 and October 2005, and determining the fair value of stock options granted in each of the years ended December 31, 2004 and 2005, we retrospectively applied the same lack of liquidity and lack of discounts used in our valuation as of December 31, 2005 to the issue price of our Series A preferred stock sold between July 2004 and October 2005. We determined that the fair value of our common stock for purposes of these valuations was $1.22 per share during this period.

 

We also estimated the value of our common stock on December 31, 2006, utilizing the income and market approaches consistent with its valuation at December 31, 2005. As of December 31, 2006 the income approach yielded a valuation of $1.63 per share for our common stock, and the market approach yielded a value of $1.33 per share based upon the sale of our Series B preferred stock in November 2006. We weighted 25% of its assessment to the income approach and 75% to the market approach, and therefore recommended a valuation of $1.39 per share as of December 31, 2006. We relied on this valuation for our recommendation to the board of directors for the strike price of all stock options granted during the year ended December 31, 2007. We also relied on this valuation in determining the fair value of the conversion features of our Series A and Series B preferred stock at December 31, 2006, and at the end of each of the first three calendar quarters in the year ended December 31, 2007.

 

Because we began evaluating an initial public offering of our common stock or a sale of our company in 2008, we amended our process to estimate the value of our common stock to utilize a probability-weighted expected return method, as detailed in a practice aid issued by the American Institute of Certified Public Accountants entitled “Valuation of Privately Held Company Equity Securities Issued as Compensation” as of December 31, 2007 and periodically thereafter. Using this valuation methodology, we estimated the value of our common stock based upon an analysis of future values of the company assuming various liquidity events or the lack of a liquidity event as described below.

 

At each valuation date, we estimated the value of our common stock under various potential outcomes for the company, including

 

 

The value of our common stock was based upon the impact of the rights, privileges and preferences of the preferred stock on the value of each class of stock in each scenario. We then weighted the values for our common stock determined under each scenario based upon our estimates of the probability of each of the four possible outcomes to determine an estimate of the value of our common stock.

 

For valuations between December 31, 2007 and May 22, 2008 the significant drivers and weightings for our valuations were: initial public offering 35%; sale of our company/assets 20%, remain private 20%; and liquidation of intellectual property 25%. For valuations between June 25, 2008 and August 27, 2008 the significant drivers and weightings for our valuations were: initial public offering 40%; sale of our company/assets 25%; remain private 20%; and liquidation of intellectual property 15%. For valuations on September 30, 2008 and October 7, 2008 the significant drivers and weightings for our valuations were: initial public offering 35%; sale of our company/assets 35%; remain private 20%; and liquidation of intellectual property 10%. For valuations between December 31, 2008 and December 1, 2009 the significant drivers and weightings for our valuations were: initial public offering 20%; sale of our company/assets 40%; remain private 20%; and liquidation of intellectual property 20%. For the valuations on December 16, 2009 and December 31, 2009 the significant drivers and weightings for our valuations were: initial public offer 25%; sale of our company/assets 45%; remain private 20%; and liquidation of intellectual property 10%. Our estimated valuations on the following dates were as follows:

 

 

In assessing these valuations, the following factors are significant:

 

 

 

 

 

 

The differences in valuation of our preferred stock and common stock is due to the impact of the rights, privileges and preferences of our preferred stock, including a cumulative preference distribution of approximately $117.5 million at December 31, 2009. We anticipate the per share price of this offering will be in excess of both the most recent issuance price of our preferred stock in August 2009, and the most recent valuations of our common stock. We believe that the increase in value above the issuance price of $5.17 per share for our Series C-1 preferred stock will be due to:

 

 

Our estimated common stock valuation was $8.53 on December 31, 2009. We believe that the impact of the following items will result in additional increases in the value of our common stock up to the issuance price of this offering:

 

 

Stock-Based Compensation

 

Prior to January 1, 2005 we accounted for employee stock options using the intrinsic-value method in accordance with Accounting Principles Board (APB), Opinion No. 25, Accounting for Stock Issued to Employees, FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB No. 25, and related interpretations. For periods prior to January 1, 2005, we have adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation (ASC 718), as amended.

 

Effective January 1, 2005, we adopted the fair value recognition provisions of ASC 718 using the modified prospective application method. The modified prospective application method requires us to (i) record compensation costs for the unvested portion of previously issued awards that remained outstanding at January 1, 2005 using the fair value amounts measured under ASC 718 and (ii) record compensation costs for any awards issued, modified, repurchased, or cancelled after January 1, 2005.

 

We recognize the grant date fair value as compensation cost of employee stock-based awards using the straight-line method over the remaining vesting period for awards granted prior to January 1, 2005 and the actual vesting period for all awards issued after January 1, 2005, adjusted for our estimates of forfeiture. Typically, we grant stock options with a requisite service period of four years from the grant date. We have elected to use the Black-Scholes option pricing model to determine the fair value of stock options granted.

 

We concluded that this was the most appropriate method by which to value our share-based payment arrangements, but if any share-based payment instruments should be granted for which the Black-Scholes method does not meet the measurement objective as stated within ASC 718, we will utilize a more appropriate method for valuing that instrument. However, we do not believe that any instruments granted to date and accounted for under ASC 718 would require a method other than the Black-Scholes method.

 

Our determination of the fair market value of share-based payment awards on the grant date using option valuation models requires the input of highly subjective assumptions, including the expected price volatility and option life. As we have been operating as a private company, we are unable to use actual price volatility or option life data as input assumptions within our Black-Scholes valuation model.

 

For the calculation of expected volatility, because we lack company-specific historical and implied volatility information, we based our estimate of expected volatility on the volatility by utilizing an average of volatilities of publicly traded companies deemed similar to us in terms of product composition, stage of lifecycle, capitalization and scope of operations. We intend to continue to consistently apply this process using this same index until a sufficient amount of historical information regarding the volatility of our own share price becomes available.

 

To estimate the expected term, we chose to utilize the “simplified” method for “plain vanilla” options as discussed within the Securities and Exchange Commission’s (SEC) Statement of Accounting Bulletin (SAB) 107. We believe that all factors listed within SAB 107 as pre-requisites for utilizing the simplified method are true for us and for our share-based payment arrangements. We intend to utilize the simplified method for the foreseeable future until more detailed information about exercise behavior will be more widely available.

Our risk-free interest rates are based on a zero-coupon U.S. treasury instrument, the term of which is consistent with the expected term of the stock options. We have not paid and do not anticipate paying cash dividends on our shares of common stock; therefore, the expected dividend yield is assumed to be zero. We are required to estimate forfeitures at the time of the grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. Stock-based payments are generally amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

 

We believe there is a high degree of subjectivity involved when using option pricing models to estimate stock-based compensation under ASC 718. There is currently not a market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values. Although the fair value of employee share-based awards is determined in accordance with ASC 718 using an option pricing model, that value may not be indicative of the fair value observed in a market transaction between a willing buyer and a willing seller. If factors change and we employ different assumptions in the application of ASC 718 in future periods than those currently applied under ASC 718, the compensation expense we record in future periods under ASC 718 may differ significantly from what we have historically reported.

 

The exercise prices of options granted were set by our board of directors, the members of which have extensive experience in the life sciences industry and all but one of whom are non-employee directors. Our board of directors sets the exercise prices of options on its determination of the fair market value of our common stock at the time of the grants, which determination is made in accordance with federal tax rules which require reasonable application of a reasonable valuation method.

 

We performed valuations of our common stock contemporaneously with the granting of stock options. We believe that all of our stock options have been granted with exercise prices that are equal to or greater than the fair value of our common stock on the date of grant. The following table provides information regarding our stock option grants to our employees and our independent members of our board of directors from our inception:

 

 

The intrinsic value of all outstanding vested and unvested options based on the initial public offering price of $11.00 per share, is $19.7 million based on 2,225,778 common stock options at a weighted average exercise price of $2.14 per share outstanding at December 31, 2009.

 

Results of Operations

 

Year ended December 31, 2009 compared to the year ended December 31, 2008

 

Research and development expenses.  Research and development expenses decreased by approximately $28.7 million, or 66%, to approximately $15.1 million for the year ended December 31, 2009 compared to approximately $43.8 million for the year ended December 31, 2008. The decrease was principally attributable to the restructuring of our agreement with pSivida Inc., which resulted in incremental expenses of $29.8 million in the year ended December 31, 2008 that were not incurred in the year ended December 31, 2009. The $29.8 million cost in 2008 was comprised of a $12.0 million cash payment, a $15.0 million promissory note issued to pSivida, and the forgiveness of $2.8 million of net outstanding receivables due from pSivida related to the agreement. We continued to incur costs in 2009 with respect to our FAME Study, which completed enrollment in October 2007, and preparations for its anticipated registration with the FDA. We incurred increased costs in 2009 related to our FAME Study of $620,000 for our clinical research organization (CRO) costs as we prepared for and completed the lock of our FAME Study database and month 24 readout in the fourth quarter of 2009 and $490,000 in technology transfer costs associated with establishing manufacturing capabilities with a third-party manufacturer for Iluvien. These amounts were offset by decreases of $1.2 million in FAME Study trial site costs, $310,000 for our reading center to evaluate pictures of each enrollee’s retina, and $240,000 for our PK Study due to the completion of enrollment and fewer patient visits per month as the trial progressed. Additionally, total development costs related to Iluvien increased by $1.3 million due to the absence of cost sharing reimbursements from pSivida as a result of the restructuring of our agreement in March 2008. We also decreased spending on the evaluation of the NADPH oxidase inhibitors obtained from Emory University and other development pipeline candidates by $270,000 due to the restricted capital markets in 2009 and in order to focus our resources on completing the development of Iluvien, but incurred $300,000 in initial license fees in 2009 to enter into these agreements with Emory University.

 

General and administrative expenses.  General and administrative expenses decreased by approximately $1.7 million, or 33%, to approximately $3.4 million for the year ended December 31, 2009 compared to approximately $5.1 million for the year ended December 31, 2008. The decrease was primarily attributable to $1.3 million incurred in preparation for the anticipated 2008 initial public offering of our common stock that was expensed in the year ended December 31, 2008 when we determined that an initial public offering was unlikely in the then near term and $380,000 in legal fees associated with the restructuring of our agreement with pSivida, the evaluation of intellectual property regarding our Iluvien inserter system and the evaluation of certain strategic options.

 

Marketing expenses.  Marketing expenses decreased by approximately $510,000, or 40%, to approximately $750,000 for the year ended December 31, 2009 compared to approximately $1.3 million for the year

ended December 31, 2008. The decrease was primarily attributable to $230,000 in decreased spending on travel and general corporate awareness due to the restricted capital markets in 2009 and in order to focus our resources on completing the development of Iluvien, and $210,000 incurred for the initiation of pricing studies of the U.S. and European markets for Iluvien during the year ended December 31, 2008 that were not incurred in the year ended December 31, 2009.

 

Interest income.  Interest income decreased by approximately $550,000, or 94%, to approximately $40,000 for the year ended December 31, 2009 compared to approximately $590,000 for the year ended December 31, 2008. The decrease in interest income is primarily attributable to a decrease in our average cash balance from $25.5 million during the year ended December 31, 2008 to $11.1 million for the year ended December 31, 2009, combined with a substantial drop in the rates of return available on our money market accounts from approximately 2.3% during the year ended December 31, 2008 to 0.3% for the year ended December 31, 2009.

 

Interest expense.  Interest expense increased by approximately $380,000, or 25%, to approximately $1.9 million for the year ended December 31, 2009 compared to approximately $1.5 million for the year ended December 31, 2008. Our interest expense is associated with our $15.0 million note payable to pSivida issued in March 2008, and the increase is due to the note payable being outstanding for the full year ended December 31, 2009 as opposed to being outstanding for nine months in 2008.

 

Increase in fair value of preferred stock conversion feature.  For the year ended December 31, 2009 we recognized an expense of approximately $23.1 million related to the increase in the fair value of the conversion feature of our preferred stock. The increase was attributable to an increase in the estimated fair value of our common stock from $3.71 at December 31, 2008 to $8.53 at December 31, 2009 and increased volatility in the market values of our peer group.

 

Income (loss) from discontinued operations.  We did not have any income (loss) from discontinued operations for either of the year ended December 31, 2008 or December 31, 2009 due to the sale of our dry eye product to Bausch & Lomb in July 2007.

 

Year ended December 31, 2008 compared to the year ended December 31, 2007

 

Research and development expenses.  Research and development expenses increased by approximately $35.4 million, or 423%, to approximately $43.8 million for the year ended December 31, 2008 compared to approximately $8.4 million for the year ended December 31, 2007. The increase was primarily attributable to the restructuring of our agreement with pSivida, which resulted in incremental non-recurring expenses of $29.8 million in 2008. The $29.8 million was comprised of a $12.0 million cash payment, a $15.0 million promissory note issued to pSivida, and the forgiveness of $2.8 million of net outstanding receivables due from pSivida related to the agreement. The remaining increase is primarily due to costs to continue our FAME Study which completed enrollment in October 2007, and preparations for its anticipated registration with the FDA. We incurred increases in our FAME Study of, $1.3 million in technology transfer costs associated with establishing manufacturing capabilities with a third-party manufacturer, $550,000 for clinical supplies, stability testing, and tech transfer assistance paid to pSivida and $490,000 for our PK Study initiated in September 2007. These amounts were offset by decreases in FAME Study trial site costs of $1.9 million and CRO costs of $490,000 due to the completion of enrollment and fewer patient visits per month as the trial progresses, and a decrease of $220,000 associated with the acquisition of patent rights in 2007 to a device similar to our delivery technology in order to avoid the risk of patent infringement. Additionally, total development costs related to Iluvien increased by $4.8 million due to the absence of cost sharing reimbursements due from pSivida as a result of the restructuring of our agreement in March 2008. We also had an increase in payroll and staffing related costs of $720,000 primarily due to additional research and development personnel necessary to monitor the increased activity of our FAME Study and facilitate the technology transfer of Iluvien to our third party manufacturers, $240,000 in increased stock compensation expense associated with December 2007 option grants and expenses of $170,000 for pilot studies of Iluvien for other indications initiated in 2008.

 

General and administrative expenses.  General and administrative expenses increased by approximately $1.9 million, or 59%, to approximately $5.1 million for the year ended December 31, 2008 compared to

approximately $3.2 million for the year ended December 31, 2007. The increase was primarily attributable to $1.3 million in expenses incurred in preparation for the anticipated 2008 initial public offering of our common stock that was expensed when we determined that an initial public offering was unlikely in the then near term, $410,000 in increased legal fees associated with the restructuring of our agreement with pSivida, the evaluation of intellectual property regarding our Iluvien inserter system and the evaluation of certain strategic options, $350,000 in increased payroll costs associated with pay increases and additional staffing, $250,000 in stock compensation expense associated with December 2007 option grants, and $90,000 in software amortization expense related to the acquisition of software in late 2007 and 2008 to support our FAME Study and the planned filing of an NDA for Iluvien. These changes were offset primarily by a decrease of $320,000 in severance and other costs associated with the departure of our Vice President of Business Development in April 2007 and a decrease of $130,000 insurance expense due to the decreased scope of our business associated with the discontinuance of our non-prescription business.

 

Marketing expenses.  Marketing expenses increased by approximately $290,000, or 30%, to approximately $1.3 million for the year ended December 31, 2008 compared to approximately $1.0 million for the year ended December 31, 2007. The increase was primarily attributable to $220,000 for the initiation of pricing studies of the U.S. and European markets for Iluvien in 2008, $100,000 in conventions and key opinion leader development and $80,000 in stock compensation expense associated with December 2007 option grants. These increases were offset by $170,000 decrease associated with reimbursement studies and an Iluvien branding project undertaken in 2007.

 

Interest income.  Interest income decreased by approximately $490,000, or 46%, to approximately $590,000 for the year ended December 31, 2008 compared to approximately $1.1 million for the year ended December 31, 2007. The decrease in interest income was primarily attributable to a substantial drop in the rates of return available on our money market accounts from approximately 4.6% in 2007 to approximately 2.3% in 2008.

 

Interest expense.  For the year ended December 31, 2008 we recognized approximately $1.5 million in interest expense associated with our $15.0 million note payable to pSivida issued in March 2008.

 

Increase in fair value of preferred stock conversion feature.  For the year ended December 31, 2008 we recognized expense of approximately $10.5 million related to the increase in the fair value of the conversion feature of our preferred stock. The increase was attributable to an increase in the estimated fair value of our common stock from $2.24 at December 31, 2007 to $3.71 at December 31, 2008, increased volatility in the market values of our peer group and an increase in the term of the redemption features as a result of the issuance our Series C preferred stock in March 2008.

 

Income (loss) from discontinued operations.  We did not have any income (loss) from discontinued operations for the year ended December 31, 2008 due to the sale of our dry eye product to Bausch & Lomb in July 2007. We recognized income from discontinued operations of $5.7 million for the year ended December 31, 2007 due to a gain of $6.0 million on the sale of our dry eye product to Bausch & Lomb, offset by a loss from operations of the non-prescription business.

 

Liquidity and Capital Resources

 

To date we have incurred recurring losses, negative cash flow from operations, and have accumulated a deficit of $171.9 million from our inception through December 31, 2009. Since our inception, we have funded our operations through the private placement of common stock, preferred stock and convertible debt, as well as by the sale of certain assets of the non-prescription business in which we were previously engaged.

 

As of December 31, 2009, we had $4.9 million in cash and cash equivalents. Including the January 2010 receipt of $10.0 million in proceeds from the exercise of Series C-1 warrants and a $4.0 million option payment from Bausch & Lomb upon the exercise by Bausch & Lomb of its option to extend the period during which it may continue to develop an allergy product acquired from us in 2006 by two years, we had $18.9 million in cash and cash equivalents which we believe is sufficient to fund our operations into September 2010, but not beyond. Our need for additional financing, and current lack of a commercial product raise substantial doubt about our ability to continue as a going concern. On a pro forma as adjusted basis, as of December 31, 2009 we expect to have approximately $66.2 million in cash and cash equivalents which we believe is sufficient to fund

our operations through the projected commercialization of Iluvien as early as the first quarter of 2011. However, we cannot be sure that this offering will be completed, that Iluvien will be approved by the FDA in the fourth quarter of 2010 or that, if approved, future sales of Iluvien will generate revenues sufficient to fund our operations beyond the first quarter of 2011, or ever. In the event additional financing is needed, we may seek to fund our operations through the sale of additional equity securities, strategic collaboration agreements and debt financing. We cannot be sure that additional financing from any of these sources will be available when needed or that, if available, the additional financing will be obtained on terms favorable to us or our stockholders. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders would likely result and the terms of any new equity securities may have a preference over our common stock. If we attempt to raise additional funds through strategic collaboration agreements and debt financing, we may not be successful in obtaining collaboration agreements, or in receiving milestone or royalty payments under those agreements, or the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to commercialize our product candidates or operate as a business.

 

Historically through December 2009, we have received $95.1 million from the sale of shares of our common and preferred stock (including securities convertible into our common stock and preferred stock):

 

 

In December 2006, we received $10.0 million in proceeds from the sale of our allergy products to Bausch & Lomb. We will receive an additional milestone payment of $8.0 million from Bausch & Lomb if one of the allergy products receives FDA approval. We also sold our dry eye product to Bausch & Lomb in July 2007, resulting in proceeds of $6.7 million to us.

 

As of December 31, 2009, we had $4.9 million in cash and cash equivalents. We have invested a substantial portion of our available cash in money market funds placed with reputable financial institutions for which credit loss is not anticipated. We have established guidelines relating to diversification and maturities of our investments to preserve principle and maintain liquidity.

 

Net cash was used in both our continuing and discontinued operations in the years and ended December 31, 2007, 2008 and 2009 as follows:

 

For the twelve months ended December 31, 2009, cash used in our continuing operations of $17.5 million was primarily due to our net loss from continuing operation of $44.2 million offset by non-cash charges including $23.1 million related to the change in fair value of our preferred stock conversion feature, $1.1 million in depreciation and amortization expense associated primarily with equipment used for the manufacture of our Iluvien registration batches, $550,000 in stock compensation and other expense and $300,000 in non-cash research and development expense paid to Emory University with our common stock as an initial license fee for two classes of NADPH oxidase inhibitors. Further offsetting our net losses from continuing operations were increases in accounts payable, accrued liabilities and other current liabilities of $890,000 and other long-term liabilities of $150,000, and a decrease in prepaid expenses and other current assets of $590,000. Accounts payable, accrued liabilities and other current liabilities increased due to increases of $1.1 million in amounts payable to our clinical trial sites and $550,000 in interest accrued on our $15.0 million promissory note to pSivida, partially offset by decreases of $420,000 in professional fees payable in connection with the preparation for an initial public offering of our common stock in 2008 and $390,000 in amounts payable to one of our third party manufacturers. The increase in other long term liabilities is due to interest being accrued on our promissory note to pSivida. Prepaid expenses and other current assets decreased primarily due to the progression of the technology transfer of Iluvien and the utilization of prepayments to our third party manufacturer.

 

For the year ended December 31, 2008, our cash used in continuing operations of $32.2 million was primarily due to our net loss from continuing operations of $61.5 million offset by non-cash charges including a promissory note payable of $15.0 million issued to pSivida and the forgiveness of $2.8 million of net receivables due from pSivida in connection with the amendment of our agreement, $10.5 million related to the change in fair value of our preferred stock conversion feature, $750,000 in stock compensation and other expense, and $240,000 in depreciation and amortization. An increase of $1.2 million in prepaid and other current assets was offset by increases of $700,000 accounts payable, accrued expenses and other current liabilities and $540,000 in other long-term liabilities. The increase in prepaid expenses and other current assets was due primarily to $1.1 million in advances to our third party manufacturers for the technology transfer of Iluvien and an $880,000 increase in our receivable due from pSivida prior to the renegotiation of our agreement, offset by decreases in prepayments of $460,000 to certain clinical trial sites and $360,000 to our contract research organizations as our FAME Study progressed. Accounts payable, accrued expenses and other current liabilities increased primarily due to $440,000 to our CROs as our FAME Study continued, $400,000 related to the technology transfer of Iluvien and $380,000 associated with preparation for an initial public offering of our common stock, offset by decreases of $440,000 in amounts payable to our clinical trial sites and $150,000 for our animal toxicology and degradation studies. The increase in other long term liabilities is due to interest being accrued on our promissory note to pSivida.

 

For the year ended December 31, 2007, our cash used in continuing operations of $10.4 million was primarily attributable to our loss from continuing operations of $11.4 million increased by an increase in other current assets of $1.6 million, and offset by an increase in our accounts payable, accrued expenses and other current liabilities of $2.2 million, non-cash stock-based compensation of $190,000, and non-cash depreciation and amortization of $150,000. The increase in prepaid expenses and other current assets was primarily attributable to an increase of $1.2 million in our receivable due from pSivida under our agreement as our FAME Study progressed and $220,000 prepayments to certain clinical trial sites for their participation in our FAME Study. The increase in accounts payable, accrued expenses and other current liabilities was comprised primarily of increases of $1.6 million in amounts payable to our clinical trial sites as we completed enrollment of our FAME Study in 2007, $310,000 in CRO and reading center costs to monitor patients and clinical trial sites, and $100,000 owed to software vendors for installation of trial management software for our FAME Study.

 

Net cash was provided by (used in) the investing activities of our continuing and discontinued operations in the years ended December 31, 2007, 2008 and 2009 as follows:

 

 

Net cash used in the investing activities of our continuing operations is attributable to purchases of property and equipment in each of the years ended December 31, 2007, 2008 and 2009.

 

Net cash provided by our financing activities was $4.9 million for the year ended December 31, 2009; $29.8 million for the year ended December 31, 2008 and $80,000 for the year ended December 31, 2007. Net cash provided by financing activities in the year ended December 31, 2009 were due to net proceeds of $4.9 million received from the issuance of our Series C-1 preferred stock and warrants for our Series C-1 preferred stock. In 2008, cash was provided primarily by net proceeds of $29.9 million received from the issuance of our Series C preferred stock. In 2007, cash provided by financing activities were primarily due to the exercise of employee stock options.

 

Our future capital requirements will depend on numerous forward-looking factors, including, but not limited to:

 

 

Obligations and Commitments

 

The following table summarizes our contractual obligations and commitments as of December 31, 2009:

 

The following amounts have not been included in the table above as the timing of the payments is uncertain:

 

 

 

Off-Balance Sheet Transactions

 

To date, we have not had any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

Qualitative and Quantitative Disclosures About Market Risk

 

We are exposed to market risk related to changes in interest rates. As of December 31, 2009, we had cash and cash equivalents of $4.9 million. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in short-term marketable securities. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our portfolio. Accordingly, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio.

 

We contract for the conduct of some of our clinical trials and other research and development activities with contract research organizations and investigational sites in the United States, Europe and India. We may be subject to exposure to fluctuations in foreign exchange rates in connection with these agreements. We do not hedge our foreign currency exposures. We have not used derivative financial instruments for speculation or trading purposes.

 

Tax Loss Carry-Forwards

 

At December 31, 2009, we had U.S. federal and state net operating loss carry-forwards (NOLs) of approximately $79.5 million and $62.7 million, respectively, which expire at various dates beginning in 2018 through 2029. Section 382 of the Internal Revenue Code limits the annual utilization of NOLs and tax credit carry-forwards following an ownership change in our company. If it is determined that significant ownership changes have occurred since we generated these NOLs, we may be subject to annual limitations on the use of these NOLs under Internal Revenue Code Section 382 (or comparable provisions of state law).

 

Recent Accounting Pronouncements

 

In March 2008, the FASB Issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133, (ASC 815), which requires companies with derivative instruments to disclose information that should enable financial statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under ASC 815, and how these items affect a company’s financial position, results of operations and cash flows. ASC 815 affects only these disclosures and does not change the accounting for derivatives. We are applying ASC 815 prospectively beginning with the first quarter of the 2009 fiscal year. The adoption of ASC 815 did not have a material effect on the disclosures in our financial statements.

 

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (SFAS 168). SFAS 168 authorized the Codification as the sole source for authoritative U.S. GAAP and any accounting literature that is not in the Codification will be considered nonauthoritative. We have commenced utilizing the Codification as its sole source of authoritative U.S. GAAP for its 2009 financial statements.

 

Overview

 

We are a biopharmaceutical company that specializes in the research, development and commercialization of prescription ophthalmic pharmaceuticals. We are presently focused on diseases affecting the back of the eye, or retina, because we believe these diseases are not well treated with current therapies and represent a significant market opportunity. Our most advanced product candidate is Iluvien, which we are developing for the treatment of diabetic macular edema (DME). DME is a disease of the retina that affects individuals with diabetes and can lead to severe vision loss and blindness. We are currently conducting two Phase 3 pivotal clinical trials (collectively, our FAME Study) for Iluvien involving 956 patients in sites across the United States, Canada, Europe and India to assess the efficacy and safety of Iluvien in the treatment of DME. In December 2009 we received the month 24 clinical readout from our FAME Study. Based upon our analysis of this data, we plan to file a New Drug Application (NDA) in the United States for the low dose of Iluvien in the second quarter of 2010, followed by registration filings in certain European countries and Canada. We intend to request Priority Review of our NDA from the U.S. Food and Drug Administration (FDA). If Priority Review is granted, we can expect a response to our NDA from the FDA in the fourth quarter of 2010. If our NDA is approved, we plan to commercialize Iluvien in the United States by marketing and selling Iluvien to retinal specialists as early as the first quarter of 2011. In addition to treating DME, Iluvien is being studied in three Phase 2 clinical trials for the treatment of the dry form of age-related macular degeneration (AMD), the wet form of AMD and retinal vein occlusion (RVO).

 

According to the Centers for Disease Control and Prevention (CDC), the number of Americans diagnosed with diabetes had increased from approximately 8.1 million people in 1994 to approximately 17.9 million people in 2007. Per the International Diabetes Federation Atlas, the estimated prevalence of people diagnosed with diabetes for 2010 has increased to 285 million people worldwide and that this number is expected to reach 438 million people by 2030. All patients with diabetes are at risk of developing some form of diabetic retinopathy, an ophthalmic condition of diabetes that presents with symptoms that include the swelling and leakage of blood vessels within the retina or the abnormal growth of new blood vessels on the surface of the retina. As reported by the American Diabetes Association, in the U.S. diabetic retinopathy causes approximately 12,000 to 24,000 new cases of blindness each year, making diabetes the leading cause of new cases of blindness in adults aged 20 to 74. When the blood vessel leakage of diabetic retinopathy causes swelling in the macula, the part of the eye responsible for central vision, the condition is called DME. The Wisconsin Epidemiologic Study of Diabetic Retinopathy found that over a ten-year period approximately 19% of diabetics studied were diagnosed with DME. Based on this study and the current U.S. diabetic population, we estimate the incidence of DME in the United States to be approximately 340,000 cases annually. As the population of diabetics increases, we expect the annual incidence of diagnosed DME to increase.

 

There are no ophthalmic drug therapies currently approved by the FDA for the treatment of DME. The current standard of care for the treatment of DME is laser photocoagulation. Laser photocoagulation is a retinal procedure in which a laser is used to cauterize leaky blood vessels or to apply a pattern of burns to reduce edema. This procedure has undesirable side effects including partial loss of peripheral and night vision. As a result of these side effects and a desire for improved visual outcomes, retinal specialists have supplemented laser photocoagulation with alternate off-label therapies for the treatment of DME, including injections of corticosteroids and anti-vascular endothelial growth factor (anti-VEGF) agents. Corticosteroids have shown improved visual acuity in DME patients in non-pivotal clinical trials, but they are associated with increased intraocular pressure (IOP), which may increase the risk of glaucoma, and cataract formation. Both of these alternate therapies are limited by a need for multiple injections to maintain a therapeutic effect.

 

Iluvien is inserted in the back of the patient’s eye to a placement site that takes advantage of the eye’s natural fluid dynamics to deliver fluocinolone acetonide (FA). Iluvien is inserted with a device that employs a 25-gauge needle which allows for a self-sealing wound. In the United States, this procedure is non-surgical and is performed in the retinal specialist’s office. Iluvien is an intravitreal insert designed to provide a therapeutic effect for up to 36 months by delivering sustained sub-microgram levels of FA, a non-proprietary corticosteroid with demonstrated efficacy in the treatment of ocular diseases. Iluvien has demonstrated efficacy

in the treatment of DME in our FAME Study. Additionally, by providing lower exposure to corticosteroids and focusing the delivery to the back of the eye, we believe that the adverse events associated with the use of Iluvien are within the acceptable limits of a drug for the treatment of DME.

 

Iluvien is also being studied in three Phase 2 clinical trials with retinal specialists to assess its safety and efficacy for the treatment of dry AMD, wet AMD and RVO. In addition to our activities related to the development and commercialization of Iluvien, we are also conducting testing on two classes of nicotinamide adenine dinucleotide phosphate (NADPH) oxidase inhibitors for which we have acquired exclusive, worldwide licenses from Emory University. Our initial focus is on the use of NADPH oxidase inhibitors in the treatment of dry AMD. We plan to evaluate the use of NADPH oxidase inhibitors in the treatment of other diseases of the eye, including wet AMD and diabetic retinopathy. We will pursue the development, license and acquisition of rights to compounds and technologies with the potential to treat diseases of the eye that we believe are not well treated by current therapies.

 

We are led by an executive team with extensive development and commercialization expertise with ophthalmic products including the launch and management of Visudyne, a drug product sponsored by Novartis Ophthalmics and the first pharmacological treatment indicated for the treatment of wet AMD. We intend to capitalize on our management’s experience and expertise in marketing eye-care products, by marketing and selling Iluvien to the approximately 1,600 retinal specialists practicing in the approximately 900 retina centers across the United States and Canada. We intend to seek a commercialization partner for sales and marketing activities outside North America.

 

Business Strategy

 

We are presently focused on diseases affecting the back of the eye, or retina, because we believe these diseases are not well treated with current therapies and represent a significant market opportunity. Our business strategy is to:

 

 

Disease Overview and Market Opportunity

 

Diabetes and Diabetic Retinopathy

 

Diabetes mellitus, and its systemic and ophthalmic complications, represents an enormous public health threat in the United States. According to the CDC, the number of Americans diagnosed with diabetes has increased from approximately 8.1 million people in 1994 to approximately 17.9 million people in 2007. In addition to diagnosed cases, the CDC estimates that an additional 5.7 million Americans with diabetes are currently undiagnosed and are therefore not being monitored and treated to control their disease and prevent systemic and ophthalmic complications. With better diagnosis methodologies and improved public awareness, the number of persons diagnosed with and being treated for diabetes is expected to increase. Per the International Diabetes Federation Atlas, the estimated prevalence of diabetes for 2010 has increased to 285 million people worldwide and this number is expected to reach 438 million people by 2030.

 

All patients with diabetes are at risk of developing some form of diabetic retinopathy, an ophthalmic complication of diabetes that presents with symptoms including the swelling and leakage of blood vessels within the retina or the abnormal growth of new blood vessels on the surface of the retina. According to the American Diabetes Association, in the United States diabetic retinopathy causes approximately 12,000 to 24,000 new cases of blindness each year making diabetes the leading cause of new cases of blindness in adults aged 20 to 74. Diabetic retinopathy can be divided into either non-proliferative or proliferative retinopathy. Non-proliferative retinopathy (also called background retinopathy) develops first and causes increased capillary permeability, microaneurysms, hemorrhages, exudates, macular ischemia and macular edema (thickening of the retina caused by fluid leakage from capillaries). Proliferative retinopathy is an advanced stage of diabetic retinopathy which, in addition to characteristics of non-proliferative retinopathy, results in the growth of new blood vessels. These new blood vessels are abnormal and fragile, growing along the retina and along the surface of the clear, vitreous gel that fills the inside of the eye. By themselves, these blood vessels do not cause symptoms or vision loss. However, these blood vessels have thin, fragile walls that are prone to leakage and hemorrhage.

 

Figures 1 and 2 provide a detailed cross section of a healthy retina and a retina affected by diabetic retinopathy.

 

 

^© A.D.A.M., Inc.

Diabetic Macular Edema

 

DME, the primary cause of vision loss associated with diabetic retinopathy, is a disease affecting the macula, the part of the retina responsible for central vision. When the blood vessel leakage of diabetic retinopathy causes swelling in the macula, the condition is called DME. The onset of DME is painless and may go undetected by the patient until it manifests with the blurring of central vision or acute vision loss. The severity of this blurring may range from mild to profound loss of vision. The Wisconsin Epidemiologic Study of Diabetic Retinopathy found that over a ten-year period approximately 19% of diabetics studied were diagnosed with DME. Based on this study and the current U.S. diabetic population, we estimate the incidence of DME in the United States to be approximately 340,000 cases annually. As the population of diabetics increases, we expect the annual incidence of diagnosed DME to increase.

 

Limitations of Current Treatments for DME

 

There are no ophthalmic drug therapies approved by the FDA for the treatment of DME. The current standard of care for the treatment of DME is laser photocoagulation. Laser photocoagulation is a retinal procedure in which a laser is used to cauterize leaky blood vessels or to apply a pattern of burns to reduce edema. This procedure has undesirable side effects including partial loss of peripheral and night vision. As a result of these side effects and a desire for improved visual outcomes, retinal specialists have supplemented laser photocoagulation with alternate off-label therapies for the treatment of DME, including injections of corticosteroids and anti- VEGF agents. Corticosteroids have been shown to improve visual acuity in DME patients in non-pivotal clinical trials, but are associated with increased IOP, which may increase the risk of glaucoma, and cataract formation. Both of these alternate therapies are limited by a need for multiple injections to maintain a therapeutic effect.

 

FDA Approved Treatments for DME

 

Laser Photocoagulation.  In laser photocoagulation, light rays are directed into the eye focusing on abnormal blood vessels that are growing within the retina and patches of edema which are near the macula. This laser, which administers heat from a fine-point beam, cauterizes the vessels to seal them from further leakage or destroys retinal tissue associated with the patch of edematous tissue, via thermal destruction, in the hope of preventing further vision loss. Results of clinical trials on laser photocoagulation have shown the procedure reduces vision loss in DME patients. Visual acuity gains have been seen as well, although results have been highly variable and may take more than eight months for median visual acuity to improve. Further, the 2008 Preferences and Trends Survey among retinal specialists showed that 84% of patients treated with laser photocoagulation required an off-label drug therapy or a combination of both additional laser photocoagulation and an off-label drug therapy to treat the disease.

 

There are no other therapies approved by the FDA for the treatment of DME.

 

Off-Label Treatments for DME

 

Intravitreal Triamcinolone Acetonide Injections (IVTA).  Triamcinolone acetonide is a corticosteroid administered via an intravitreal injection either as an adjunct to laser photocoagulation or as a stand alone treatment. Typically administered in a 4,000 microgram (µg) suspension, IVTA is relatively inexpensive and has demonstrated temporary visual improvement and reduction of edema in patients with DME. Due to the potential side effects, including increased IOP, which may increase the risk of glaucoma, and cataract formation, as well as the need for multiple injections, the use of IVTA for the treatment of DME is not optimal.

 

Anti-VEGF Intravitreal Injection.  Anti-VEGF therapies are administered via an intravitreal injection. VEGF has been identified as an important mediator in diabetic retinopathy, including DME, and appears to play a role in increasing vascular permeability in this condition. Similar to IVTA, anti-VEGFs require multiple injections, potentially as frequently as once per month, to sustain a therapeutic effect. Two Phase 3 clinical trials studying the use of Lucentis (ranibizumab injection), a drug sponsored by Genentech, Inc., a wholly-owned member of the Roche Group (Genentech), as a treatment for DME are currently underway, where the

clinical trial design is based on one injection per month. Results from a single-center study involving 26 patients comparing one injection of IVTA versus Genentech’s Avastin (bevacizumab) in patients with refractory DME was published in the October 2007 issue of the British Journal of Ophthalmology. Over the four to eight week period post-injection, IVTA was statistically significantly better at improving vision and reducing macular thickness than Avastin. This head-to-head study supports the anecdotal observations reported by retinal specialists that, in DME, corticosteroids appear to be therapeutically superior to anti-VEGF therapy.

 

Iluvien

 

Overview

 

Our most advanced product candidate is Iluvien, an intravitreal insert designed to provide a therapeutic effect for up to 36 months in the treatment of DME by delivering sustained sub-microgram levels of FA, a non-proprietary corticosteroid with demonstrated efficacy in the treatment of ocular disease. Intravitreal refers to the space inside the eye behind the lens that contains the jelly-like substance called vitreous. DME is a disease of the retina which affects individuals with diabetes and can lead to severe vision loss and blindness. Iluvien is inserted in the back of the patient’s eye using an insertion device (the Iluvien inserter) employing a 25-gauge needle which allows for a self-sealing wound. This insertion is very similar to the administration of an intravitreal injection, a procedure commonly employed by retinal specialists. In the United States, this procedure is non-surgical and is performed in the retinal specialist’s office. Based on our analysis of the month 24 clinical readout from our FAME Study, we believe Iluvien improves vision while reducing side effects commonly associated with the use of corticosteroids for the following reasons:

 

 

Fluocinolone Acetonide

 

Fluocinolone acetonide (FA) is the active compound in Iluvien and a member of the class of steroids known as corticosteroids. FA is a non-proprietary corticosteroid that has a history of use in treating ocular disease as the active compound in Bausch & Lomb Incorporated’s product Retisert (a surgically implanted intravitreal drug delivery device approved for the treatment of chronic non-infectious posterior uveitis). Corticosteroids have demonstrated a range of pharmacological actions, including inhibition of inflammation, inhibition of leukostasis, upregulation of occludin, inhibition of release of certain inflammatory cytokines and suppression of VEGF secretion. These pharmacological actions have the potential to treat various ocular

conditions, including DME, dry AMD, wet AMD and RVO. However, FA shares many of the same side effects as other corticosteroids currently available for intraocular use, including increased IOP, which may increase the risk of glaucoma, and cataract formation.

 

Iluvien is Positioned to Reduce Side Effects

 

Based on our analysis of the month 24 clinical readout from our FAME Study, it appears that Iluvien mitigates the incidence of steroid-induced IOP elevations and cataract formation commonly associated with the intraocular use of corticosteroids, which we believe is due to its location in the posterior portion of the eye, as illustrated below. Fluid, or aqueous humor, generated at the ciliary body, located just behind the iris, flows within the eye primarily via two currents as illustrated below. The predominant current flows through the iris into the anterior chamber and exits the eye mainly through the trabecular outflow pathway. Another current of outflow is directed toward the back of the eye. Various publications support the existence of these currents within the eye, including an article by J. Park et. al. published in 2005 in the Journal of Controlled Release, an article by J. Xu et. al. published in 2000 in Pharmaceutical Research and a paper by M. Araie and D.M. Maurice published in the 1991 in the Journal of Experimental Eye Research.

 

 

^© Nucleus Medical Art

 

The side effect of increased IOP associated with corticosteroids in certain people is directly related to the interaction of corticosteroids with the cells of the trabecular meshwork, a specialized tissue that acts as a filter located in the front of the eye. In some individuals, corticosteroids result in a build-up of debris in this meshwork, increasing resistance to outflow, and increasing pressure inside the eye. The positioning of Iluvien allows it to take advantage of the posterior flow of fluid away from the trabecular meshwork of the eye. We believe this positioning minimizes the anterior chamber exposure to FA and mitigates the incidence of IOP elevations and cataract formation commonly associated with the intraocular use of corticosteroids.

 

Iluvien Provides Sustained Sub-Microgram Delivery

 

Iluvien consists of a tiny polyimide tube with membrane caps, licensed by us from pSivida US, Inc. (pSivida), that is filled with 190µg of FA in a polyvinyl alcohol matrix. Iluvien is non-bioerodable; however, both polyimide and the polyvinyl alcohol matrix are biocompatible with ocular tissues and have histories of safe use within the eye. In February 2005, we entered into an agreement with pSivida for the development of

FA in pSivida’s proprietary delivery system. Our agreement with pSivida provides us with a worldwide exclusive license to develop and sell Iluvien for delivery to the back of the eye for the treatment and prevention of eye diseases in humans (other than uveitis). See “— Licenses and Agreements” below for additional information related to our agreement with pSivida.

 

The low dose of Iluvien is designed to provide sustained sub-microgram levels of FA and a therapeutic effect for up to 36 months. We believe that Iluvien’s ability to deliver sub-microgram levels of FA mitigates the incidence of IOP elevations and cataract formation commonly associated with the intraocular use of corticosteroids. As illustrated in the chart below, in vitro data from multiple clinical supply batches of the low dose of Iluvien show that the daily amount of FA released starts at an average daily release rate 0.23µg per day and continues to release at the month 24 time point. Our analysis of the FA release rate of Iluvien is ongoing.

 

 

The Iluvien Inserter

 

We developed the Iluvien inserter, a custom insertion system for Iluvien, which includes improvements over the modified syringe used during our two Phase 3 pivotal clinical trials (individually referred to as Trial A and Trial B, and collectively as our FAME Study). These improvements include ergonomic design features, a transparent window to visually confirm Iluvien’s presence within the inserter and markings to guide retinal specialists to the proper insertion point. As was the case with the modified syringe used during our FAME Study, the Iluvien inserter uses a 25-gauge needle which results in a wound that is small enough to seal itself after Iluvien has been inserted into the back of the eye and the needle has been removed. We believe that a 25-gauge needle is the smallest needle capable of delivering Iluvien into the back of eye. In the United States, this procedure is non-surgical and is performed in the retinal specialist’s office. The Iluvien inserter is also being used in our Phase 2 trial for the use of Iluvien in the treatment of RVO. See “— Development Program for the Treatment of DME” and “— Iluvien for Other Diseases of the Eye” below for additional information with respect to our FAME Study and RVO clinical trial.

Iluvien Clinical Development Program

 

The following table summarizes current and planned clinical trials for Iluvien.

 

 

Development Program for the Treatment of DME

 

We are currently conducting the FAME Study for Iluvien involving 956 patients in sites across the United States, Canada, Europe and India to assess the efficacy and safety of Iluvien in the treatment of DME. Combined enrollment was completed in October 2007, and the month 24 clinical readout from our FAME Study was received in December 2009. We believe that the month 24 data supports approval of the low dose of Iluvien for the treatment of DME. Therefore, we plan to proceed with the preparation of a registration dossier and to submit an NDA in the United States for the low dose of Iluvien to the FDA in the second quarter of 2010 with the month 24 clinical data, followed by registration filings in certain European countries and Canada.

 

Consistent with the FDA requirement for registration and approval of drugs being developed for diabetic retinopathy, including DME, the primary efficacy endpoint for our FAME Study is the difference in the percentage of patients whose best corrected visual acuity (BCVA) improved from baseline by 15 or more letters on the Early Treatment Diabetic Retinopathy Study (ETDRS) eye chart between the treatment and control groups at month 24. The ETDRS eye chart is the standard used in clinical trials for measuring sharpness of sight as established by the National Eye Institute’s Early Treatment Diabetic Retinopathy Study. In addition, the FDA requires a numerical comparison of the percentage of patients with BCVA improvement of 15 or more letters between the month 24 and month 18 data to determine if the month 24 results are equal to or greater than the month 18 results. Patients enrolled in our FAME Study will be followed for 36 months. Although we will submit the additional 12 months of clinical data to applicable regulatory authorities, the approval of Iluvien by regulatory authorities, including the FDA, will be based on the month 24 clinical data from our FAME Study.

 

We believe that Iluvien meets the requirements for Priority Review in the United States and we intend to make a formal request for this review classification when we file our NDA with the FDA. Upon receipt, the FDA will notify us within 45 days of Iluvien’s final review classification. In the European Union, we will be utilizing the decentralized registration procedure. The Iluvien insertion system will not require a separate

device application, but it must meet the safety and regulatory requirements of the applicable regulatory authorities when evaluated as part of the drug product marketing application.

 

FAME Study

 

We initiated our FAME Study in September 2005. Trial A and Trial B have identical protocols and completed enrollment in October 2007 with a total of 956 patients across 101 academic and private practice centers. Trial A drew patients from sites located in the northern regions of the United States, Europe and India and all sites in Canada, while sites in the southern regions of the United States, India and Europe comprise Trial B.

 

Our FAME Study was designed to assess the safety and efficacy of Iluvien in patients with DME involving the center of the macula, and who had at least one prior macular laser treatment 12 weeks or more before study entry. The inclusion criteria for our FAME Study were designed to select DME patients with BCVA between 20/50 (68 letters on the ETDRS eye chart) and 20/400 (19 letters on the ETDRS eye chart) in the study eye and no worse than 20/400 in the non-study eye. Patients who had received steroid drug treatments for DME within three months of screening or anti-VEGF injections within two months of screening, and patients with glaucoma, ocular hypertension, IOP greater than 21mmHg or concurrent therapy with IOP-lowering agents in the study eye at screening were not eligible to participate in this trial.

 

The following table describes the baseline characteristics of the patients randomized into our FAME Study.