Initial Public Offering (IPO): Pre-Effective Amendment to Registration Statement (General Form) — Form S-1 Filing Table of Contents
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Barry J. Kramer, Esq.
David K. Michaels, Esq.
Thomas J. Hall, Esq.
Fenwick & West LLP
801 California Street Mountain View, California94041
(650) 988-8500
William C. Davisson, Esq.
B. Shayne Kennedy, Esq.
Latham & Watkins LLP
140 Scott Drive Menlo Park, California94025
(650) 328-4600
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the effective date of
this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act
of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act of 1933, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act of 1933, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering. o
CALCULATION OF REGISTRATION FEE
Proposed Maximum
Proposed Maximum
Amount of
Title of Each Class of
Amount to be
Offering
Aggregate
Registration
Securities to be Registered
Registered(1)
Price per Share(2)
Offering Price
Fee(3)
Common Stock, par value $0.00001 per share
5,750,000
$13.00
$74,750,000
$7,999
(1)
Includes 750,000 shares issuable upon exercise of the
underwriters’ over-allotment option.
(2)
Estimated solely for the purpose of calculating the amount of
the registration fee pursuant to rule 457(a) under the
Securities Act of 1933.
(3)
Paid previously.
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment that
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the Securities
and Exchange Commission declares our registration statement
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
Asthmatx, Inc. is offering 5,000,000 shares of common stock.
•
We anticipate that the initial public offering price will be
between $11.00 and $13.00 per share.
•
This is our initial public offering and no public market
currently exists for our shares.
•
Proposed trading symbol:
NASDAQ Global Market — AZMA.
This investment involves risk. See Risk Factors beginning on
page 8.
Per Share
Total
Initial public offering price
$
$
Underwriting discount
$
$
Proceeds, before expenses, to Asthmatx, Inc.
$
$
The underwriters have a
30-day option to
purchase up to 750,000 additional shares of common stock from us
to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
You should rely only on the information
contained in this prospectus and in any free writing prospectus
that we provide. We have not, and the underwriters have not,
authorized any other person to provide you with different
information. This prospectus is not an offer to sell, nor is it
seeking an offer to buy, these securities in any state where the
offer or sale is not permitted. The information in this
prospectus is complete and accurate as of the date on the front
cover of this prospectus, but the information may have changed
since that date.
The items in the following summary are
described in more detail later in this prospectus. This summary
does not contain all the information you should consider before
investing in our common stock. You should carefully read the
more detailed information set out in this prospectus, especially
the risks of investing in our common stock that we discuss in
Risk Factors, as well as the financial statements and the
related notes to those statements included elsewhere in this
prospectus. References in this prospectus to “we,”“us,”“our,”“our company” and
“Asthmatx” refer to Asthmatx, Inc. unless the context
requires otherwise.
Our Business
We are a medical device company focused on
developing and commercializing a novel therapeutic treatment for
asthma. We have developed proprietary technology designed to
deliver controlled thermal energy to the airways of adult
patients to reduce the mass of airway smooth muscle, in a
procedure called Bronchial
Thermoplastytm.
The contraction of airway smooth muscle in the lung airways is a
main cause of airway constriction that leads to difficulty in
breathing during asthma attacks. We believe that reducing airway
smooth muscle in asthma patients can decrease the ability of the
airways to constrict, thereby providing a significant
therapeutic benefit to those asthma patients whose symptoms are
poorly controlled despite using conventional asthma medications.
We have developed a device named the
Alair®
System specifically to perform the Bronchial Thermoplasty
procedure. The Alair System is composed of two primary
components: a proprietary, single-use, small diameter catheter
with an expandable tip, the Alair Catheter; and a radio
frequency controller, the Alair RF Controller. During Bronchial
Thermoplasty, a pulmonologist inserts the Alair Catheter into
the patient’s lung airways through the working channel of a
bronchoscope. A bronchoscope is a commonly used instrument with
a small light and camera that is inserted through the nose or
mouth. Once in place, the pulmonologist expands the tip of the
Alair Catheter and uses the Alair RF Controller to deliver
thermal energy (heat) to the airway walls. This thermal energy
reduces the mass of airway smooth muscle, and we believe that it
does not have any meaningful lasting effect on other airway
tissues. Bronchial Thermoplasty is performed under conscious
sedation with local anesthesia on an outpatient basis in three
30-60 minute
procedures, each spaced at least three weeks apart.
Physicians had administered Bronchial
Thermoplasty to approximately 150 asthma patients in our
clinical trials as of August 31, 2006. We believe that the
data from our completed trials indicate that Bronchial
Thermoplasty performed using the Alair System, when combined
with conventional asthma medications, offers adult patients with
moderate-to-severe asthma a significant improvement in the
control of their asthma symptoms, enhancing their quality of
life. We also believe that Bronchial Thermoplasty provides a
persistent reduction in asthma symptoms for moderate-to-severe
asthma patients, based primarily on one-year follow-up data from
more than 85 patients in our clinical trials. We have followed
patients in our completed trials for at least one year
post-treatment, and have four-year data for 16 patients. In
addition, we believe that our clinical trials to date have
indicated a favorable safety profile for the Bronchial
Thermoplasty procedure. The vast majority of adverse events have
been mild to moderate in severity and are of the type normally
seen in asthma patients undergoing standard bronchoscopic
procedures. These adverse events were resolved within one week,
on average, using conventional drug therapies.
We are currently enrolling severe asthma
patients in a clinical trial under an Investigational Device
Exemption, or IDE, granted by the U.S. Food and Drug
Administration, or FDA. We have designed
this trial, named the AIR2 Trial, to
evaluate the safety and efficacy of Bronchial Thermoplasty
performed using the Alair System in severe asthmatics who are
still symptomatic despite taking high doses of conventional
asthma medications. We currently anticipate that the AIR2 Trial
will include approximately 300 patients at approximately 40
sites in North America, Europe, Australia and South America. As
of August 31, 2006, we had enrolled 115 patients in
this trial, and we expect to enroll at least 225 patients
by early 2007. We intend that the AIR2 Trial will be a pivotal
trial and that we will use this trial as the basis for an
application for premarket approval, or PMA, with the FDA. We
anticipate that we will file our PMA application by the end of
2007.
We are a development stage company. To
date, we have not generated any product revenue, and from our
inception in December 2003 through June 30, 2006, we had a
deficit accumulated during the development stage of
$26.3 million. We do not expect the Alair System to be
approved to treat asthma in the United States before at least
the end of 2008. Accordingly, we do not expect to generate any
revenue from sales of the Alair System until at least late 2008,
and we expect our losses to continue and increase as we continue
to conduct our AIR2 Trial and initiate commercialization
activities.
Market Opportunity
Asthma is a chronic respiratory disease
characterized by airway hyperresponsiveness, which is a
condition in which airways narrow excessively or too easily in
response to a stimulus, as well as inflammation of the airways
and excess mucus production. Asthma episodes or attacks cause
narrowing of the airways, which makes breathing difficult.
Asthma attacks may occur at irregular intervals and be triggered
by allergens or irritants that are inhaled into the lungs or by
stress, cold air, viral infections or other stimuli. Asthma
attacks can have a significant impact on a patient’s life,
limiting participation in many activities. In severe cases,
asthma attacks can be life threatening. The prevalence of asthma
has grown in recent decades, and there is no known cure.
According to the American Lung
Association, there were approximately 20 million Americans
with asthma in 2002, 14 million of whom were adults. Asthma
resulted in approximately 1.9 million emergency room visits
in 2002, of which approximately 484,000 resulted in
hospitalization. The estimated annual cost of asthma in the
United States is approximately $16.1 billion, including an
estimated $11.5 billion in direct costs such as asthma
medications, physician office visits, emergency room visits and
hospitalizations.
Patients and physicians currently manage
asthma with a combination of stimulus avoidance and medications.
Stimulus avoidance is generally difficult or impractical. For
the majority of asthma patients, medications are used
successfully to control their symptoms. However, we estimate
that at least 15% of adult asthma patients, or 2 million
adults in the United States, suffer from severe asthma. Many of
these patients experience frequent and serious symptoms despite
regular treatment with high doses of asthma medications.
Although these patients represent a minority of asthma patients,
we believe that they account for a disproportionate amount of
the overall asthma-related costs in the United States, primarily
because of their need for unscheduled physician office visits,
expensive emergency room visits and hospitalizations.
We believe that this patient population is
substantially underserved by the current standard of care and
that there is a significant unmet need for an effective,
persistent treatment for asthma.
The Asthmatx Solution
We have developed a novel catheter-based
procedure for the treatment of asthma known as Bronchial
Thermoplasty. Bronchial Thermoplasty reduces the mass of airway
smooth muscle, which is generally
thicker in asthma patients, and has been
shown to play a significant role in the disease itself. By
reducing the mass of airway smooth muscle, we believe that we
can decrease the ability of the airways to constrict and thereby
provide a significant therapeutic benefit to asthma patients
whose symptoms are poorly controlled despite using conventional
asthma medications.
We believe that Bronchial Thermoplasty
performed using the Alair System offers the following benefits
to patients, doctors, hospitals and payors:
•
Improved Standard of
Care. We believe that there is
a significant unmet need in the severe asthma population. When
combined with existing asthma medications, we believe that
Bronchial Thermoplasty has the potential to offer many adult
asthma patients a substantially improved quality of life by
reducing asthma symptoms.
•
Persistent
Effect. We believe that
Bronchial Thermoplasty is the first procedure that reduces
airway smooth muscle, resulting in a substantial and persistent
improvement in measures of asthma control.
•
Simple, Convenient
Procedure. Bronchial
Thermoplasty is an outpatient treatment performed in three short
treatment sessions. The procedure is performed using a
bronchoscope, a device which is commonly used by pulmonologists
for diagnostic purposes and to clear airway obstructions. Since
pulmonologists regularly use bronchoscopes for these purposes,
we believe that, with proper training, they will be able to
quickly learn how to use the Alair System.
•
Improved Economics for Patients,
Providers and Payors. We
believe Bronchial Thermoplasty will reduce direct and indirect
healthcare costs of moderate-to-severe asthma patients by
reducing the need for unscheduled physician office visits,
emergency room visits and hospitalizations.
Our Strategy
Our objective is to become the leading
provider of therapeutic medical devices for patients who suffer
from asthma. Key elements of our strategy include:
•
Obtaining FDA approval to market the Alair
System for the treatment of asthma;
•
Establishing awareness of Bronchial
Thermoplasty as a safe and effective treatment for asthma;
•
Establishing third-party coverage and
reimbursement for Bronchial Thermoplasty;
•
Commercializing the Alair System through a
direct sales force; and
•
Leveraging our technology, technical
expertise and strong intellectual property position to establish
and extend our market position in asthma treatment and to
explore treatments of other lung disorders.
Our business is subject to many risks and
uncertainties that could materially harm our business. Before
investing in our common stock, you should carefully consider the
following:
•
We have not received, and may never
receive, FDA approval to market the Alair System for the
treatment of asthma;
•
We have not generated any product revenue
to date, and our ability to generate any significant revenue in
the future depends on the success of our ongoing AIR2 Trial and
obtaining FDA approval;
•
Bronchial Thermoplasty may have
unanticipated long-term effects, in particular because there is
only limited knowledge about the workings of airway smooth
muscle and related tissues and the effect of Bronchial
Thermoplasty on those tissues;
•
We have limited knowledge regarding how
Bronchial Thermoplasty reduces airway smooth muscle mass, or the
means by which it reduces asthma symptoms, and this limits our
ability to predict how long the benefits of Bronchial
Thermoplasty will persist;
•
We may be unable to obtain acceptable
prices or adequate coverage or reimbursement for Bronchial
Thermoplasty from third-party payors;
•
Bronchial Thermoplasty performed using the
Alair System may never achieve market acceptance from healthcare
institutions, pulmonologists or asthma patients;
•
We may face competition from other medical
device or pharmaceutical companies, and technological
breakthroughs in the treatment of asthma may render Bronchial
Thermoplasty and the Alair System obsolete; and
•
The other factors described in the section
entitled Risk Factors starting on page 8, and other
information provided throughout this prospectus.
Corporate Information
Since our inception in December 2003, we
have focused our resources on developing and commercializing an
asthma treatment system utilizing technology from Broncus
Technologies, Inc. We were originally incorporated in
California, and we plan to reincorporate into Delaware prior to
the completion of this offering.
Our principal offices are located at 1340
Space Park Way, Mountain View, California94043, and our
telephone number is (650) 810-1100. Our World Wide Web
address is www.asthmatx.com. The information found on, or
accessible through, our website is not a part of this prospectus.
We have obtained registered trademarks for
Asthmatx, our logo, the Alair System and Bronchial Thermoplasty.
All other trademarks, tradenames and service marks appearing in
this prospectus are the property of their respective owners.
Common stock to be outstanding after this
offering
16,010,501 shares
Use of proceeds
We expect to use the net proceeds of this
offering primarily for clinical trials and other research and
development expenses, building our commercial infrastructure,
working capital and general corporate purposes. See Use of
Proceeds.
Proposed NASDAQ Global Market symbol
AZMA
The number of shares of common stock to be
outstanding after this offering is based on
11,010,501 shares outstanding as of August 31, 2006,
and excludes:
•
1,507,503 shares of common stock
issuable upon exercise of outstanding options at a weighted
average exercise price of $1.22 per share;
•
1,000 shares of common stock issuable
upon exercise of an outstanding warrant; and
•
900,733 shares of common stock
reserved for future grant or issuance under our 2006 equity
incentive plan and 2006 employee stock purchase plan and
automatic increases to the shares reserved for future grant or
issuance under these plans to occur January 1 of each year
during the term of each plan, as described in further detail in
Management — Equity Incentive Plans — 2006
Equity Incentive Plan and Management — Equity
Incentive Plans — 2006 Employee Stock Purchase Plan.
Except as otherwise noted, all information
in the prospectus:
•
reflects our reincorporation into Delaware
and the filing of our restated certificate of incorporation
prior to the closing of this offering;
•
reflects a
1-for-3 reverse split
of our capital stock to occur prior to the closing of this
offering;
•
reflects the conversion of all our
outstanding shares of preferred stock into 9,927,016 shares
of common stock upon the closing of this offering; and
•
assumes no exercise of the
underwriters’ over-allotment option.
The following tables summarize our
financial data. The statements of operations data for the period
from December 30, 2003 (date of inception) to
December 31, 2003 and the years ended December 31,2004 and 2005 have been derived from our audited financial
statements included elsewhere in this prospectus. The statements
of operations data for the six months ended June 30, 2005
and 2006 and for the cumulative period from December 30,2003 (date of inception) to June 30, 2006, and the balance
sheet data as of June 30, 2006, have been derived from our
unaudited financial statements included elsewhere in this
prospectus. The unaudited financial statements include, in the
opinion of management, all adjustments, which include only
normal recurring adjustments, that management considers
necessary for the fair presentation of the financial information
set forth in those financial statements. You should read this
data together with our financial statements and footnotes to
those statements included elsewhere in this prospectus and the
information in Selected Financial Data and Management’s
Discussion and Analysis of Financial Condition and Results of
Operations. Our historical results are not necessarily
indicative of the results to be expected in any future period.
The pro forma statements of operations
data and the pro forma as adjusted balance sheet data give
effect to the conversion of all outstanding preferred stock into
common stock upon the closing of this offering. The pro forma as
adjusted balance sheet data also give effect to our receipt of
the net proceeds from the sale of 5,000,000 shares of
common stock offered by us at an assumed initial public offering
price of $12.00 per share, after deducting the estimated
underwriting discounts and offering expenses payable by us.
In 2005, in accordance with EITF
Issue No. 00-27,
Application of Issue
No. 98-5,
Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios, to
Certain Convertible Instruments we recognized a deemed
dividend related to a beneficial conversion feature of
convertible preferred stock.
(3)
See Note 2 to our financial
statements for a description of the method used to compute net
loss per share attributable to common stockholders —
basic and diluted and weighted average shares
outstanding — basic and diluted.
(4)
See Note 12 to our financial
statements for a description of the method used to compute pro
forma net loss per share attributable to common
stockholders — basic and diluted (unaudited) and pro
forma weighted average shares outstanding — basic and
diluted (unaudited).
Cash, cash equivalents and available-for-sale securities
$
25,683
$
78,983
Working capital
22,712
76,012
Total assets
26,870
80,170
Convertible preferred stock
(restated)(1)
44,320
—
Total stockholders’ equity (deficit)
(restated)(1)
(21,628
)
75,992
(1)
See Note 1 to our financial
statements regarding a correction of an error relating to the
recording of the beneficial conversion feature of convertible
preferred stock in December 2005.
(2)
Assumes net proceeds to us from this
offering of $53.3 million. Each $1.00 increase or decrease
in the assumed public offering price of $12.00 per share
would increase or decrease, respectively, the amount of cash,
cash equivalents and available-for-sale securities, working
capital, total assets and total stockholders’ equity
(deficit) on a pro forma as adjusted basis by approximately
$4.7 million, assuming the number of shares offered by us,
as set forth on the cover of this prospectus, remains the same
and after deducting the estimated underwriting discounts and
offering expense payable by us.
Investing in our common stock involves
a high degree of risk. You should carefully consider the
following risk factors, as well as the other information in this
prospectus, before deciding whether to invest in shares of our
common stock. If any of the following risks actually occur, our
business, financial condition and results of operations would
suffer. In that case, the trading price of our common stock
would likely decline and you might lose all or part of your
investment in our common stock.
Risks Related to Our Business
We are a development stage company and
we currently do not generate revenue from the sale of any
products.
We are a development stage medical device
company with a limited operating history, and we currently do
not have any commercialized products or any source of product
revenue. To date, we have generated only a minimal amount of
revenue, all of which was received under a research grant. We
have invested all of our time and resources in developing
Bronchial Thermoplasty performed using the Alair System, which
will require additional clinical evaluation, regulatory
approval, significant marketing efforts and substantial
additional investment before it can provide us with any revenue.
Our efforts may not lead to a commercially successful product.
In addition, the use of Bronchial Thermoplasty for asthma is a
novel procedure that has not previously been investigated to any
meaningful extent prior to our clinical trials. Accordingly, we
are subject to the risks of failure inherent in the development
of a product based on new technology.
We only recently began enrolling patients
for a pivotal clinical trial, our AIR2 Trial, to be used as
a basis for our application for U.S. Food and Drug
Administration, or FDA, approval to market the Alair System, and
we do not expect to commercialize Bronchial Thermoplasty
performed using the Alair System before late 2008, if at all. If
we are not successful in completing our clinical trials, or if
the data from our clinical trials are not satisfactory, we may
not proceed with our planned filing of an application for
regulatory approval or we may be forced to delay our regulatory
filings to conduct additional clinical trials or for other
reasons. If we are unable to obtain regulatory approval for the
Alair System and successfully commercialize Bronchial
Thermoplasty, we will be unable to generate meaningful revenue.
We have incurred losses since inception
and anticipate that we will continue to incur losses for the
foreseeable future.
We are not profitable and have incurred
net losses in each quarter since our inception in December 2003,
including net losses of $274,000, $5.7 million,
$11.0 million and $9.4 million, respectively, for the
period ended December 31, 2003, the years ended
December 31, 2004 and 2005 and the six months ended
June 30, 2006. We have financed our operations primarily
through private placements of our equity securities and have
devoted substantially all of our resources to research and
development relating to Bronchial Thermoplasty. We expect our
research and development expenses to increase in connection with
our AIR2 Trial and other development and commercialization
activities. We expect to incur significant sales and marketing
expenses and manufacturing expenses prior to our anticipated
receipt of FDA approval, and we expect these expenses to
increase further if we receive such approval. Additionally, we
expect that our general and administrative expenses will
increase due to the additional operational and regulatory
burdens applicable to public companies. As a result, we expect
to continue to incur significant and increasing operating losses
for the foreseeable future.
We have not received, and may never
receive, FDA approval to market the Alair System.
We presently do not have the necessary
regulatory approvals to market the Alair System for the
treatment of asthma in the United States. If approved, we plan
initially to launch the Alair System in the United States. The
regulatory approval process in the United States involves, among
other things, successfully completing clinical trials and
obtaining premarket approval, or PMA, from the FDA. The PMA
process requires us to demonstrate the safety and efficacy of
the Alair System to the FDA’s satisfaction. This process is
expensive and uncertain, can take several years after a PMA
application is filed and may never result in the FDA granting a
PMA. The FDA could delay, limit or deny approval of a PMA
application of the Alair System for many reasons, including:
•
we may not be able to demonstrate the
safety and efficacy of the Alair System to the FDA’s
satisfaction; and
•
changes in FDA approval policies or
adoption of new regulations may require additional data.
In addition, there is no precedent for FDA
approval of an interventional medical device for the treatment
of asthma. Because Bronchial Thermoplasty performed using the
Alair System represents a novel way to treat asthma, because it
is interventional and involves tissue reduction, and because
asthma symptoms are already addressed by drug therapies that are
generally effective for a large portion of the asthma
population, we believe the FDA may review our application for
approval of the Alair System with a high degree of scrutiny,
which could cause that process to be lengthier and more involved
than that for products without these characteristics. In
addition, these factors may cause the FDA to require us to
conduct additional clinical trials and provide additional
evidence regarding the safety and efficacy of the Alair System,
and may affect the willingness of the FDA to ultimately approve
the marketing of the Alair System to treat asthma.
Furthermore, our AIR2 Trial is designed to
use, as its primary endpoint, the patient’s response to an
Asthma Quality of Life Questionnaire, or AQLQ, a subjective
patient-reported outcome. While the FDA has approved our
AIR2 Trial protocol that utilizes AQLQ scores as the
primary endpoint, we believe that most asthma medications that
have been approved by the FDA have used more objective measures
of pulmonary function as primary endpoints. It is possible that
in reviewing our trial results for our PMA submission, the FDA
may want to see significant improvements in secondary endpoints,
including more objective measures of pulmonary function, in
addition to AQLQ. Accordingly, even if we believe that the data
from the AIR2 Trial are favorable, the FDA may not approve the
Alair System, and may request additional information, including
data from additional clinical trials. Any delay in, or failure
to receive, approval for the Alair System would delay or prevent
us from generating product revenue or achieving profitability.
Even if the Alair System is approved by
the FDA, this approval may be more restrictive than we
anticipate. Accordingly, we could be limited to marketing the
Alair System to only a subpopulation of asthma patients, which
would limit the size of our potential market.
If we are unable to successfully
complete our AIR2 Trial, or if we experience significant delays,
our ability to commercialize Bronchial Thermoplasty performed
using the Alair System, and our financial position, will be
impaired.
Before we can market the Alair System, we
must successfully complete our AIR2 Trial, as well as any other
required clinical trials. Clinical trials are lengthy, expensive
and uncertain and are subject to delays and failure at any
stage. Furthermore, the data we collect from our AIR2 Trial may
not demonstrate the safety and efficacy of the Alair System, and
may not be sufficient to support FDA approval even if the
trial’s intended efficacy endpoints and safety profile are
achieved. The FDA may
disagree with our interpretation of data,
or may find the results inadequate in terms of safety or
efficacy, and may require us to pursue additional preclinical
studies or clinical trials or provide additional data and
information, which could further delay the approval of the Alair
System. If we are unable to demonstrate the safety and efficacy
of the Alair System in our AIR2 Trial to the FDA’s
satisfaction, we will be unable to obtain regulatory approval to
market the Alair System.
Our AIR2 Trial involves screening,
assessing, testing, treating and monitoring patients at
approximately 40 sites worldwide, and will require coordination
with patients and clinical institutions as well as with
treatment and assessment physicians and related medical
personnel. Conducting a clinical trial of this scale is a
complex and uncertain process. To enroll and treat patients at a
clinical site, we must first obtain clinical site approvals,
finalize contracts at trial sites and train site personnel. The
FDA has previously notified us that expanding the number of
investigational sites may result in the inability of the FDA to
assess initial performance data due to statistical issues at
low-enrolling sites and because sites with only a few patients
will require a thorough and individual evaluation of all
reported adverse events and initial findings. If this were to
occur, it could impact the final number of study participants we
would need to enroll based on the design of our study. The
results of the AIR2 Trial are blinded, so we believe that we
will not know how patients treated with the Alair System have
responded to treatment until some time after a sufficient number
of patients have completed the trial procedures. The ultimate
timing of the results and number of patients will vary based on
the parameters of our AIR2 Trial design.
The AIR2 Trial protocol requires us to
obtain clinical data from at least 225 patients to meet our
primary safety and efficacy endpoints. Depending on the
attrition level, which is the number of enrolled patients who
fail for any reason to complete the trial, we are planning to
enroll approximately 300 patients. If we do not obtain
acceptable results as defined in our study design, we may
continue enrolling additional patients as necessary to complete
our trial up to a maximum of 600 patients. As of
August 31, 2006, we had enrolled a total of
115 patients, and we currently expect to enroll at least
225 patients by early 2007. However, it may take us longer than
we expect to reach this enrollment threshold, and we may
experience a higher level of attrition than we expect. In
particular, the interventional nature and novelty of Bronchial
Thermoplasty may make it more difficult to enroll a sufficient
number of patients in the trial, and may increase the attrition
level. Moreover, while we anticipate that we may first be able
to submit our PMA application from our AIR2 Trial to the FDA by
the end of 2007, our PMA application to the FDA could be delayed
for a variety of reasons, including delays in reaching our
enrollment threshold, the need for additional time to analyze
unclear or uncertain results, regulatory developments or
requests by the FDA for additional data.
In addition, our AIR2 Trial protocol
requires that a third of the enrolled patients be assigned to a
control group that receives a sham procedure, which consists of
a bronchoscopic procedure that appears to the patient to be
delivering Bronchial Thermoplasty, without actually delivering
thermal energy. The prospect of going through this procedure
without receiving Bronchial Thermoplasty may cause patients to
be less willing to enroll in our clinical trial, and this sham
procedure may generate a placebo effect in which patients may
report a benefit after going through an invasive procedure, even
if no active treatment is delivered. As a result of this placebo
effect, our AIR2 Trial may generate data that shows a
smaller difference between the control group’s data and
that of the group receiving Bronchial Thermoplasty than would
otherwise be the case. This could reduce the likelihood that our
AIR2 Trial will demonstrate the efficacy of Bronchial
Thermoplasty. In addition, our AIR2 Trial is the first of our
clinical trials that has been sham controlled and, as a result,
we may obtain data that are not consistent with our previously
completed clinical trials because of an underestimation of the
placebo effect in the design of our AIR2 Trial.
Furthermore, our AIR2 Trial has been
designed based on a Bayesian adaptive approach to statistical
analysis that provides an opportunity to learn from evidence as
it accumulates (including evidence
from prior trials). While the FDA has
indicated its acceptance of this approach in our AIR2 Trial, the
FDA has also publicly announced that it plans to develop and
issue further guidance on the use of this approach in designing
clinical trials. It is possible that the FDA could announce
guidance that is inconsistent with the design of our AIR2 Trial,
which could require that we redesign and repeat all or part of
our AIR2 Trial, substantially delaying completion of the trial.
Completion of our AIR2 Trial could be
delayed or halted, and the trial could be unsuccessful, for many
reasons, including:
•
the FDA or other regulatory authorities
may force us to modify our previously approved protocol, or deny
any request we may make to modify this protocol, or may place
our AIR2 Trial on hold;
•
patients may not enroll in, or complete,
our AIR2 Trial at the rate we expect;
•
the interim or final results of our AIR2
Trial may be inconclusive or unfavorable as to immediate and
long-term safety or efficacy;
•
sites currently participating in our AIR2
Trial may drop out of the trial, which may require us to engage
new sites;
•
we may experience difficulties or delays
in bringing additional clinical sites on-line;
•
patients may not comply with trial
protocols;
•
patients may not return for post-treatment
follow-up at the rate
we expect;
•
patients may experience unanticipated
adverse events or side effects, which could cause our AIR2 Trial
to be delayed or stopped;
•
clinical investigators may decline to
participate in our AIR2 Trial, and may not perform on our
anticipated schedule or consistent with the investigator
agreement, clinical trial protocol, good clinical practices or
other FDA requirements;
•
third-party organizations may not perform
data collection and analysis in a timely or accurate manner;
•
regulatory inspections of our AIR2 Trial
may require us to undertake corrective action or suspend or
terminate our AIR2 Trial if inspectors find us not to be in
compliance with regulatory requirements; and
•
government regulations or policies may
change.
If the AIR2 Trial is delayed, it may take
us longer to commercialize the Alair System and generate product
revenue. Moreover, our development costs will increase if we
have material delays in our AIR2 Trial or if we need to perform
more or larger clinical trials than planned.
While we have conducted preclinical
studies, and limited clinical trials outside of the United
States, and obtained an Investigational Device Exemption, or
IDE, prior to commencing our AIR2 Trial, FDA approval of an IDE
application permitting us to conduct testing does not mean that
the FDA will consider the data gathered in the trial sufficient
to support approval of a PMA application. In
addition, the results of preclinical
studies and limited clinical trials do not necessarily predict
later clinical trial results.
Potential long-term complications from
Bronchial Thermoplasty, and limits to the persistence of the
benefits of Bronchial Thermoplasty, may not be revealed by our
clinical experience to date.
Our clinical trials have been limited in
size and duration of follow-up. As of August 31, 2006,
approximately 150 patients had been treated with the Alair
System. We do not yet have follow-up data beyond one year for
most of these patients. It is possible that Bronchial
Thermoplasty may have adverse consequences that only become
apparent a longer time after the procedure has been completed or
after the procedure has been performed on a larger number of
patients. Furthermore, the results from our completed clinical
trials may not be indicative of the clinical results obtained
when we examine patients at later dates.
Because Bronchial Thermoplasty involves
reduction of airway smooth muscle, it is possible that this
therapy could have unexpected long-term consequences that are
not detected in our clinical trials. Additionally, we have not
been able to closely examine and analyze the airway tissues of
asthma patients who have been treated with Bronchial
Thermoplasty, which has limited our ability to understand the
manner in which this therapy acts upon airway tissue. For
example, airway smooth muscle produces a variety of mediators,
and contains receptors, whose function and activity are not well
understood. Reduction of airway smooth muscle could reduce the
production of such mediators, or the availability of such
receptors, and we do not know whether this may have adverse
consequences. Additionally, when the mass of airway smooth
muscle is reduced through Bronchial Thermoplasty, it is replaced
with a thin layer of collagen matrix, and we do not know whether
the presence of this collagen matrix in the airways may have
adverse consequences. Accordingly, it is possible that Bronchial
Thermoplasty may have unanticipated adverse effects on airway
tissue, or may adversely affect the manner in which such tissue
responds to other treatments.
Our belief that Bronchial Thermoplasty
provides a persistent benefit is based primarily on one-year
follow-up data from our clinical trials, and is subject to
uncertainty due to the limited amount of longer-term data from
our trials to date as well as uncertainty as to how Bronchial
Thermoplasty acts upon airway tissue. We only have follow-up
data regarding the persistence of the benefits of Bronchial
Thermoplasty beyond one year for 16 patients, who were treated
in our feasibility study. Because of the small number of
patients, the results obtained in this study may not be
indicative of the long term persistence of the benefits of
treatment, and it is possible that these benefits may diminish
over time. In addition, data obtained in our feasibility study
showed a reduction in the improvement in a clinical endpoint
from the second year to the third and fourth years following
treatment, although the significance of this reduction is not
clear due to the small number of patients treated in this study
and the fact that not all of these patients were available for
each annual follow-up.
While we have observed that Bronchial
Thermoplasty results in a reduction in the mass of airway smooth
muscle, we have limited knowledge regarding how this occurs, or
the extent to which the reduction of asthma symptoms that we
have observed is due to this reduction of airway smooth muscle
mass, or to other possible effects of the procedure. These
limits to our understanding of the effect of Bronchial
Thermoplasty also limit our ability to predict how long the
benefits of Bronchial Thermoplasty will persist. If the benefits
of Bronchial Thermoplasty were shown to subside over time,
market acceptance of this procedure as a treatment for asthma
could be adversely affected.
If we are unable to obtain adequate
coverage or reimbursement from third-party payors for Bronchial
Thermoplasty performed using the Alair System, we will be unable
to generate significant revenue.
The availability of insurance coverage and
reimbursement for newly approved medical devices is uncertain.
The commercial success of Bronchial Thermoplasty in both
domestic and international markets will be substantially
dependent on whether third-party coverage and reimbursement for
Bronchial Thermoplasty is available. Medicare, Medicaid, health
maintenance organizations and other third-party payors are
increasingly attempting to contain healthcare costs by limiting
both coverage and the level of reimbursement, and, as a result,
they may not cover or provide adequate payment for Bronchial
Thermoplasty. To position Bronchial Thermoplasty for acceptance
by third-party payors, we may have to agree to a lower net sales
price than we might otherwise charge. The continuing efforts of
government and third-party payors to contain or reduce the costs
of healthcare may limit our revenue.
The efficacy, safety, ease of use and
cost-effectiveness of the Alair System will in part determine
the availability and level of reimbursement for Bronchial
Thermoplasty. In particular, we expect that securing coverage
and reimbursement for Bronchial Thermoplasty will be more
difficult if our AIR2 Trial does not demonstrate a level of
improvement that healthcare providers, healthcare institutions
and asthma patients consider clinically meaningful, regardless
of whether this clinical trial meets FDA requirements.
Reimbursement also may be more difficult to obtain if payors
view Bronchial Thermoplasty as adding to their costs because
Bronchial Thermoplasty may be delivered to asthma patients who
will continue to receive a significant amount of reimbursed
conventional asthma medications or other care. Moreover, the
novelty of Bronchial Thermoplasty to treat asthma will likely
complicate the establishment of a uniform and favorable
reimbursement policy.
In some foreign markets, pricing and
profitability of medical devices and procedures are subject to
government control. In the United States, we expect that there
will continue to be federal and state proposals for similar
controls. Governmental and private sector payors have instituted
initiatives to limit the growth of healthcare costs using, for
example, price regulation or controls and competitive pricing
programs. Some third-party payors also require pre-approval of
coverage for new or innovative devices or procedures before they
will reimburse healthcare providers who use such devices or
procedures. It is uncertain whether Bronchial Thermoplasty
performed using the Alair System will be viewed as sufficiently
cost-effective to warrant adequate coverage and reimbursement
levels.
Bronchial Thermoplasty performed using
the Alair System may never achieve market acceptance even if we
obtain regulatory approval and adequate coverage and
reimbursement from third-party payors.
To date, only those patients and
physicians involved in our clinical trials have used the Alair
System and, even if we obtain regulatory approval and adequate
coverage and reimbursement from
third-party payors,
people with asthma or the medical community may not endorse
Bronchial Thermoplasty. Our success is dependent upon achieving
widespread acceptance of Bronchial Thermoplasty among medical
practitioners and asthma patients. Bronchial Thermoplasty is a
new procedure, and its effects and method of action are not yet
well understood. Accordingly, market acceptance of Bronchial
Thermoplasty will depend on our ability to successfully
communicate the benefits of Bronchial Thermoplasty to each of
the constituencies that are involved in deciding whether to
treat a particular patient using Bronchial Thermoplasty:
•
the healthcare practitioners, such as
pulmonologists, who treat asthma patients, as well as referring
physicians;
•
the healthcare institutions where the
procedure would be performed, as well as opinion leaders in
these institutions; and
Marketing to each of these constituencies
requires a different marketing approach and involves different
challenges, and we must convince each of these groups of the
efficacy and safety of Bronchial Thermoplasty to be successful.
Our ability to market Bronchial Thermoplasty successfully to
each of these constituencies will depend on a number of factors,
including:
•
regulatory approval of the Alair System
for the treatment of asthma;
•
the perceived safety, efficacy and
persistence of the benefits of Bronchial Thermoplasty relative
to alternative therapies;
•
the level of education and awareness among
physicians and asthma patients concerning Bronchial Thermoplasty
and the Alair System;
•
publicity concerning Bronchial
Thermoplasty;
•
the price of the Alair System and the
associated costs of Bronchial Thermoplasty;
•
the frequency and severity of any side
effects; and
•
the availability and perceived advantages
and disadvantages of alternative treatments.
Patients may not perceive the benefits of
Bronchial Thermoplasty and may be unwilling to change their
current treatment regimens. In particular, patients may be
unwilling to undergo Bronchial Thermoplasty since it is an
interventional procedure, and they may be unwilling to allow a
bronchoscope to be introduced into their lungs or to allow their
lung tissue to be modified in order to receive this treatment.
In addition, since Bronchial Thermoplasty must be performed by
physicians in hospitals or other healthcare institutions,
patients may perceive this treatment as being less convenient
than other therapies. Furthermore, because we do not expect that
Bronchial Thermoplasty will eliminate the need for asthma
medications, asthma patients may perceive the procedure as being
of limited benefit.
Physicians may be slow to adopt Bronchial
Thermoplasty and the Alair System because of perceived liability
risks arising from the use of new products and the uncertainty
of third-party coverage
and reimbursement. Physicians may not recommend or perform
procedures with the Alair System until there is long-term
clinical evidence to convince them to alter their existing
treatment methods and until prominent physicians begin
recommending Bronchial Thermoplasty performed using the Alair
System to asthma patients. In addition, physicians will need to
be trained in the Bronchial Thermoplasty procedure. We cannot
predict when, if ever, physicians may adopt Bronchial
Thermoplasty or the Alair System. If the Alair System is
approved but does not achieve an adequate level of acceptance by
patients and physicians, we will not generate significant
product revenue and we may not become profitable.
In addition, our Alair Catheter is
designed for use in standard bronchoscopes that are currently
available. If manufacturers of bronchoscopes were to change the
shape of the working channel of their bronchoscopes, then the
Alair Catheter may not work with their bronchoscopes. This could
reduce demand for our Alair System.
Breakthroughs in the treatment of
asthma could render Bronchial Thermoplasty or the Alair System
obsolete.
The market for asthma related therapies
could change rapidly with technological change and product
innovation. The Alair System is based on our proprietary
technology, but a number of companies and
medical researchers are pursuing new
technologies for the treatment of asthma. A novel device
developed and marketed by one of our competitors could
significantly reduce market acceptance of Bronchial Thermoplasty
and the Alair System. Moreover, the pharmaceutical industry may
develop and commercialize novel asthma medications that may
impact the market acceptance of Bronchial Thermoplasty. In
addition, the National Institutes of Health and other supporters
of asthma research are continually seeking ways to prevent, cure
or improve the treatment of asthma. While we believe Bronchial
Thermoplasty may provide a persistent treatment for asthma, it
is not a cure for the disease. Therefore, Bronchial Thermoplasty
and the Alair System in its current state may be rendered
obsolete if a cure were to be developed or by other
breakthroughs in asthma treatment or prevention.
We expect to operate in a highly
competitive market, we may face competition from large,
well-established companies with significant resources, and we
may not be able to compete effectively.
We may face competition from companies
that develop and market medications for the management of asthma
and from medical device companies that may develop alternative
systems for the treatment of asthma. Even though we intend to
market the Alair System as being complementary to current
medications for the management of asthma, pharmaceutical
companies may view our technology as a threat and may focus
their resources on competing with Bronchial Thermoplasty. We
could face considerable competition from larger medical device
and pharmaceutical companies, which may have a number of
competitive advantages, including:
•
significantly greater name recognition;
•
established relations with healthcare
professionals, customers and third-party payors;
•
established distribution networks;
•
additional product lines, and the ability
to offer rebates or bundle products to offer higher discounts or
incentives to gain a competitive advantage;
•
greater experience in conducting research
and development, manufacturing, clinical trials, obtaining
regulatory approval for products and marketing approved
products; and
•
greater financial and human resources for
product development, sales and marketing, and patent litigation.
As a result, we may not be able to compete
effectively against these companies or their products.
We depend on clinical investigators and
clinical sites to enroll patients in our clinical trials and
other third parties to manage the trials and to perform related
data collection and analysis, and, as a result, we may face
costs and delays that are outside of our control.
We may not be able to control the amount
and timing of resources that clinical sites may devote to our
clinical trials. If these clinical investigators and clinical
sites fail to enroll a sufficient number of patients in our AIR2
Trial, fail to assist in minimizing enrollee attrition, or fail
to ensure compliance by patients with clinical protocols, we
will be unable to complete these trials in a timely fashion,
which could delay or prevent us from obtaining regulatory
approvals for the Alair System. Our agreements with clinical
investigators and clinical sites for clinical testing place
substantial responsibilities on these parties and, if these
parties fail to perform as expected, our AIR2 Trial could be
delayed or terminated. If these clinical investigators, clinical
sites or other third parties do not carry out their contractual
duties or obligations or fail to meet expected deadlines, or if
the quality or accuracy of the clinical data they obtain is
compromised due to their failure to adhere to our clinical
protocols investigator agreements or for other reasons, our
clinical trials may be extended, delayed or
terminated, and we may be unable to obtain
regulatory approval for the Alair System, or successfully
commercialize Bronchial Thermoplasty.
We may be unable to complete the
development of the Alair System and commercialization of
Bronchial Thermoplasty without additional funding.
Our operations have consumed substantial
amounts of cash since inception. We expect to continue to spend
substantial amounts on research and development, including
conducting clinical trials for the Alair System. Even before we
receive approval to market the Alair System, we expect to spend
significant additional amounts on commercialization, including
development of a direct sales force and expansion of
manufacturing capacity. For the year ended December 31,2005 and the six months ended June 30, 2006, our net cash
used in operating activities was $8.2 million and
$5.8 million, respectively. We expect that our cash used by
operations will increase significantly in future periods.
Changing circumstances may cause us to consume capital
significantly faster than we currently anticipate. We may need
additional funds to complete the development of the Alair System
and commercialization of Bronchial Thermoplasty. Additional
financing may not be available on a timely basis on terms
acceptable to us, or at all. Any additional financing may be
dilutive to stockholders. The amount of funding we will need
will depend on many factors, including:
•
the rate of progress and cost of our AIR2
Trial and development of the Alair System;
•
the success of our research and
development efforts;
•
the costs and timing of FDA approval of
the Alair System;
•
the expenses we incur in developing,
selling and marketing the Alair System;
•
the revenue generated by any sales of the
Alair System;
•
the emergence of competing or
complementary technological developments;
•
the costs of filing, prosecuting,
defending and enforcing any patent claims and other intellectual
property rights;
•
the terms and timing of any collaborative,
licensing or other arrangements that we may establish; and
•
the acquisition of businesses, products
and technologies, although we currently have no commitments or
agreements relating to any of these types of transactions.
If adequate funds are not available, we
may have to delay or cease development of the Alair System or
commercialization of Bronchial Thermoplasty or license to third
parties the rights to commercialize products or technologies
that we would otherwise seek to commercialize. We also may have
to reduce marketing, customer support or other resources. Any of
these factors could harm our financial condition.
If we are unable to establish sales,
marketing and distribution capabilities or enter into and
maintain arrangements with third parties to sell, market and
distribute the Alair System, our business will be
harmed.
We do not have a sales organization and
have no experience as a company in the sale, marketing and
distribution of asthma treatment products. To achieve commercial
success for any approved product we must either develop a sales
and marketing force or enter into marketing and sales
arrangements
with others. We currently plan to
establish a direct sales force in the United States. Our sales
force may compete with the experienced and well-funded marketing
and sales operations of our potential competitors. Developing a
sales force is expensive and time consuming and could delay or
limit the success of any product launch. We may not be able to
develop this capacity on a timely basis or at all. If we are
unable to establish sales and marketing capabilities, we will
need to contract with third parties to market and sell any
approved products in the United States. To the extent that we
enter into arrangements with third parties to perform sales,
marketing and distribution services in the United States, our
product revenue could be lower than if we directly marketed
Bronchial Thermoplasty and the Alair System. Furthermore, to the
extent that we enter into co-promotion or other marketing and
sales arrangements with other companies, any revenue received
will depend on the skills and efforts of others, and we do not
know whether these efforts will be successful. If we are unable
to establish and maintain adequate sales, marketing and
distribution capabilities, independently or with others, we may
not be able to generate product revenue and may not become
profitable.
Our manufacturing operations are
dependent upon third-party manufacturers and suppliers, making
us vulnerable to supply problems that could harm our
business.
We currently rely on Stellartech Research
Corporation and Life Science Outsourcing to manufacture and
supply the Alair RF Controller and Alair Catheter, respectively,
used in the Alair System for the purpose of our clinical trials.
In order to produce our devices in the quantities we anticipate
will be necessary to meet market demand, we may need to increase
our manufacturing capacity significantly over the current level
by adding or changing contract manufacturers, or by leasing and
staffing a facility to manufacture the product ourselves. In
addition, our contract manufacturers rely on sole-source
suppliers to manufacture some of the components used in the
Alair System. If any of our existing suppliers are unable or
unwilling to meet our demand for components, or if the
components or finished products that they supply do not meet
quality or other specifications, the development and
commercialization of the Alair System could be delayed or
prevented.
Our manufacturers and suppliers may
encounter problems during manufacturing, particularly in ramping
up capacity for commercialization, due to a variety of reasons,
including failure to follow specific protocols and procedures,
failure to comply with applicable regulations, equipment
malfunction and environmental factors, any of which could delay
or impede their ability to meet our demand. Our reliance on
these outside manufacturers and suppliers also subjects us to
other risks that could harm our business, including:
•
suppliers may make errors in manufacturing
components that could negatively affect the efficacy or safety
of the Alair System or cause delays in shipment of our products;
•
we may not be able to obtain adequate
supply of components and materials in a timely manner or on
commercially reasonable terms;
•
we may have difficulty locating and
qualifying alternative suppliers for our sole-source supplies;
•
switching or adding manufacturers, or
manufacturing the Alair System ourselves, will require
pre-approval by the FDA and corresponding state agencies, and
such pre-approval may not be granted on a timely basis or at all;
•
switching components may require product
redesign and submission to the FDA of a PMA supplement or
possibly a separate PMA application, either of which could
significantly delay production;
our suppliers manufacture products for a
range of customers, and fluctuations in demand for products
these suppliers manufacture for others may affect their ability
to deliver components to us in a timely manner; and
•
our suppliers may encounter financial
hardships unrelated to our demand for components, which could
inhibit their ability to fulfill our orders and meet our
requirements.
Any interruption or delay in the supply of
components or materials, or our inability to obtain components
or materials from alternate sources at acceptable prices in a
timely manner, could impair our ability to meet the demand of
our future customers and cause them to cancel orders or switch
to competitive products.
We have limited manufacturing
capabilities, and we will face challenges and risk if we decide
to manufacture the Alair System ourselves.
We currently have limited resources,
facilities and experience to commercially manufacture the Alair
System ourselves. We may decide in the future to increase our
own manufacturing capacity in order to produce the Alair System
ourselves in the quantities we anticipate will be necessary to
meet market demand, rather than depending on third party
manufacturers. If we determine that we will manufacture the
Alair System ourselves, we will have to comply with FDA and
corresponding state agencies laws, rules and regulations, which
may include filing an amendment or supplement to our PMA. In
addition, developing commercial-scale manufacturing facilities
would require the investment of substantial funds, which may not
be available or which may reduce funds available for research
and development or other activities. The development of
manufacturing facilities would also require the hiring of
additional management, quality assurance, quality control and
technical personnel who have the necessary manufacturing
experience, and personnel with the necessary skills and
experience may not be available to us. Also, the scaling of
manufacturing capacity is subject to numerous risks and
uncertainties, such as the availability and suitability of
facility space, construction timelines, design, installation and
maintenance of manufacturing equipment, among others, which can
lead to unexpected delays. Furthermore, we may encounter
unanticipated difficulties or delays in the process of
transitioning manufacturing from third parties to our own
facilities, which could result in increased costs, and result in
product shortages. If we are unable to manufacture a sufficient
supply of the Alair System, we may not have the capability to
satisfy market demand and our business will suffer. In addition,
if the scaled-up
production process is not efficient or produces products that do
not meet quality and other standards, our future financial
results would be adversely affected.
Failure to obtain regulatory approval
in foreign jurisdictions will prevent us from marketing our
products abroad.
Following commercial launch in the United
States, we plan to introduce Bronchial Thermoplasty performed
using the Alair System on an international basis. Outside the
United States, we can market a product only if we receive a
marketing authorization and, in some cases, reimbursement
approval, from the appropriate regulatory authorities. The
approval procedure varies among countries and can involve
additional preclinical and clinical testing, and the time
required to obtain approval may differ from that required to
obtain FDA approval. The foreign regulatory approval process may
include all of the risks associated with obtaining FDA approval
in addition to other risks. While the Alair System has received
approval from the European Union to bear the CE conformity
marking, we may not obtain other foreign regulatory approvals on
a timely basis, if at all. Moreover, if our International
Organization for Standardization, or ISO, certification or
the ISO certifications of any of our vendors is revoked in the
future, this would inhibit our ability to commercialize
Bronchial Thermoplasty in Europe. Approval by the FDA does not
ensure approval by regulatory authorities in other countries,
and approval by one foreign regulatory authority does not ensure
approval by regulatory authorities in other foreign countries or
by the FDA. We may not be able to file for regulatory approvals
and may
not receive necessary approvals to
effectively commercialize Bronchial Thermoplasty in any market
on a timely basis, or at all.
Even if the Alair System is approved by
regulatory authorities, if we or our suppliers fail to comply
with ongoing regulatory requirements, or if we experience
unanticipated problems, the Alair System could be subject to
restrictions or withdrawal from the market.
The Alair System, along with the
manufacturing processes, post-approval clinical data (if any),
adverse events, recalls or corrections, and promotional
activities, will be subject to continual review and periodic
inspections by the FDA and other regulatory bodies. In
particular we and our suppliers are required to comply with the
Quality System Regulation, or QSR, and other regulations, which
cover the methods and documentation of the design, testing,
production, control, quality assurance, labeling, packaging,
storage and shipping of any product for which we obtain
marketing approval. The FDA enforces the QSR through announced
and unannounced inspections. We and our
third-party
manufacturers have not yet been inspected by the FDA and will
have to successfully complete such an inspection before we ship
any commercial products. Failure by us or one of our suppliers
to comply with statutes and regulations administered by the FDA
and other regulatory bodies, or failure to take adequate
response to any observations, could result in, among other
things, any of the following actions:
•
warning letters or untitled letters;
•
fines and civil penalties;
•
withdrawal or suspension of approval or
clearance by the FDA or other regulatory bodies;
•
product recall or seizure;
•
orders for physician notification or
device repair, replacement or refund;
•
interruption of production;
•
operating restrictions;
•
injunctions; and
•
criminal prosecution.
If any of these actions were to occur, it
would harm our reputation and cause our product sales and
profitability to suffer. Furthermore, our key component
suppliers may not currently be or may not continue to be in
compliance with applicable regulatory requirements.
Even if regulatory approval or clearance
of the Alair System is granted, the approval or clearance may be
subject to limitations on the indication for which the product
may be marketed. If the FDA determines that our promotional
materials, training or other activities constitutes promotion of
an unapproved use, it could request that we cease or modify our
training or promotional materials or subject us to regulatory
enforcement actions, including the issuance of an untitled or
warning letter, injunction, seizure, civil fine and criminal
penalties. It is also possible that other federal, state or
foreign enforcement authorities might take action if they
consider promotional, training or other materials to constitute
promotion of an unapproved or uncleared use, which could result
in significant fines or penalties under other statutory
authorities, such as laws prohibiting false claims for
reimbursement.
Furthermore, any modification to a device
that has received FDA clearance or approval that could
significantly affect its safety or efficacy, or that would
constitute a major change in its intended use, design or
manufacture, requires a new clearance or approval from the FDA.
If the FDA disagrees with any determination by us that new
clearance or approval is not required, we may be required to
cease marketing or to recall the modified product until we
obtain clearance or approval. In addition, we could be subject
to significant regulatory fines or penalties.
In addition, regulatory approval of a
product may contain requirements for costly post-marketing
testing or surveillance to monitor the safety or efficacy of the
product. Later discovery of previously unknown problems with our
products, including unanticipated adverse events or adverse
events of unanticipated severity or frequency, manufacturing
problems, or failure to comply with regulatory requirements such
as the QSR, may result in restrictions on such products or
manufacturing processes, withdrawal of the products from the
market, voluntary or mandatory recalls, fines, suspension of
regulatory approvals, product seizures, injunctions or the
imposition of civil or criminal penalties.
In addition, healthcare laws and
regulations may change significantly in the future. Any new
healthcare laws or regulations may adversely affect our
business. A review of our business by courts or regulatory
authorities may result in a determination that could adversely
affect our operations. Also, the healthcare regulatory
environment may change in a way that restricts our operations.
If we do not achieve our clinical trial
and product development goals in the time frames we announce and
expect, our stock price may decline.
From time to time, we estimate and
publicly announce, including in this prospectus, the anticipated
timing of the accomplishment of various clinical, regulatory and
other product development goals. These statements, which are
forward-looking statements, include our estimates regarding
enrolling patients in our clinical trials, when we expect to
complete our AIR2 Trial or other clinical trials, when we expect
to submit our first PMA application to the FDA to seek
regulatory approval to market the Alair System, and when we
expect to obtain FDA approval for or begin to receive meaningful
revenue from the Alair System. These estimates are based on a
variety of assumptions. The timing of the actual achievement of
these milestones may vary dramatically compared to our
estimates, in some cases for reasons beyond our control. Our
failure to meet any publicly-announced goals may be perceived
negatively by the public markets, and, as a result, our stock
price may decline.
We face the risk of product liability
claims and may not be able to maintain or obtain
insurance.
Our business exposes us to the risk of
product liability claims that is inherent in the testing,
manufacturing, marketing and sale of medical devices, including
those which may arise from the misuse or malfunction of, or
design flaws in, the Alair System. We may be subject to product
liability claims if the Alair System causes, or merely appears
to have caused, an injury. Claims may be made by patients,
healthcare providers or others selling our products. Although we
have product liability and clinical trial liability insurance
that we believe is appropriate, this insurance is subject to
deductibles and coverage limitations. Our current product
liability insurance may not continue to be available to us at an
acceptable cost or on acceptable terms, if at all, and, if
available, the coverage may not be adequate to protect us
against any future product liability claims, which could result
in significant costs and harm to our business.
We may be subject to claims against us
even if the apparent injury is due to the actions of others. For
example, we rely on the expertise of physicians, nurses and
other associated medical personnel to perform Bronchial
Thermoplasty and to care for treated patients. If these medical
personnel are not properly trained or are negligent, the
capabilities of the Alair System may be diminished or the
patient may suffer critical injury, which may subject us to
liability. These liabilities could prevent or interfere with our
commercialization efforts. Defending a lawsuit, regardless of
merit, could be costly, could
divert management attention and might
result in adverse publicity, which could result in the
withdrawal of, or inability to recruit, clinical trial
volunteers or result in reduced acceptance of Bronchial
Thermoplasty in the marketplace.
Our inability to adequately protect our
intellectual property could allow our competitors and others to
produce products based on our technology, which could
substantially impair our ability to compete.
Our success and ability to compete is
dependent, in part, upon our ability to maintain the proprietary
nature of our technologies. We rely on a combination of patent,
copyright and trademark law, and trade secrets and nondisclosure
agreements to protect our intellectual property. However, such
methods may not be adequate to protect us or permit us to gain
or maintain a competitive advantage. Our patent applications may
not issue as patents in a form that will be advantageous to us,
or at all. Our issued patents, and those that may issue in the
future, may be challenged, invalidated or circumvented, which
could limit our ability to stop competitors from marketing
related products. To protect our proprietary rights, we may, in
the future, need to assert claims of infringement against third
parties to protect our intellectual property. The outcome of
litigation to enforce our intellectual property rights in
patents, copyrights, trade secrets or trademarks is highly
unpredictable, could result in substantial costs and diversion
of resources, and could have a material adverse effect on our
financial condition and results of operations regardless of the
final outcome of such litigation. In the event of an adverse
judgment, a court could hold that some or all of our asserted
intellectual property rights are not infringed, invalid or
unenforceable, and could order us to pay attorney fees. Despite
our efforts to safeguard our unpatented and unregistered
intellectual property rights, we may not be successful in doing
so or the steps taken by us in this regard may not be adequate
to detect or deter misappropriation of our technology or to
prevent an unauthorized third party from copying or otherwise
obtaining and using our product candidates, technology or other
information that we regard as proprietary. Additionally, third
parties may be able to design around our patents. Furthermore,
the laws of foreign countries may not protect our proprietary
rights to the same extent as the laws of the United States. Our
inability to adequately protect our intellectual property could
allow our competitors and others to produce products based on
our technology, which could substantially impair our ability to
compete.
We may become subject to claims of
infringement or misappropriation of the intellectual property
rights of others, which could prohibit us from commercializing
Bronchial Thermoplasty performed using the Alair System, require
us to obtain licenses from third parties or to develop
non-infringing alternatives, and subject us to substantial
monetary damages and injunctive relief.
Third parties could, in the future, assert
infringement or misappropriation claims against us with respect
to Bronchial Thermoplasty and/or the Alair System. Whether a
product infringes a patent involves complex legal and factual
issues, the determination of which is often uncertain.
Therefore, we cannot be certain that we have not infringed the
intellectual property rights of such third parties or others.
Our competitors may assert that Bronchial Thermoplasty and/or
the Alair System are covered by U.S. or foreign patents
held by them. Because patent applications may take years to
issue, there may be applications now pending of which we are
unaware that may later result in issued patents that Bronchial
Thermoplasty and/or the Alair System infringe. There could also
be existing patents of which we are unaware that one or more
components of the Alair System may inadvertently infringe. If
the number of competitors in the market for asthma treatment
systems grow, the possibility of inadvertent patent infringement
by us or a patent infringement claim against us increases.
Any infringement or misappropriation claim
could cause us to incur significant costs, could place
significant strain on our financial resources, divert
management’s attention from our business and harm our
reputation. If the relevant patents were upheld as valid and
enforceable and we were found to infringe, we could be
prohibited from commercializing the Alair System unless we could
obtain licenses to use the technology covered by the patent or
are able to design around the patent. We may
be unable to obtain a license on terms
acceptable to us, if at all, and we may not be able to redesign
the Alair System to avoid infringement. Any such license could
impair operating margins on future product revenue. A court
could also order us to pay compensatory damages for such
infringement, and potentially treble damages, plus prejudgment
interest and attorney fees. These damages could be substantial
and could harm our reputation, business, financial condition and
operating results. A court also could enter orders that
temporarily, preliminarily or permanently enjoin us and our
customers from making, using, selling, offering to sell or
importing the Alair System, or could enter an order mandating
that we undertake certain remedial activities. Depending on the
nature of the relief ordered by the court, we could become
liable for additional damages to third parties.
Our success will depend on our ability
to attract and retain our personnel.
We are highly dependent on our senior
management, especially Glen French, our President and Chief
Executive Officer. Our success will depend on our ability to
retain our current management and to attract and retain
qualified personnel in the future, including scientists,
clinicians, engineers and other highly skilled personnel.
Competition for senior management personnel, as well as
scientists, clinicians and engineers, is intense and we may not
be able to retain our personnel. The loss of the services of
members of our senior management, scientists, clinicians or
engineers could prevent the implementation and completion of our
objectives, including the development and introduction of
Bronchial Thermoplasty. The loss of a member of our senior
management or our professional staff would require the remaining
executive officers to divert immediate and substantial attention
to seeking a replacement. Each of our officers may terminate
their employment at any time without notice and without cause or
good reason. We do not carry key person life insurance on any of
our employees other than Mr. French.
We expect to rapidly expand our sales and
marketing, product development and administrative operations.
This expansion is expected to place a significant strain on our
management and will require hiring a significant number of
qualified personnel. Accordingly, recruiting and retaining such
personnel in the future will be critical to our success. There
is intense competition from other companies and research and
academic institutions for qualified personnel in the areas of
our activities. If we fail to identify, attract, retain and
motivate these highly skilled personnel, we may be unable to
continue our development and commercialization activities.
We will incur increased costs and
demands on our management as a result of the regulatory
obligations of being a public company.
The obligations of being a public company,
including substantial public reporting and auditing obligations,
will require significant additional expenditures, place
additional demands on our management and divert its attention
away from our business, and will require the hiring of
additional personnel. For example, we are evaluating our
internal controls systems in order to allow us to report on, and
our independent registered public accounting firm to attest to,
our internal controls, as required by Section 404 of the
Sarbanes-Oxley Act. While we anticipate being able to fully
implement the requirements relating to internal controls and all
other aspects of Section 404 in a timely fashion, we cannot
be certain as to the timing of completion of our evaluation,
testing and remediation actions or the impact of the same on our
operations since there is no precedent available by which to
measure compliance adequacy. As a development stage company with
limited capital and human resources, we will need to divert
management’s time and attention away from our business in
order to ensure compliance with these regulatory requirements.
This diversion of management’s time and attention may have
a material adverse effect on our business, financial condition
and results of operations.
We identified a material weakness in
our internal control over financial reporting.
Our management is responsible for
establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting
is the process designed by, or under the supervision of, our CEO
and CFO, and effected by our board of directors, management and
other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles and includes those
policies and procedures that (i) pertain to the maintenance
of records that in reasonable detail accurately and fairly
reflect our transactions and dispositions of assets;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being
made only in accordance with the authorization of our management
and directors; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a
material effect on our financial statements. In September 2006,
we identified a control deficiency that represents a material
weakness in our internal control over financial reporting.
A material weakness is a control
deficiency, or combination of control deficiencies, that results
in a more than remote likelihood that a material misstatement of
the annual or interim financial statements will not be prevented
or detected. The material weakness we identified in our internal
control over financial reporting consists of our failure to
maintain effective controls for the proper recording of a
beneficial conversion feature associated with our Series CC
convertible preferred stock. This control deficiency resulted in
the restatement of our balance sheets as of and statements of
shareholders’ deficit for the periods ended
December 31, 2005 and June 30, 2006. Additionally,
this control deficiency could result in a misstatement of
shareholders equity and convertible preferred stock that would
result in a material misstatement of our annual or interim
financial statements that would not be prevented or detected.
Our efforts to remediate the aforementioned material weakness in
our internal control over financial reporting consists of
strengthening our processes related to complex equity
transactions.
We may identify additional material
weaknesses in our internal control over financial reporting in
the future. Beginning with our Annual Report on
Form 10-K for
fiscal year 2007, pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002, our management will be required to
assess the effectiveness of our internal control over financial
reporting, and we will be required to have our independent
registered public accounting firm audit management’s
assessment and the design and operating effectiveness of our
internal control over financial reporting. If our management or
our independent registered public accounting firm were to either
identify a material weakness or otherwise conclude in their
reports that our internal control over financial reporting was
not effective, investors could lose confidence in our reported
financial information and the value of our stock could be
adversely impacted which, in turn, could harm our business and
have an adverse effect on our future ability to raise additional
capital funds.
Changes in or interpretations of
accounting rules and regulations, such as expensing of stock
options, could result in unfavorable accounting charges or
require us to change our compensation policies.
Accounting methods and policies for
business and market practices, including policies regarding
expensing stock options, are subject to review, interpretation
and guidance from relevant accounting authorities, including the
Securities and Exchange Commission. In December 2004 the
Financial Accounting Standards Board, or FASB, issued
SFAS No. 123 (revised 2004), Share-Based
Payment, or SFAS 123R, which requires all share-based
payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on
their fair values beginning with the first annual period after
June 15, 2005. We rely heavily on stock options to
compensate existing employees and attract new employees. As a
result of SFAS 123R, we may choose to reduce our reliance
on stock options as a compensation tool. If we reduce our use of
stock options, it may be more difficult for us to attract and
retain qualified employees. Although we believe that our
accounting practices are
consistent with current accounting
pronouncements, changes to or interpretations of accounting
methods or policies in the future may require us to reclassify,
restate or otherwise change or revise our financial statements.
Some of our directors also serve on the
board of directors of Broncus Technologies, Inc., with which we
have a number of relationships, which could result in such
directors having different interests than our stockholders on
Broncus-related matters.
We have a number of relationships with
Broncus Technologies, Inc. arising from our inception in
December 2003. See Related Party Transactions —
Formation-Related Agreements. Four of our directors, including
our President and Chief Executive Officer, are also directors of
Broncus, and directly or indirectly have equity interests in
Broncus. As of August 31, 2006, Glen French, our President
and Chief Executive Officer and a member of our board of
directors, beneficially owned approximately 1.3% of the
outstanding shares of capital stock of Broncus, Dr. Michael
Laufer and James Fitzsimmons, members of our board of directors,
beneficially owned 0.2% and 0.3%, respectively, of the
outstanding shares of capital stock of Broncus, and investment
funds with which Dr. Beat Merz, a member of our board
of directors, is affiliated beneficially owned 25.1% of the
outstanding shares of capital stock of Broncus. In addition,
Dr. Laufer is a special limited partner of an investment
fund that beneficially owns 14.5% of the outstanding shares of
capital stock of Broncus.
Should issues arise in our relationship
with Broncus, such directors may have interests that are
different than those of our other stockholders. For example, a
conflict of interest may arise in the event of questions
regarding the terms or possible amendment of, or as a result of
any breach of, the agreements we have entered into with Broncus.
In addition, Broncus is engaged in developing a treatment for
emphysema and potentially other lung diseases, and conflicts may
arise in the event that we seek to develop a treatment for the
same or similar diseases or Broncus seeks to develop a treatment
for asthma. We are restricted from using technology that was
transferred to us by Broncus, and certain technology developed
by us prior to June 30, 2005, in the field of emphysema.
Similarly, Broncus is restricted from using technology that it
retained at the time of our inception, and certain technology
that it developed subsequent to our inception and prior to
June 30, 2005, in the field of asthma, as described under
Related Party Transactions — Formation-Related
Agreements. In the event a material conflict with Broncus arises
in the future, any director with an interest in the matter will
be expected to recuse himself or herself from voting on the
matter. However, we have not established any specific procedures
designed to address potential
Broncus-related
conflicts.
Our facilities and the facilities of
our third-party manufacturers are located near known earthquake
fault zones, and the occurrence of an earthquake or other
catastrophic disaster could damage our facilities or the
facilities of our third-party manufacturers, which could cause
us to curtail our operations.
Our facilities and the facilities of our
third-party manufacturers are located in California near known
earthquake fault zones and, therefore, are vulnerable to damage
from earthquakes. We are also vulnerable to damage from other
types of disasters, such as power loss, fire, floods and similar
events. If any disaster were to occur, our ability to operate
our business could be seriously impaired. We currently may not
have adequate insurance to cover our losses resulting from
disasters or other similar significant business interruptions,
and we do not plan to purchase additional insurance to cover
such losses due to the cost of obtaining such coverage. Any
significant losses that are not recoverable under our insurance
policies could seriously impair our business and financial
condition.
The market price for our common stock
is likely to be volatile and could result in a decline in the
value of your investment.
Our stock price is likely to be volatile.
The stock market in general and the securities of medical device
companies in particular have experienced extreme volatility that
has often been unrelated to the operating performance of
particular companies. This has been especially true for
development stage companies such as ours. As a result of this
volatility, you may not be able to sell your common stock at or
above the initial public offering price. The following factors,
in addition to other risk factors described in this section and
general market and economic conditions, may have a significant
impact on the market price of our common stock:
•
results of our research and development
efforts and our AIR2 Trial;
•
the timing of regulatory approval for the
Alair System;
•
failure of the Alair System, if approved,
to achieve commercial success;
•
the announcement of new products or
product enhancements by our competitors;
•
regulatory developments in the United
States and foreign countries;
•
ability to manufacture the Alair System in
commercial quantities and in accordance with regulatory
standards;
•
changes in financial estimates or
recommendations by securities analysts;
•
public concern over the safety of
Bronchial Thermoplasty;
•
developments or disputes concerning
patents or other proprietary rights;
•
product liability claims and litigation
against us or our competitors;
•
the departure of key personnel;
•
changes in private or governmental payor
coverage and reimbursement arrangements;
•
changes in accounting principles or
practices; and
•
future sales of our common stock.
A decline in the market price of our
common stock could cause you to lose some or all of your
investment and may adversely impact our ability to attract and
retain employees and raise capital. In addition, stockholders
may initiate securities class action lawsuits if the market
price of our stock drops significantly. Whether or not
meritorious, litigation brought against us could result in
substantial costs and could divert the time and attention of our
management. Our insurance to cover claims of this sort may not
be adequate.
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. An active trading market for
our shares may never develop or be sustained following this
offering. Accordingly, you may
not be able to sell your shares quickly or
at the market price if trading in our stock is not active. The
initial public offering price for our common stock will be
determined through negotiations between the underwriters and us.
The initial public offering price may vary from the market price
of our common stock after this offering. You may not be able to
sell your common stock at or above the initial public offering
price.
We have broad discretion in the use of
the net proceeds from this offering, and may not use them
effectively.
We cannot specify with certainty the
particular uses of the net proceeds we will receive from this
offering. Our management will have broad discretion in the
application of the net proceeds, including for any of the
purposes described in Use of Proceeds. Accordingly, you will
have to rely upon the judgment of our management with respect to
the use of the proceeds, with only limited information
concerning management’s specific intentions. Our management
may spend a portion or all of the net proceeds from this
offering in ways that our stockholders may not desire or that
may not yield a favorable return. The failure by our management
to apply these funds effectively could harm our business.
Pending their use, we may invest the net proceeds from this
offering in a manner that does not produce income or that loses
value.
Concentration of ownership among our
existing directors, executive officers and principal
stockholders may prevent new investors from influencing
significant corporate decisions.
Upon closing of this offering, based upon
beneficial ownership as of August 31, 2006, our current
directors, executive officers and principal stockholders, and
their affiliates will, in the aggregate, beneficially own
approximately 60% of our outstanding common stock. As a result,
these stockholders will be able to exercise a controlling
influence over matters requiring stockholder approval, including
the election of directors and approval of significant corporate
transactions, and will have significant influence over our
management and policies. Some of these persons or entities may
have interests that are different from yours. For example, these
stockholders may support proposals and actions with which you
may disagree or which are not in your interests. The
concentration of ownership could delay or prevent a change in
control of our company or otherwise discourage a potential
acquirer from attempting to obtain control of our company, which
in turn could reduce the price of our common stock. In addition,
these stockholders, some of whom have representatives sitting on
our board of directors, could use their voting influence to
maintain our existing management and directors in office, delay
or prevent changes of control of our company, or support or
reject other management and board proposals that are subject to
stockholder approval, such as amendments to our employee stock
plans and approvals of significant financing transactions.
If there are substantial sales of our
common stock, our stock price could decline.
If our existing stockholders sell a large
number of shares of our common stock or the public market
perceives that these sales may occur, the market price of our
common stock could decline. Based on shares outstanding on
August 31, 2006, upon the closing of this offering, assuming no
outstanding options are exercised prior to the closing of this
offering, we will have approximately 16,010,501 shares of
common stock outstanding. All of the shares offered under this
prospectus will be freely tradable without restriction or
further registration under the federal securities laws, unless
purchased by our affiliates. Taking into consideration the
effect of lock-up
agreements entered into by our stockholders, the remaining
11,010,501 shares outstanding upon the closing of this
offering will be
available for sale pursuant to
Rules 144 and 701, and the volume, manner of sale and other
limitations under these rules, as follows:
•
10,782,935 shares of common stock
will be eligible for sale in the public market, beginning
180 days after the effective date of this prospectus,
unless the lock-up
period is otherwise extended pursuant to its
terms; and
•
the remaining 227,566 shares of
common stock will become eligible for sale at various dates
thereafter upon the lapse of our right of repurchase with
respect to unvested shares.
In some cases, shares may be sold earlier
upon receipt of waivers of the restrictions under these
lock-up
agreements.
Existing stockholders holding an aggregate
of 9,927,016 shares of common stock have rights with
respect to the registration of these shares of common stock with
the Securities and Exchange Commission. See Description of
Capital Stock — Registration Rights. If we register
their shares of common stock following the expiration of the
lock-up agreements,
these stockholders can immediately sell those shares in the
public market.
Promptly following this offering, we
intend to register up to 2,408,242 shares of common stock
that are authorized for issuance under our stock option plans
and employee stock purchase plan. As of August 31, 2006,
1,507,503 shares were subject to outstanding options, of
which 422,387 shares were vested. Once we register these
shares, they can be freely sold in the public market upon
issuance, subject to the
lock-up agreements
referred to above and restrictions on our affiliates.
You will incur immediate and
substantial dilution as a result of this offering.
The initial public offering price is
substantially higher than the book value per share of our common
stock. As a result, purchasers in this offering will experience
immediate and substantial dilution of $7.23 per share in
the tangible book value of our common stock from the initial
public offering price, based on the number of shares outstanding
as of June 30, 2006 and assuming an initial public offering
price of $12.00 per share. This is due in large part to earlier
investors in our company having paid substantially less than the
assumed initial public offering price when they purchased their
shares. Investors who purchase shares of common stock in this
offering will contribute approximately 57.3% of the total
consideration paid by all stockholders but will own only
approximately 31.4% of our common stock, based on the number of
shares outstanding as of June 30, 2006 and assuming an
initial public offering price of $12.00 per share. In addition,
the exercise of currently outstanding options to purchase common
stock and future equity issuances, including future public or
private securities offerings and any additional shares issued in
connection with acquisitions, will result in further dilution.
For additional information, please see Dilution.
Our charter documents and Delaware law
may inhibit a takeover that stockholders consider
favorable.
Upon the closing of this offering,
provisions of our restated certificate of incorporation and
bylaws and applicable provisions of Delaware law may make it
more difficult for or prevent a third party from acquiring
control of us without the approval of our board of directors.
These provisions:
•
establish a classified board of directors,
so that not all members of our board of directors may be elected
at one time;
•
set limitations on the removal of
directors;
•
limit who may call a special meeting of
stockholders;
establish advance notice requirements for
nominations for election to our board of directors or for
proposing matters that can be acted upon at stockholder meetings;
•
do not permit cumulative voting in the
election of our directors, which would otherwise permit less
than a majority of stockholders to elect directors;
•
prohibit stockholder action by written
consent, thereby requiring all stockholder actions to be taken
at a meeting of our stockholders; and
•
provide our board of directors the ability
to designate the terms of and issue a new series of preferred
stock without stockholder approval.
In addition, Section 203 of the
Delaware General Corporation Law generally limits our ability to
engage in any business combination with certain persons who own
15% or more of our outstanding voting stock or any of our
associates or affiliates who at any time in the past three years
have owned 15% or more of our outstanding voting stock. These
provisions may have the effect of entrenching our management
team and may deprive you of the opportunity to sell your shares
to potential acquirers at a premium over prevailing prices. This
potential inability to obtain a control premium could reduce the
price of our common stock.
Please see Description of Capital
Stock — Anti-Takeover Provisions for a more detailed
description of these provisions.
This prospectus contains forward-looking
statements that are based on our management’s beliefs and
assumptions and on information currently available to our
management. The forward-looking statements are contained
principally in the sections entitled Summary, Risk Factors,
Management’s Discussion and Analysis of Financial Condition
and Results of Operations and Business. Forward-looking
statements include, but are not limited to, statements about:
•
our expectations with respect to
regulatory submissions and approvals, including the potential
timing of our submission of a PMA application to the FDA and the
timing of possible FDA approval;
•
our expectations with respect to our
clinical trials, including the timing of reaching our enrollment
goals for our clinical trials;
•
our ability to commercialize Bronchial
Thermoplasty;
•
the statements regarding our growth
strategy;
•
our expectations with respect to our
intellectual property position;
•
our ability to develop and commercialize
new products; and
•
our estimates regarding our capital
requirements and our need for additional financing.
In some cases, you can identify
forward-looking statements by terms such as may, will, should,
could, would, expect, plan, anticipate, believe, estimate,
project, predict, potential and similar expressions intended to
identify forward-looking statements. We may not actually achieve
the plans, intentions or expectations disclosed in our
forward-looking statements, and you should not place undue
reliance on our forward-looking statements. Actual results or
events could differ materially from the plans, intentions and
expectations disclosed in the forward-looking statements we
make. We have included important factors in the cautionary
statements included in this prospectus, particularly in the Risk
Factors section, that could cause actual results or events to
differ materially from the forward-looking statements that we
make.
Moreover, we operate in a very competitive
and rapidly changing environment. New risks emerge from time to
time. It is not possible for our management to predict all
risks, nor can we assess the impact of all factors on our
business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from
those contained in any forward-looking statements we may make.
You should read this prospectus and the
documents that we have filed as exhibits to the registration
statement, of which this prospectus is a part, completely and
with the understanding that our actual future results may be
materially different from what we expect. We do not assume any
obligation to update any forward-looking statements.
We estimate that we will receive net
proceeds of $53.3 million from our sale of
5,000,000 shares of common stock in this offering, based on
the assumed public offering price of $12.00 per share,
after deducting the estimated underwriting discounts and
offering expenses payable by us. If the underwriters’
over-allotment option is exercised in full, we estimate we will
receive net proceeds of approximately $61.7 million. Each
$1.00 increase or decrease in the assumed public offering price
of $12.00 per share would increase or decrease,
respectively, our net proceeds by approximately
$4.7 million, assuming the number of shares offered by us,
as set forth on the cover of this prospectus, remains the same
and after deducting the estimated underwriting discounts and
offering expenses payable by us.
The principal purposes of this offering
are to obtain additional working capital, to create a public
market for our common stock and to facilitate our future access
to the public equity markets. Of the net proceeds to us from
this offering, we expect to use approximately:
•
$20.0 million for clinical trials and
other research and development expenses;
•
$20.0 million for building our
commercial infrastructure, including sales and marketing
resources; and
•
the remainder for working capital and
general corporate purposes.
The amounts actually spent for these
purposes may vary significantly and will depend on a number of
factors, including the amount of cash used in our operations,
the status of our AIR2 Trial and regulatory approval efforts,
our commercialization efforts, competitive and other industry
pressures and other factors described in Risk Factors. While we
have no present understandings, commitments or agreements to
enter into any potential acquisitions, we may also use a portion
of the net proceeds for the acquisition of, or investment in,
technologies or products that complement our business.
Accordingly, management will retain broad discretion as to the
allocation of the net proceeds we receive from this offering.
Pending the uses described above, we will
invest the net proceeds we receive from this offering in
short-term, interest-bearing, investment-grade securities. We
cannot predict whether the net proceeds will yield a favorable
return.
DIVIDEND POLICY
Since our inception, we have never
declared or paid cash dividends on our capital stock and do not
anticipate declaring or paying cash dividends in the foreseeable
future. We expect to retain future earnings, if any, to fund the
development and growth of our business. Any future determination
to pay dividends on our common stock will be at the discretion
of our board of directors and will depend upon, among other
factors, our financial condition, operating results, current and
anticipated cash needs, plans for expansion and other factors
that our board of directors may deem relevant.
The following table sets forth our
capitalization as of June 30, 2006:
•
on an actual basis; and
•
on a pro forma as adjusted basis to
reflect (1) the effect of our reincorporation in Delaware,
(2) the conversion of all outstanding preferred stock into
common stock upon the completion of this offering, and (3) the
closing of this offering and the receipt of the estimated net
proceeds from the sale of 5,000,000 shares of common stock
in this offering at the assumed public offering price of
$12.00 per share, after deducting the estimated
underwriting discounts and offering expenses payable by us.
You should read this capitalization table
together with Management’s Discussion and Analysis of
Financial Condition and Results of Operations and with the
financial statements and related notes to those statements
included elsewhere in this prospectus.
Cash, cash equivalents and available-for-sale securities
$
25,683
$
78,983
Convertible preferred stock: no par value, 10,061,177 shares
authorized, 9,927,016 shares issued and outstanding,
actual; no shares authorized, issued or outstanding, pro forma
as adjusted
$
44,320
$
—
Stockholders’ equity (deficit):
Preferred stock: $0.00001 par value, no shares authorized,
issued and outstanding, actual; 3,333,333 shares authorized, no
shares issued and outstanding, pro forma as adjusted
—
—
Common stock: no par value, 15,000,000 shares authorized,
997,115 shares issued and outstanding, actual; $0.00001 par
value, 40,000,000 shares authorized, 15,924,131 shares
issued and outstanding, pro forma as
adjusted(2)
6,389
—
Additional paid-in capital
—
104,009
Deferred stock-based compensation
(1,723
)
(1,723
)
Notes receivable from stockholders
(133
)
(133
)
Deficit accumulated during the development stage
(26,265
)
(26,265
)
Accumulated other comprehensive income
104
104
Total stockholders’ equity (deficit)
(21,628
)
75,992
Total capitalization
$
22,692
$
75,992
(1)
Each $1.00 increase or decrease in the
assumed public offering price of $12.00 per share would increase
or decrease, respectively, the amount of cash, cash equivalents
and available-for-sale securities, common stock, total
stockholders’ equity (deficit) and total capitalization on
a pro forma as adjusted basis by approximately
$4.7 million, assuming the number of shares offered by us,
as set forth on the cover of this prospectus, remains the same
and after deducting the estimated underwriting discounts and
offering expense payable by us.
(2)
Common stock issued and outstanding
includes 315,606 shares subject to repurchase.
The information in the table above
excludes, as of June 30, 2006:
•
1,462,246 shares of common stock
issuable upon exercise of outstanding options at a weighted
average exercise price of $0.75 per share;
•
1,333 shares of common stock issuable
upon exercise of an outstanding warrant; and
•
1,032,036 shares of common stock
reserved for future grant or issuance under our 2006 equity
incentive plan and 2006 employee stock purchase plan, and
automatic increases to the shares reserved for future grant or
issuance under these plans to occur January 1 of each year
during the term of each plan, as described in further detail in
Management — Equity Incentive Plans — 2006
Equity Incentive Plan and Management — Equity
Incentive Plans — 2006 Employee Stock Purchase Plan.
If you invest in our common stock, your
interest will be diluted immediately to the extent of the
difference between the initial public offering price per share
of our common stock and the pro forma as adjusted net tangible
book value per share of our common stock immediately after
completion of this offering.
As of June 30, 2006, we had a
negative net tangible book value of $(21.6) million, or
$(21.69) per share of common stock. Net tangible book value
per share is equal to our total tangible assets (total assets
less intangible assets) less total liabilities and convertible
preferred stock, divided by the number of outstanding shares of
our common stock.
Dilution in net tangible book value per
share represents the difference between the amount per share
paid by investors in this offering and net tangible book value
per share of our common stock immediately after the completion
of this offering. After giving effect to the conversion of all
outstanding shares of preferred stock into common stock upon the
closing of this offering, our pro forma net tangible book value
as of June 30, 2006 would have been $22.7 million, or
$2.08 per share of common stock. After further giving
effect to the sale of 5,000,000 shares of common stock
offered by us in this offering at an assumed public offering
price of $12.00 per share, after deducting the estimated
underwriting discounts and offering expenses payable by us, our
pro forma as adjusted net tangible book value as of
June 30, 2006 would have been $76.0 million, or
$4.77 per share of common stock. This represents an
immediate increase in net tangible book value of $2.69 per
share to our existing stockholders and an immediate dilution of
$7.23 per share to new investors purchasing shares in this
offering. The following table illustrates this per share
dilution:
Assumed initial public offering price per share
$
12.00
Historical negative net tangible book value per share as of
June 30, 2006
$
(21.69
)
Pro forma increase per share attributable to conversion of
preferred stock
23.77
Increase per share attributable to this offering
2.69
Pro forma as adjusted net tangible book value per share
4.77
Dilution per share to new investors in this offering
$
7.23
A $1.00 increase or decrease in the
assumed public offering price of $12.00 per share would
increase or decrease, respectively, our pro forma as adjusted
net tangible book value by $4.7 million, our pro forma as
adjusted net tangible book value by $0.29 per share and the
dilution to new investors in this offering by $0.29 per
share, assuming that the number of shares offered by us, as set
forth on the cover page of this prospectus, remains the same and
after deducting the estimated underwriting discounts and
offering expenses payable by us.
The following table shows, as of
June 30, 2006, the number of shares of common stock
purchased from us, the total consideration paid to us and the
average price paid per share by existing stockholders and by new
investors purchasing common stock in this offering at an assumed
initial public offering price of $12.00 per share, before
deducting the estimated underwriting discount and offering
expenses payable by us.
A $1.00 increase or decrease in the
assumed public offering price of $12.00 per share would
increase or decrease, respectively, the total consideration paid
by new investors and total consideration paid by all
stockholders by $5.0 million, assuming that the number of
shares offered by us, as set forth on the cover page of this
prospectus, remains the same and after deducting the estimated
underwriting discounts and offering expenses payable by us.
The discussion and the information in the
tables above exclude, as of June 30, 2006:
•
1,462,246 shares of common stock
issuable upon exercise of outstanding options at a weighted
average exercise price of $0.75 per share;
•
1,333 shares of common stock issuable
upon exercise of an outstanding warrant; and
•
1,032,036 shares of common stock
reserved for future grant or issuance under our 2006 equity
incentive plan and 2006 employee stock purchase plan, and
automatic increases to the shares reserved for future grant or
issuance under these plans to occur January 1 of each year
during the term of each plan, as described in further detail in
Management — Equity Incentive Plans — 2006
Equity Incentive Plan and Management — Equity
Incentive Plans — 2006 Employee Stock Purchase Plan.
If the underwriters exercise in full their
over-allotment option to purchase up to 750,000 additional
shares from us in this offering, our pro forma as adjusted net
tangible book value per share as of June 30, 2006 would
have been $5.06, representing an immediate increase in pro forma
net tangible book value per share attributable to this offering
of $2.98 to our existing stockholders and an immediate dilution
per share to new investors in this offering of $6.94. If the
underwriters’ over-allotment option is exercised in full,
our existing stockholders would own 65.5% and our new investors
would own 34.5% of the total number of shares of our common
stock outstanding after this offering.
Assuming the exercise in full of
outstanding stock options and the warrant, our pro forma as
adjusted net tangible book value per share as of June 30,2006 would have been $4.43, representing an immediate increase
in pro forma net tangible book value per share of $2.35 per
share to our existing stockholders. Assuming the exercise in
full of the outstanding stock options and the warrant, the
shares purchased by the new investors would constitute 28.8% of
all shares purchased from us, and the total consideration paid
by new investors would constitute 56.7% of the total
consideration paid for all shares purchased from us. In
addition, the average price per share paid by existing
stockholders would be $3.71.
The following tables summarize our
selected financial data. The statements of operations data for
the period from December 30, 2003 (date of inception) to
December 31, 2003 and the years ended December 31,2004 and 2005 and the balance sheet data as of December 31,2004 and 2005 have been derived from our audited financial
statements included elsewhere in this prospectus. The balance
sheet data as of December 31, 2003 has been derived from
our audited financial statements not included in this
prospectus. The statements of operations data for the six months
ended June 30, 2005 and 2006 and the cumulative period from
December 30, 2003 (date of inception) to June 30, 2006
and the balance sheet data as of June 30, 2006 have been
derived from our unaudited financial statements included
elsewhere in this prospectus. The unaudited financial statements
include, in the opinion of management, all adjustments, which
include only normal recurring adjustments, that management
considers necessary for the fair presentation of the financial
information set forth in those financial statements. You should
read this data together with our financial statements and notes
to those statements included elsewhere in this prospectus and
the information in Management’s Discussion and Analysis of
Financial Condition and Results of Operations. Our historical
results are not necessarily indicative of the results to be
expected in any future period.
In 2005, in accordance with EITF Issue
No. 00-27,
Application of Issue
No. 98-5,
Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios, to
Certain Convertible Instruments we recognized a deemed
dividend related to a beneficial conversion feature of
convertible preferred stock.
(3)
See Note 2 to our financial
statements for a description of the method used to compute net
loss per share attributable to common stockholders —
basic and diluted and weighted average shares
outstanding — basic and diluted.
(4)
See Note 12 to our financial
statements for a description of the method used to compute pro
forma net loss per share attributable to common
stockholders — basic and diluted (unaudited) and pro
forma weighted average shares outstanding — basic and
diluted (unaudited).
Cash, cash equivalents and available-for-sale securities
$
50
$
12,542
$
31,237
$
25,683
Working capital
1,857
11,584
30,517
22,712
Total assets
2,272
12,854
31,733
26,870
Convertible preferred
stock(1)
2,079
17,438
44,320
44,320
Total stockholders’
deficit(1)
(113
)
(5,776
)
(13,851
)
(21,628
)
(1)
See Note 1 to our financial
statements regarding a correction of an error relating to the
recording of the beneficial conversion feature of the
convertible preferred stock in December 2005.
The following Management’s
Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our financial
statements and the related notes to those statements included
elsewhere in this prospectus, and gives effect to the
restatement of our financial statements discussed in Note 1
“Restatement of Financial Statements” to our financial
statements. This discussion contains forward-looking statements
based upon current expectations that involve risks and
uncertainties, such as our plans, objectives and intentions, as
set forth in Information Regarding Forward-Looking Statements.
Our actual results and the timing of events could differ
materially from those anticipated in these forward-looking
statements as a result of several factors, including those set
forth in the following discussion and in Risk Factors, Business
and elsewhere in this prospectus.
Overview
We are a medical device company focused on
developing and commercializing a novel therapeutic treatment for
asthma. We have developed proprietary technology designed to
deliver controlled thermal energy to the lung airways of adult
patients to reduce airway smooth muscle, in a procedure called
Bronchial Thermoplasty. The contraction of airway smooth muscle
in the lung airways is a main cause of airway constriction that
leads to difficulty in breathing during asthma attacks. We
believe that reducing airway smooth muscle in asthma patients
can decrease the ability of the airways to constrict, thereby
providing a significant therapeutic benefit to asthma patients
whose symptoms are poorly controlled despite using conventional
asthma medications. We have developed a device named the Alair
System specifically to perform the Bronchial Thermoplasty
procedure.
Since our inception in December 2003, we
have sought to develop an asthma treatment system using assets
and technology transferred to us by Broncus Technologies, Inc.
Physicians had administered Bronchial Thermoplasty to
approximately 150 asthma patients in our clinical
trials as of August 31, 2006. We believe that the data from
these trials indicate that Bronchial Thermoplasty performed
using the Alair System, when combined with conventional asthma
medications, offers adult patients with moderate-to-severe
asthma a significant improvement in the control of their asthma
symptoms, improving their quality of life. We are currently
enrolling patients in our AIR2 Trial under an Investigational
Device Exemption, or IDE, granted by the FDA to evaluate the
safety and efficacy of Bronchial Thermoplasty in severe
asthmatics who are still symptomatic despite taking high doses
of conventional medication. We currently anticipate that the
AIR2 Trial will include approximately 300 patients at
approximately 40 sites in North America, Europe, Australia
and South America. As of August 31, 2006, we had enrolled
115 patients in this trial and we expect to enroll at least
225 patients by early 2007. We intend that the AIR2 Trial
will be a pivotal trial and that we will use this trial as the
basis for an application for premarket approval, or PMA, with
the FDA. We anticipate that we will file our PMA application by
the end of 2007.
We are a development stage company. To
date, we have not generated any product revenue, and we have
incurred net losses in each quarter since our inception in
December 2003. Through June 30, 2006, we had a deficit
accumulated during the development stage of $26.3 million.
We expect our losses to continue and increase as we continue to
conduct our AIR2 Trial and initiate commercialization
activities. We have financed our operations primarily through
private placements of equity securities. In December 2005, we
raised aggregate net cash proceeds of approximately
$26.9 million in a private placement of shares of our
Series CC preferred stock.
To date, we have not generated any product
revenue. We do not expect to generate any revenue from sales of
the Alair Sytem to treat asthma until at least late 2008. To
date, our only revenue has been derived from our clinical
research under a subcontract of a federal government grant,
which expired in August 2006. Our research and development grant
agreement provides for periodic payments in support of our
research activities. Grant revenue is received and recognized as
earned based on actual costs incurred or as milestones are
achieved.
Research and
Development
Our research and development expenses
primarily consist of engineering and research expenses related
to our asthma treatment technology, clinical trials, regulatory
expenses and manufacturing expenses incurred to build the Alair
Catheter and Alair RF Controller. These expenses are primarily
related to employee compensation, including salary, fringe
benefits, recruitment, relocation and temporary employee
expenses. We also incur significant expenses to operate our
clinical trials including trial design, clinical site
reimbursement, data management and associated travel expenses.
Our research and development expenses also include fees for
contract research organizations, outside design services,
contractors and materials, and assembly expenses for our
catheters and controllers. From our inception through
June 30, 2006, we have incurred $19.8 million in
research and development expenses, including $950,000 of
stock-based compensation.
We expect research and development
expenses for future periods to increase as we continue the
development of the Alair System, conduct our AIR2 Trial,
research and develop new product opportunities and hire
additional employees.
Sales, General and
Administrative
Our sales, general and administrative
expenses primarily consist of compensation for our executive,
financial, sales, marketing and administrative functions. From
our inception through June 30, 2006, we have incurred
$8.5 million for sales, general and administrative
expenses, including $3.3 million of stock-based
compensation.
We expect that sales, general and
administrative expenses will increase significantly in future
periods as we prepare for commercialization, as well as due to
the expenses associated with operating as a publicly-traded
company.
In anticipation of FDA approval of the
Alair System, we plan to increase our manufacturing capacity and
personnel to enable us to produce commercial quantities of our
devices. Our capacity expansion could be constrained by the lack
of readily available laboratory and manufacturing space,
equipment design, production and validation, regulatory approval
of our factory and personnel staffing. We also plan to expand
the number of our sales and marketing personnel prior to
obtaining FDA approval. If and when we obtain FDA approval, we
plan to launch the Alair System in the United States with our
own direct sales force.
Stock-Based
Compensation
Stock-based compensation consists of
compensation expense related to employee stock option grants.
Prior to January 1, 2006, we accounted for stock-based
employee compensation arrangements in accordance with the
provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, or APB 25,
and related interpretations, and followed the disclosure
provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation.
Under APB No. 25, compensation
expense is based on the difference, if any, on the date of the
grant, between the fair value of our common stock and the
exercise price. The fair value of the shares of common stock
that underlie the stock options we have granted has historically
been determined by our board of directors. Because there has
been no public market for our common stock, our board has
determined the fair value of our common stock at the time of
grant of the option by considering a number of objective and
subjective factors, including our sales of preferred stock to
unrelated third parties, our operating and financial
performance, the lack of liquidity of our capital stock, trends
in the medical device market and other similar healthcare
stocks, arm’s length, third-party sales of our common stock
and valuations performed by management.
For financial reporting purposes, in
connection with the preparation of the audit of our 2005
financial statements, we reassessed the fair value of the common
stock underlying the stock options granted to our employees.
This reassessment was based primarily on a retrospective
valuation performed by management and discounted back to various
dates. As a result, we recorded stock-based compensation expense
in our statement of operations for the year ended
December 31, 2005 to the extent that these reassessed
values of the underlying common stock exceeded the exercise
price of the stock options as of the initial grant date. This
deferred stock-based compensation expense is amortized over the
vesting period of the stock options and is included as a
component of stock-based compensation.
In 2005, we issued full recourse notes
receivable to two executive officers totaling $251,200 in
connection with the early exercise of stock options. These notes
bore interest at a rate of 4.19% which we consider to be below
the market rate on the issuance dates. In accordance with FASB
Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation an Interpretation of
APB Opinion No. 25, we accounted for the issuance of
the notes as a modification which resulted in a new measurement
date and variable accounting on the date of exercise. We
recorded deferred
stock-based
compensation of $3.6 million based on the intrinsic value
of the stock options on the exercise date and amortized
$2.6 million in accordance with FASB Interpretation
No. 28, Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans, an Interpretation of
APB Opinions No. 15 and 25, on the date of the
modification. The remaining unamortized deferred
stock-based
compensation expense will be amortized on a straight line basis
over the remainder of the vesting period. These notes were
repaid in July 2006. See Note 13 to our financial
statements.
At June 30, 2006, the total
unamortized deferred stock-based compensation recorded in
accordance with APB No. 25 was approximately
$1.7 million, and is expected to be amortized as follows:
$359,000 in the remaining six months of 2006, $715,000 in
2007, $421,000 in 2008 and $228,000 in 2009.
Effective January 1, 2006, we adopted
the fair value recognition provisions of
SFAS No. 123R, Share-Based Payment, using the
prospective transition method, which requires us to apply the
provisions of SFAS 123R only to new awards granted, and to
awards modified, repurchased or cancelled, after the effective
date. For the six months ended June 30, 2006, the total
compensation cost related to stock-based awards granted under
SFAS 123R to employees and directors but not yet recognized
was approximately $10.2 million, net of estimated
forfeitures. We will amortize this cost on a straight-line basis
over a weighted average period of approximately four years.
Stock-based compensation expense of $1.4 million in the six
months ended June 30, 2006 comprised $1.0 million of
stock-based compensation expense recognized under SFAS 123R
and amortization of $357,000 of deferred stock-based
compensation arising under APB No. 25.
Stock-based compensation expense is
allocated among research and development expenses and sales,
general and administrative expenses based on the job function of
the holders of the outstanding stock options. Stock-based
compensation expense has been allocated as follows:
Revenue.
We generated zero product revenue during the six months ended
June 30, 2005 and 2006. We recognized grant revenue of
$147,000 and $212,000 in the six months ended June 30, 2005
and 2006, respectively, from the reimbursement of clinical
research related expenses under a subcontract of a federal
government grant.
Research and
Development. Research and
development expenses during the six months ended June 30,2005 and 2006 were $3.0 million and $7.4 million,
respectively. This increase is primarily attributable to
increased expenses associated with our completed clinical trials
and our ongoing AIR2 Trial, which commenced in
October 2005. During the six months ended June 30,2005, research and development expenses consisted primarily of
$1.3 million for clinical trial expenses, $959,000 for
salaries and related expenses, $430,000 for consulting services
and $137,000 for development and prototype builds. During the
six months ended June 30, 2006, research and development
expenses consisted primarily of $3.9 million for clinical
trial expenses, $1.6 million for salaries and related
expenses, $572,000 for development and prototype builds,
$518,000 for consulting services and $247,000 for travel.
Research and development expenses did not include any
stock-based compensation during the six months ended
June 30, 2005 and included stock-based compensation of
$498,000 during the six months ended June 30, 2006.
The increase of $4.4 million during
the six months ended June 30, 2006 compared to the same
period in 2005 was due primarily to expense of $2.6 million
related to expanded participation in our clinical trials,
$641,000 for salaries and related expenses for increased
research and development personnel and $435,000 for increased
development and prototype builds.
Sales, General and
Administrative. Sales,
general and administrative expenses during the six months ended
in June 30, 2005 and 2006 were $770,000 and
$2.6 million, respectively. This increase is primarily
attributable to increased headcount to support the growth of our
operations and to prepare for our initial public offering, as
well as stock-based compensation expense. During the six months
ended June 30, 2005, sales, general and administrative
expenses consisted primarily of $444,000 for salaries and
related expenses, $95,000 for professional services and
consulting and $231,000 for all other sales, general and
administrative expenses. During the six months ended
June 30, 2006, sales, general and administrative expenses
included $854,000 for salaries and related expenses, $237,000
for professional services, $190,000 for advertising and
promotional fees and $436,000 for all other sales, general and
administrative expenses. Sales, general and administrative
expenses did not include any stock-based compensation during the
six months ended June 30, 2005 and included stock-based
compensation of $893,000 during the six months ended
June 30, 2006.
Interest and Other
Income. Interest and other
income for the six months ended June 30, 2005 and 2006 was
$126,000 and $503,000, respectively. This increase was primarily
due to a higher average cash balance and increased interest
rates.
Revenue.
We generated zero product revenue during 2003, 2004 and 2005. We
recognized zero revenue, $523,000 and $355,000 in 2003, 2004 and
2005, respectively, related to our clinical research under a
subcontract of a federal government grant.
Research and
Development. Research and
development expenses were $200,000 in 2003, $5.0 million in
2004 and $7.2 million in 2005. Research and development
expenses in 2004 consisted primarily of $2.3 million for
clinical trial expenses, $1.7 million for salaries and
related expenses, $530,000 for research and development-related
consulting services and $386,000 for other research-related
expenses. Research and development expenses in 2005 consisted
primarily of $2.7 million for clinical trial expenses,
$2.1 million for salaries and related expenses,
$1.0 million for research and development-related
consulting services and $454,000 for development and protoype
builds. Our research and development expenses did not include
any stock-based compensation in 2004 and included stock-based
compensation of $452,000 in 2005.
The $4.8 million increase from 2003
to 2004 was primarily due to 2004 being the first full year of
operations following our inception on December 30, 2003.
The $2.2 million increase from 2004 to 2005 was primarily
due to expansion of clinical trials and product development
activities and reflected increases of $860,000 for salaries and
related expenses for the addition of five full time research and
development employees, $287,000 for increased development and
prototype builds, $496,000 for research and development-related
consulting and $348,000 for clinical trial expenses.
Sales, General and
Administrative. Sales,
general and administrative expenses were $110,000 in 2003,
$1.4 million in 2004 and $4.4 million in 2005. Sales,
general and administrative expenses in 2004 consisted primarily
of $799,000 for salaries and related expenses and $311,000 for
professional services and other operating expenses. Sales,
general and administrative expenses in 2005 consisted primarily
of $1.2 million for salaries and related expenses and
$740,000 for professional services and other operating expenses.
Our sales, general and administrative expenses also included
stock-based compensation of $45,000 in 2003, $23,000 in 2004 and
$2.4 million in 2005.
The $1.3 million increase from 2003
to 2004 was primarily due to 2004 being the first full year of
operations following our inception on December 30, 2003.
The $3.0 million increase from 2004 to 2005 was primarily
related to salaries and related expenses for increased
administrative personnel in accounting and marketing.
Interest and Other
Income. Interest and other
income was $36,000 in 2003, $150,000 in 2004 and $281,000 in
2005. The increases were primarily due to higher average cash
balances and increased interest rates.
Deemed
Dividend. In 2005, in
accordance with EITF Issue No. 00-27, Application of Issue
No. 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features, or Contingently Adjustable
Conversion Ratios to certain Convertible Instruments, we
recognized a deemed dividend related to a beneficial conversion
feature of convertible preferred stock of $21.1 million.
This deemed dividend represents the difference between the per
share conversion price of our Series CC preferred stock,
which we issued in December 2005, and the reassessed fair value
of our common stock on the issuance date, multiplied by the
number of shares of Series CC preferred stock issued. We do
not expect this deemed dividend to have any impact on future
financial periods, nor do we expect to recognize additional
deemed dividends as a result of our preferred stock.
We are a development stage company and
have incurred operating losses since our inception in December
2003. As of June 30, 2006, we had a deficit accumulated
during the development stage of $26.3 million. We have
funded our operations primarily from the transfer of
$2.2 million in cash from Broncus at our inception and the
private placement of equity securities, raising aggregate net
proceeds of $44.4 million through June 30, 2006. As of
June 30, 2006, we had $25.7 million in cash, cash
equivalents and available-for-sale securities and
$22.7 million in working capital.
Net Cash Used in Operating
Activities. Net cash used
in operating activities was $2.0 million in 2003,
$2.8 million in 2004 and $8.2 million in 2005. Net
cash used in operating activities was $5.8 million during
the six months ended June 30, 2006. Net cash used in
operating activities primarily reflects operating losses during
each period and is primarily related to salaries and related
expenses, facilities, supplies and outside services used to
support our clinical trials and other development programs. From
December 30, 2003 (date of inception) to December 31,2005, we added 24 full-time employees.
Net Cash Used in Investing
Activities. Net cash used
in investing activities was $96,000 in 2003, $23,000 in 2004 and
$4.5 million in 2005. Net cash used in investing activities
was $16.1 million in the six months ended June 30,2006. Net cash used in investing activities in 2003 and 2004 was
primarily related to the purchase of property and equipment. Net
cash used in investing activities in 2005 and the six months
ended June 30, 2006 was primarily related to the net
purchase of short-term available-for-sale securities.
Net Cash Provided by Financing
Activities. Net cash
provided by financing activities was $2.2 million in 2003,
$15.4 million in 2004 and $26.9 million in 2005. Net
cash provided by financing activities was $142,000 in the six
months ended June 30, 2006. Net cash provided by financing
activities in 2003 was primarily from our issuance of
convertible preferred stock and common stock in connection with
our inception. Net cash provided by financing activities in 2004
was primarily from our Series BB preferred stock financing,
and in 2005 was primarily from our Series CC preferred
stock financing. Net cash provided by financing activities in
the six months ended June 30, 2006 related primarily to
proceeds from the issuance of common stock in connection with
the exercise of employee stock options.
Operating Capital and Capital
Expenditure Requirements
To date, we have not commercialized any
products. We anticipate that we will continue to incur net
losses for the next several years as we continue to carry out
our AIR2 Trial and further expand our clinical team, continue to
develop the Alair System, begin to increase our manufacturing
capacity and begin to expand our manufacturing, sales and
marketing personnel in contemplation of FDA approval of the
Alair System.
We do not expect to generate product
revenue from sales of the Alair System to treat asthma until we
obtain FDA approval. We believe that the net proceeds from this
offering, together with our cash and cash equivalent and
available-for-sale securities, will be sufficient to meet our
anticipated cash requirements through at least the end of 2007
and will be sufficient to meet our cash requirements for our
AIR2 Trial, PMA application and preparation for
commercialization of the Alair System, unless we encounter
unanticipated difficulties or delays. If our available cash and
cash equivalents, available-for-sale securities, and net
proceeds from this offering are insufficient to satisfy our
liquidity requirements, or if we develop additional products, we
may seek to sell additional equity or debt securities or obtain
a credit facility. The sale of additional equity or convertible
debt securities may result in additional dilution to our
stockholders. If we raise additional funds through the issuance
of debt securities or preferred stock, these securities could
have rights senior to those of our common stock and could
contain covenants that would restrict our
operations. We may require additional capital beyond our
currently forecasted amounts. Any such required additional
capital may not be available on reasonable terms, if at all. If
we are unable to obtain additional financing, we may be required
to reduce the scope of, delay or eliminate some or all of our
planned research, development and commercialization activities,
which could harm our business.
Because of the numerous risks and
uncertainties associated with the development of the Alair
System, we are unable to estimate the exact amounts of capital
outlays and operating expenditures that will be required for our
current and anticipated clinical trials. Our future funding
requirements will depend on many factors, including, but not
limited to:
•
the rate of progress and cost of our
clinical trials, in particular our AIR2 Trial;
•
the success of our research and
development efforts;
•
the costs and timing of FDA approval of
the Alair System;
•
the expenses we incur to increase our
manufacturing capacity;
•
the expenses we incur in selling and
marketing the Alair System;
•
the emergence of competing or
complementary technological developments;
•
the costs of filing, prosecuting,
defending and enforcing any patent claims and other intellectual
product rights; and
•
the terms and timing of any collaborative
or other commercial arrangements that we may establish.
Contractual
Obligations
The following table summarizes our
outstanding contractual obligations as of December 31, 2005
and the effect those obligations are expected to have on our
liquidity and cash flows in future periods:
Payment Due by Period
Less than
More than
Obligation
Total
1 Year
1-3 Years
3-5 Years
5 Years
Operating leases
$
161,400
$80,550
$80,850
$
—
$
—
Our long-term obligations are related
solely to our facility lease. We do not have any purchase
commitments with our suppliers.
Off-Balance Sheet
Arrangements
We do not have any off-balance sheet
arrangements.
Related Party Transactions
For description of our related party
transactions, please see Related Party Transactions.
Critical Accounting Policies and
Estimates
The discussion and analysis of our
financial condition and results of operations are based on our
financial statements, which we have prepared in accordance with
accounting principles generally
accepted in the United States of America.
The preparation of these financial statements requires us to
make estimates and assumptions that affect the reported amounts
of assets, liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements as well
as the reported revenue and expenses during the reporting
periods. We evaluate our estimates and judgments on an ongoing
basis. We base our estimates on historical experience and on
various other factors that we believe are reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions.
While our significant accounting policies
are more fully described in Note 1 to our financial
statements included elsewhere in this prospectus, we believe
that the following accounting policies and estimates are most
critical to a full understanding and evaluation of our reported
financial results.
Clinical Trial
Accruals
We record accruals for clinical trial
expenses, comprising primarily payments for work performed by
contract research organizations, physicians and participating
hospitals. We accrue expenses for clinical trials performed by
contract research organizations, medical procedure related
expenses and payments to patients based on estimates of work
performed under our contracts related to our clinical trials. We
accrue clinical expenses as patients are enrolled in the trial.
Stock-Based Compensation
Expense
Prior to January 1, 2006, we
accounted for employee stock options using the intrinsic-value
method in accordance with APB 25. Under this method,
compensation expense was recorded for a stock option grant only
if the deemed fair value of the underlying common stock exceeded
the exercise price on the date of grant.
The fair value of the shares of common
stock that underlie the stock options we have granted has
historically been determined by our board of directors. Because
there has been no public market for our common stock, our board
determined the fair value of our common stock at the time of
grant of the option by considering a number of objective and
subjective factors, including our sales of preferred stock to
unrelated third parties, our operating and financial
performance, the lack of liquidity of our capital stock, trends
in the medical device market and other similar healthcare
stocks, arm’s length, third-party sales of our common stock
and valuations performed by management.
For financial reporting purposes, in
connection with the preparation of the audit of our 2005
financial statements, we reassessed the fair value of the common
stock underlying the stock options granted to our employees.
This reassessment was based primarily on a retrospective
valuation performed by management and discounted back to various
dates during 2005. As a result, we recorded stock-based
compensation expense in our statement of operations for the year
ended December 31, 2005 to the extent that these reassessed
values of the underlying common stock exceeded the exercise
price of the stock options as of the initial grant date. This
deferred stock-based compensation expense is amortized over the
vesting period of the stock options. If the fair value of our
common stock were deemed to be higher, the amount of stock-based
compensation expense that we are required to incur could
increase materially.
Effective January 1, 2006, we adopted
the fair value recognition provisions of SFAS No. 123R
using the prospective transition method, which requires us to
apply the provisions of SFAS No. 123R only to new
awards granted, and to awards modified, repurchased or
cancelled, after the effective date. Under this transition
method, stock-based compensation expense recognized beginning
January 1, 2006 is based on the following: (a) the
grant-date fair value of stock option awards granted or modified
after January 1, 2006; and (b) the balance of deferred
stock-based compensation related to stock option
awards granted prior to January 1,2006, which was calculated using the intrinsic value method as
previously permitted under APB Opinion No. 25.
Deferred Tax Assets
Significant management judgment is
required in determining our provision for our deferred tax
assets and liabilities and any valuation allowance recorded
against our net deferred tax assets. We have recorded a full
valuation allowance on our net deferred tax assets as of
June 30, 2006 due to uncertainties related to our ability
to utilize our deferred tax assets in the foreseeable future.
These deferred tax assets primarily consist of certain net
operating loss carry forwards and research and development tax
credits.
Recent Accounting
Pronouncements
In November 2005, the Financial Accounting
Standards Board, or FASB, issued FASB Staff Position, or FSP,
Nos. FAS 115-1 and FAS 124-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments, which provides guidance on determining when
investments in certain debt and equity securities are considered
impaired, whether that impairment is other-than-temporary, and
the measurement of an impairment loss. This FSP also includes
accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures
about unrealized losses that have not been recognized as
other-than-temporary impairments. The FSP is required to be
applied to reporting periods beginning after December 15,2005. The adoption of this FSP in 2006 had no impact on our
financial statements.
In June 2005, the FASB issued
SFAS No. 154, Accounting Changes and Error
Corrections: a Replacement of Accounting Principles Board
Opinion No. 20 and FASB Statement No. 3, or
SFAS No. 154. SFAS No. 154 requires
retrospective application for voluntary changes in accounting
principle unless it is impracticable to do so. Retrospective
application refers to the application of a different accounting
principle to previously issued financial statements as if that
principle had always been used. SFAS No. 154’s
retrospective application requirement replaces APB No 20’s
requirement to recognize most voluntary changes in accounting
principle by including in net income (loss) of the period of the
change the cumulative effect of changing to the new accounting
principle. SFAS No. 154 defines retrospective
application as the application of a different accounting
principle to prior accounting periods as if that principle had
always been used or as the adjustment of previously issued
financial statements to reflect a change in the reporting
entity. SFAS No. 154 also redefines
“restatement” as the revising of previously issued
financial statements to reflect the correction of an error. The
requirements of SFAS No. 154 are effective for
accounting changes made in fiscal years beginning after
December 15, 2005 and will only impact our financial
statements in periods in which a change in accounting principle
is made.
In March 2005, the FASB issued
Interpretation No. 47, Accounting of Conditional Asset
Retirement Obligations, or FIN 47. FIN 47
clarifies that an entity must record a liability for a
“conditional” asset retirement obligation if the fair
value of the obligation can be reasonably estimated. FIN 47
also clarifies when an entity would have sufficient information
to reasonably estimate the fair value of an asset retirement
obligation. FIN 47 is effective no later than the end of
the first reporting period ending after December 15, 2005.
The adoption of FIN 47 did not have an impact on our
financial statements.
In December 2004, the FASB issued
SFAS No. 153, or SFAS No. 153, Exchanges
of Nonmonetary Assets — an amendment of Accounting
Principles Board Opinion No. 29, or APB No. 29.
The guidance in APB No. 29, Accounting for Nonmonetary
Transactions, is based on the principle that gains or losses
on exchanges of nonmonetary assets may be recognized based on
the differences in the fair values of the assets exchanged. The
guidance in APB 29, however, included certain exceptions to
that principle which allowed the asset
received to be recognized at the book value of the asset
surrendered. SFAS No. 153 amends APB No. 29 to
eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for
“exchanges of nonmonetary assets that do not have
commercial substance.” A nonmonetary exchange has
commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange.
The provisions of SFAS No. 153 should be applied
prospectively, and are effective for our company for nonmonetary
asset exchanges occurring from the third quarter of 2005. The
adoption of this statement did not have an impact on our
financial statements.
In July 2006, the FASB issued FASB
Interpretation No. 48, or FIN 48, Accounting for
Uncertainty in Income Taxes — an interpretation of
FASB Statement No. 109, which clarifies the accounting
for uncertainty in tax positions. FIN 48 requires that we
recognize in our financial statements, the impact of a tax
position, if that position is more likely than not of being
sustained on audit, based on the technical merits of the
position. The provisions of FIN 48 are effective as of the
beginning of our 2007 fiscal year, with the cumulative effect,
if any, of the change in accounting principle recorded as an
adjustment to opening retained earnings. We are currently
evaluating the impact of adopting FIN 48 on our financial
statements.
Quantitative and Qualitative
Disclosures about Market Risk
The primary objective of our investment
activities is to preserve our capital for the purpose of funding
operations while at the same time maximizing the income we
receive from our investments without significantly increasing
risk. To achieve these objectives, our investment policy allows
us to maintain a portfolio of cash equivalents and short-term
investments in a variety of securities, including money market
funds and corporate debt securities. Due to the short-term
nature of our investments, a 1% change in market interest rates
would have an adverse impact on the total value of our portfolio
of less than $250,000 as of June 30, 2006.
To date we have not recognized any
revenue, and have not entered into any material agreements,
denominated in other than U.S. dollars. Accordingly we
believe we have no material exposure to risk from changes in
foreign currency exchange rates.
We are a medical device company focused on
developing and commercializing a novel therapeutic treatment for
asthma. We have developed proprietary technology designed to
deliver controlled thermal energy to the airways of adult
patients to reduce the mass of airway smooth muscle, in a
procedure called Bronchial
Thermoplastytm.
The contraction of airway smooth muscle in the lung airways is a
main cause of airway constriction that leads to difficulty in
breathing during asthma attacks. We believe that reducing airway
smooth muscle in asthma patients can decrease the ability of the
airways to constrict, thereby providing a significant
therapeutic benefit to those asthma patients whose symptoms are
poorly controlled despite using conventional asthma medications.
We have developed a device named the
Alair®
System specifically to perform the Bronchial Thermoplasty
procedure. The Alair System is composed of two primary
components: a proprietary, single-use, small diameter catheter
with an expandable tip, the Alair Catheter; and a radio
frequency controller, the Alair RF Controller. During Bronchial
Thermoplasty, a pulmonologist inserts the Alair Catheter into
the patient’s lung airways through the working channel of a
bronchoscope. A bronchoscope is a commonly used instrument with
a small light and camera that is inserted through the nose or
mouth. Once in place, the pulmonologist expands the tip of the
Alair Catheter and uses the Alair RF Controller to deliver
thermal energy (heat) to the airway walls. This thermal energy
reduces the mass of airway smooth muscle, and we believe that it
does not have any meaningful lasting effect on other airway
tissues. Bronchial Thermoplasty is performed under conscious
sedation with local anesthesia on an outpatient basis in three
30-60 minute
procedures, each spaced at least three weeks apart.
Physicians had administered Bronchial
Thermoplasty to approximately 150 asthma patients in our
clinical trials as of August 31, 2006. We believe that the
data from our completed trials indicate that Bronchial
Thermoplasty performed using the Alair System, when combined
with conventional asthma medications, offers adult patients with
moderate-to-severe asthma a significant improvement in the
control of their asthma symptoms, enhancing their quality of
life. We also believe that Bronchial Thermoplasty provides a
persistent reduction in asthma symptoms for moderate-to-severe
asthma patients, based primarily on one-year follow-up data from
more than 85 patients in our clinical trials. We have followed
patients in our completed trials for at least one year
post-treatment, and have four-year data for 16 patients. In
addition, we believe that our clinical trials to date have
indicated a favorable safety profile for the Bronchial
Thermoplasty procedure. The vast majority of adverse events have
been mild to moderate in severity and are of the type normally
seen in asthma patients undergoing standard bronchoscopic
procedures. These adverse events were resolved within one week,
on average, using conventional drug therapies.
We are currently enrolling severe asthma
patients in a clinical trial under an Investigational Device
Exemption, or IDE, granted by the U.S. Food and Drug
Administration, or FDA. We have designed this trial, named the
AIR2 Trial, to evaluate the safety and efficacy of
Bronchial Thermoplasty performed using the Alair System in
severe asthmatics who are still symptomatic despite taking high
doses of conventional asthma medications. We currently
anticipate using this trial as the basis for an application for
premarket approval, or PMA, with the FDA. We anticipate that we
will file our PMA application by the end of 2007.
Market Opportunity
Asthma is a chronic respiratory disease
characterized by airway hyperresponsiveness, which is a
condition in which airways narrow excessively or too easily in
response to a stimulus, as well as inflammation of the airways
and excess mucus production. Asthma episodes or attacks cause
narrowing of the airways, which makes
breathing difficult. An asthma attack leaves the victim gasping
for breath as the airways become constricted, inflamed and
clogged with thick, sticky secretions. Asthma attacks may occur
at irregular intervals and may be triggered by allergens or
irritants that are inhaled into the lungs or by stress, cold
air, viral infections or other stimuli. Asthma attacks have a
significant impact on a patient’s life, limiting
participation in many activities. In severe cases, asthma
attacks can be life threatening. The prevalence of asthma has
grown in recent decades, and there is no known cure.
According to the American Lung
Association, there were approximately 20 million Americans
with asthma in 2002, 14 million of whom were adults. Asthma
resulted in approximately 1.9 million emergency room visits
in 2002, of which approximately 484,000 resulted in
hospitalization. The estimated annual cost of asthma in the
United States is approximately $16.1 billion, including an
estimated $11.5 billion in direct costs such as asthma
medications, physician office visits, emergency room visits and
hospitalizations.
Asthma is commonly classified by varying
degrees of severity, from mild to severe. We estimate that at
least 15% of adult asthma patients, or 2 million adults in
the United States, suffer from severe asthma. Many of these
patients experience frequent and serious symptoms despite
regular treatment with high doses of asthma medications.
Although these patients represent a minority of asthma patients,
we believe that they account for a disproportionate amount of
the overall asthma-related costs in the United States. According
to data published in the June 2003 issue of the Journal of
Allergy and Clinical Immunology, the average annual per patient
treatment cost for severe asthma patients is more than double
the average annual per patient treatment cost for all
asthmatics. We believe that these increased costs reflect the
inability of the existing standard of care to control asthma in
severe asthma patients, resulting in a high volume of
unscheduled physician office visits, expensive emergency room
visits and hospitalizations.
Existing Asthma Therapies and Their
Limitations
Patients and physicians currently manage
asthma with a combination of stimulus avoidance and medications.
Stimulus avoidance is generally difficult or impractical. For
example, asthma patients cannot always avoid asthma triggers,
such as cold weather, viral infections and emotional stress, or
may be unwilling to give up their asthma triggers, such as pets
and certain foods. While asthma medications have been
successfully used to control symptoms for a majority of asthma
patients, their effectiveness is often limited in more severe
asthmatics.
Asthma medications can be used to provide
short-term relief for acute asthma symptoms, and to provide
longer-term control, requiring daily or regular use by patients
with persistent asthma. Asthma medications for short-term relief
are referred to as rescue medications, and asthma medications
for longer-term control are referred to as maintenance
medications.
There are two major groups of asthma
medications:
•
Anti-Inflammatory
Drugs. These drugs reduce the
amount of inflammation in the lung airways. These drugs are used
as a preventive measure to lessen the risk of asthma attacks, or
exacerbations, and therefore typically serve as maintenance
medications. Corticosteroids are one type of anti-inflammatory
drug used for controlling asthma. Corticosteroids are
administered in two ways — inhaled via an inhaler,
known as inhaled corticosteroids, or ICS, and orally via pill,
known as oral corticosteroids, or OCS. Examples of
anti-inflammatory drugs include Flovent (ICS) and prednisone
(OCS).
Bronchodilators.
These drugs act principally to dilate the airways by relaxing
airway smooth muscle. Bronchodilators reverse and/or inhibit
airway constriction and related symptoms of acute asthma, but do
not reverse airway inflammation or reduce airway
hyperresponsiveness. Bronchodilators come in two basic
forms — maintenance medications such as long-acting
beta agonists, or LABA, which serve to produce prolonged
bronchodilation, and short-acting rescue medications, which can
alleviate the symptoms of asthma attacks. Examples of
bronchodilators include the maintenance medication Serevent and
the rescue medication albuterol.
These types of medications were first
introduced decades ago, and much of the subsequent development
has been focused on identifying doses and combinations of these
medications that further alleviate symptoms generally, that
improve convenience for patients (and accordingly improve
compliance) by reducing the frequency of taking medications, or
that are tailored to particular classes of patients. For
example, Advair is a combination of LABA and ICS that reduces
the total number of inhalations or “puffs” required
per day. In addition, recent introductions of novel asthma
medications include Xolair, an injectable antibody designed to
treat allergic asthma, and Singulair, a member of a class of
anti-inflammatory drugs called leukotriene inhibitors.
Asthma severity is determined by the
extent of symptoms and measures of lung function in combination
with the level of maintenance and rescue medications taken.
Widely used treatment protocols classify asthma patients into
four levels of severity according to the persistence of their
asthma symptoms and recommend that patients pursue a regimen
that includes doses of ICS and LABA that increase in strength as
severity increases:
Recommended Maintenance
Average Total
Asthma Severity
Definition
Medication
Annual Cost*
Mild Intermittent
Daytime symptoms two days per week or less; nighttime symptoms
two nights per month or less
No daily medication needed
No data
Mild Persistent
Daytime symptoms more often than two days per week but less than
daily; nighttime symptoms more often than two times per month
Low dose ICS
$
2,646
Moderate Persistent
Daytime symptoms daily; nighttime symptoms more often than one
night per week
Reflects total direct and indirect costs,
including medications, hospitalizations and emergency room
visits and other costs, in 1998 dollars, according to a study
published in the Journal of Allergy and Clinical Immunology in
June 2003.
Because mild intermittent asthmatics do
not require maintenance medication, throughout this prospectus
we refer to three categories, mild, moderate and severe, which
correlate to mild persistent, moderate persistent and severe
persistent, respectively, as defined by these guidelines.
Despite the abundance of medications to
treat asthma, there are significant limitations associated with
the existing standard of care, including:
•
Limited Efficacy in Severe
Asthmatics. Even with standard
of care medical management, a number of recent surveys indicate
that symptoms are still poorly controlled in severe asthma
patients, and that this patient population often continues to
experience frequent and serious symptoms despite taking high
doses of asthma medications.
Side
Effects. Existing asthma
medications introduce the possibility of serious side effects.
For example, side effects of corticosteriods include
osteoporosis, skin thinning and adrenal suppression. In
addition, the possible side effects of short-acting rescue
medications include rapid heartbeat, skeletal muscle tremor,
potassium deficiency, increased lactic acid, headache and
hyperglycemia. As with any medication, side effects become a
greater concern as asthma medication dosages increase.
•
Significant Ongoing
Costs. Because the existing
standard of care often results in poor control in severe
asthmatics, the severe asthma patient often requires expensive
unscheduled physician office visits, emergency room visits and
hospitalizations, and incurs significantly higher annual costs
for asthma medications compared to the average asthma patient.
Not all of these costs are reimbursed by insurance, and those
that are covered are often passed back to patients in the form
of higher insurance premiums.
These shortfalls, as well as the
inconvenience of taking medication on a daily or regular basis,
have resulted in poor patient compliance. According to a 2005
report issued by the Global Initiative for Asthma, noncompliance
in taking asthma maintenance medications is estimated at
approximately 50%. We believe that non-compliance, in particular
by severe asthmatics, may be an additional contributing factor
to the increased number of emergency room visits and
hospitalizations for these patients.
As a result of these limitations, we
believe there is a significant opportunity to improve the
standard of care for many asthma patients by better controlling
their asthma symptoms while, at the same time, reducing the
overall cost of care for these patients.
The Role of Airway Smooth Muscle in
Asthma
Airway smooth muscle consists of muscle
tissue within the walls of the lung airways. Contraction of the
airway smooth muscle is a main cause of airway constriction that
leads to difficulty in breathing during asthma attacks. Because
asthma patients may experience frequent contraction of airway
smooth muscle as a result of their condition, these patients
experience an increase in airway smooth muscle mass. This
increase, together with inflammation of the airways, combines to
thicken airway walls, which decreases the inside diameter of the
airways. This decrease in airway diameter causes increased
resistance to airflow and further contributes to difficulty in
breathing during asthma attacks.
While we do not believe that airway smooth
muscle serves an important role in respiration, it is possible
that reduction of airway smooth muscle, and the development of a
thin layer of collagen matrix that grows in place of airway
smooth muscle, could have negative consequences to patient
health.
Bronchodilator medications target the
contraction of airway smooth muscle. However, the ability of
these medications to reduce hyperresponsiveness has been limited
in severe asthma patients. Consequently, given these
limitations, we believe that an alternative approach to
targeting airway smooth muscle may improve the existing standard
of care in patients with asthma. More specifically, we believe
that by reducing the mass of airway smooth muscle in asthma
patients, we will be able to reduce the ability of airway smooth
muscle to constrict. By reducing the ability of the airway
smooth muscle to constrict, we believe that we will be able to
provide significant and persistent therapeutic benefits to
asthma patients.
The Asthmatx Solution
We have developed a novel catheter-based
procedure for the treatment of asthma known as Bronchial
Thermoplasty. Bronchial Thermoplasty is an outpatient procedure
designed to help control asthma by reducing the mass of airway
smooth muscle. Using the Alair System, thermal energy is
delivered to the airway wall, heating the tissue in a controlled
manner in order to reduce the mass of airway smooth muscle.
Following application of this heat, a portion of the airway
smooth muscle tissue is replaced by a thin layer of newly formed
collagen. We believe that reducing airway smooth muscle in
asthma patients can decrease the ability of the airways to
constrict, thereby reducing the frequency and severity of asthma
symptoms. We expect Bronchial Thermoplasty to complement
maintenance medications in raising the level of asthma control
and improving the quality of life of patients with
moderate-to-severe asthma. In addition, we expect Bronchial
Thermoplasty to reduce the need for unscheduled physician office
visits, emergency room visits, hospitalizations and reliance on
short-term rescue medications by severe asthmatics.
The Alair System has evolved through
multiple cycles of development and incorporates feedback from
physicians and patients who have participated in our clinical
trials to optimize system functionality and ease of use. The
system is comprised of two primary components:
•
Alair
Catheter. The Alair Catheter is
a long, flexible device with an expandable electrode basket
array attached at one end and a deployment handle at the other.
This proprietary device is designed to be delivered through the
working channel of a standard bronchoscope. The electrode basket
array is deployed to contact the walls of the airways and to
deliver thermal energy. The Alair Catheter is a single-use
device.
•
Alair Radio Frequency
Controller. The Alair RF
Controller is a compact electronic instrument which generates
controlled radio frequency, or RF, energy. Radio frequency
energy is commonly used in electrosurgical applications such as
cutting or coagulating tissue. As energy is transferred from the
electrode to the tissue, an increase in resistance causes the RF
energy to be converted to thermal energy (heat). We have
developed a proprietary set of control parameters and algorithms
that are designed to deliver the correct intensity and duration
of thermal energy for our asthma treatment application that is
sufficient to reduce the mass of airway smooth muscle tissue,
while limiting long-term impact to surrounding tissues. The
Alair RF Controller’s safety parameters also are designed
to deliver energy only when conditions are appropriate. For
instance, energy cannot be delivered until all accessories are
properly connected, and if the electrode array is not in proper
contact with the airway wall, the front panel notifies the
pulmonologist to reposition the array to make proper contact.
During Bronchial Thermoplasty, a
pulmonologist introduces a standard flexible bronchoscope
through a patient’s nose or mouth, and into the lung
airways. The small diameter
Alair®
Catheter is delivered into the airways through the working
channel of the bronchoscope, and the tip of the Alair Catheter
is expanded to contact the walls of targeted airways. The four
arms of the expanded catheter basket array come in contact with
and fit snugly against the airway wall. The expanded basket
array then delivers controlled thermal energy for about ten
seconds to heat the airway smooth muscle. A contiguous series of
thermal energy applications are needed to treat the larger
conducting airways that are accessible with a bronchoscope. Once
the treatment session is completed, the device and the
bronchoscope are removed. The entire procedure is performed on
an outpatient basis under conscious sedation with local
anesthesia, in three 30-60 minute procedures each spaced at
least three weeks apart.
Alair Catheter in the Airway
By providing a persistent reduction in the
mass of airway smooth muscle, Bronchial Thermoplasty can
decrease the ability of the airways to constrict during asthma
attacks, improving air flow in the lungs. Based on preclinical
and clinical results to date, we do not believe that Bronchial
Thermoplasty has any significant lasting effect on other airway
tissues. Although the airway’s ciliated epithelium, which
helps direct the flow of mucus in airways,
is partially injured during Bronchial Thermoplasty, we found in
our preclinical safety study that this tissue healed within
weeks after treatment with the Alair System.
We believe that Bronchial Thermoplasty
performed with the Alair System offers the following benefits to
patients, doctors, hospitals and payors:
•
Improved Standard of
Care. We believe that the
severe asthmatic population is substantially underserved with
the existing standard of care. Many of these patients experience
frequent and serious symptoms despite regular treatment with
high doses of asthma medications. Accordingly, we believe that
Bronchial Thermoplasty, together with existing asthma
maintenance medications, has the potential to offer many adult
asthma patients an opportunity for a substantial increase in
control of their asthma symptoms and improvements in quality of
life.
•
Persistent
Effect. Current asthma
medications act to alleviate the symptoms of asthma, but
typically require ongoing use. We believe that Bronchial
Thermoplasty is the first procedure that provides a persistent
treatment for asthma.
•
Simple, Convenient
Procedure. Bronchial
Thermoplasty performed using the Alair System is an outpatient
treatment performed in three treatment sessions, each 30-60
minutes in length. The procedure is performed under conscious
sedation with local anesthesia. The Alair System features
several automatic safety and control algorithms designed to
limit the delivery of energy for safety purposes. Since
Bronchial Thermoplasty is performed through a bronchoscope, a
device which pulmonologists use regularly for diagnostic
purposes and to clear airway obstructions, we believe that, with
proper training, they will be able to quickly learn how to use
the Alair System.
•
Improved Economics for Patients,
Providers and Payors. We
believe Bronchial Thermoplasty will reduce direct and indirect
healthcare costs of moderate-to-severe asthma patients by
reducing the need for unscheduled physician office visits,
emergency room visits and hospitalizations.
Our Strategy
Our objective is to become the leading
provider of therapeutic medical devices for patients who suffer
from asthma. The key elements of our strategy to achieve this
objective include:
•
Obtain FDA Approval to Market the Alair
System for the Treatment of
Asthma. To date, we have
gathered data from three clinical trials in asthma patients,
which we believe show an encouraging safety and efficacy
profile. We have applied the experience gained from these
studies and have consulted with the FDA in designing our
pivotal-IDE study, the AIR2 Trial. We commenced the AIR2 trial
in October 2005 and are currently enrolling patients with severe
asthma. If the results from this clinical trial are favorable,
we intend to seek approval from the FDA to market the Alair
System in the United States. The breadth of approval that
we will seek will be determined based on the results of this and
prior trials. However, it is possible that the FDA could limit
any approval to a smaller population of asthma patients than we
request. We intend to focus our initial marketing efforts
primarily on severe asthma patients, and to explore
opportunities over the longer term to extend our focus to those
moderate asthma patients whose symptoms are poorly controlled
despite using conventional asthma medications.
Establish Awareness of Bronchial
Thermoplasty as a Safe and Effective Treatment for
Asthma. Bronchial Thermoplasty
is a novel treatment for asthma patients. We believe that it
will be important to create broad awareness of Bronchial
Thermoplasty and its benefits among the clinical community and
relevant patient populations. We plan to collaborate with
opinion leaders at key medical institutions and generate and
publish clinical and scientific data that demonstrate the safety
and efficacy of Bronchial Thermoplasty. In particular, the AIR2
Trial uses a quality of life measure as the primary endpoint,
which we believe may provide us with a significant marketing
advantage. We have presented clinical data at leading
conferences, and researchers have published peer reviewed
articles describing Bronchial Thermoplasty in leading journals.
•
Establish Third-Party Coverage and
Reimbursement for Bronchial
Thermoplasty. We plan to seek
specific and appropriate coverage for Bronchial Thermoplasty
from private insurers and governmental payors, such as Medicaid
and Medicare. In seeking coverage and reimbursement, we intend
to focus on the potential for Bronchial Thermoplasty to reduce
the need for unscheduled physician office visits, emergency room
visits and hospitalizations in the severe asthma patient
population, which we believe will significantly reduce total
costs on the healthcare system. We have designed our clinical
trials to demonstrate these potential cost benefits to
third-party payors. We plan to assist patients in securing
coverage and appropriate reimbursement for Bronchial
Thermoplasty from third-party payors through a dedicated
reimbursement group and the provision of detailed supporting
documentation.
•
Commercialize the Alair System Through
a Direct Sales Force. We plan
to build a specialized direct sales force to call directly on
the pulmonologists who will use the Alair System and educate and
influence adoption of our technology. To complement our sales
efforts, we intend to employ clinical managers who will educate,
train and provide support to pulmonologists. Our marketing and
sales teams will implement marketing programs targeted at the
primary care physicians and allergists who treat a significant
number of asthmatics. Following the anticipated regulatory
approval and launch of the Alair System in the United States, we
will explore opportunities to distribute the Alair System in
selected European and Asian markets through strategic
relationships with established participants in those markets, or
through a direct sales presence.
•
Leverage Our Technology, Technical
Expertise, and Strong Intellectual Property Position to
Establish and Extend Our Market Position in Asthma Treatment and
to Explore Treatments of Other Lung
Disorders. We have built a
broad patent portfolio that can assist us in establishing and
extending our market position in asthma treatment. We have also
built strong in-house research and engineering competencies that
have allowed us to develop new concepts. We intend to continue
to develop our intellectual property portfolio, and to explore
the feasibility of other applications for our technology so that
we can target unmet needs in other lung disorders.
Clinical Development Program
Our clinical trials have been designed to
establish the safety and efficacy of Bronchial Thermoplasty
performed using the Alair System. We are focused on obtaining
premarket approval from the FDA to market the Alair System for
use in performing Bronchial Thermoplasty for the treatment of
asthma in the United States. In addition, our trials have been
designed and executed to establish credibility with healthcare
providers who would recommend and perform this procedure and
payors that would provide third-party reimbursement for this
procedure. A PMA application must be supported by valid
scientific evidence to demonstrate to the FDA’s
satisfaction the efficacy and safety of the device.
Trial Design
Considerations. A clinical
diagnosis of asthma is dependent on a patient history and
physical examination, review and measurement of patient reported
symptoms and quality of life, and pulmonary function tests.
Accordingly, we have designed our clinical trials around a
combination of patient-reported outcomes, defined as measures of
a patient’s health status that are provided directly by the
patient according to established protocols without
interpretation by a physician, as well as several pulmonary
function tests.
Primary and Secondary
Endpoints. The endpoints
that we use most often in our clinical trials include:
•
AQLQ
Score. The Asthma Quality of
Life Questionnaire, or AQLQ, is a broadly accepted asthma
disease-specific questionnaire that measures the functional
impairments (including assessment of symptoms, activity
limitation, emotional function and environmental stimuli) that
are most important for adults with asthma. Under the AQLQ,
impairments are assessed on a
7-point scale, with 1
indicating the poorest quality of life.
•
Exacerbations.
Exacerbations, or the incidence of asthma attacks, may be
classified as mild or severe. We define a mild exacerbation as
an attack resulting in two consecutive days with a 20% decrease
in morning peak expiratory flow, an attack requiring increased
use of rescue medication above a specified threshold for two
consecutive days, or an attack resulting in awakening at night
due to asthma symptoms for two consecutive days. We define a
severe exacerbation as an attack resulting in two consecutive
days with a 30% decrease in morning peak expiratory flow, or an
attack requiring treatment with OCS.
•
Methacholine Challenge
Testing. Methacholine challenge
testing is a measure of airway responsiveness to methacholine,
which causes airway constriction in a manner similar to an
asthma attack. The test typically takes the form of an
increasing dosage of inhaled methacholine, doubled at each test
run. After each dose, airway constriction is measured by
measuring
FEV1.
The concentration of methacholine needed to lower
FEV1
by 20% from the patient’s baseline level of lung function
is known as the
PC20
value. The results of this test are expressed in terms of the
number of doublings, or the number of times the dose is doubled
to achieve this reduction of
FEV1.
To obtain an accurate
PC20
reading, this test is administered only after patients have
ceased taking LABA for at least 48 hours.
•
PEF (peak expiratory
flow). PEF measures how fast a
person can exhale air. The measurement of peak expiratory flow,
is dependent on the patient’s effort, and therefore the
highest of three measured values is reported. This test requires
a peak expiratory flow meter, a small handheld device designed
for this measure. The severity of asthma is reflected in the
baseline PEF as well as its variability across 24 hours.
Ideally, PEF should be measured first thing in the morning when
values are typically near their lowest, and again late at night,
when values are typically at their highest. This information is
recorded by the patient in a daily diary.
•
FEV1.
FEV1
is the measurement of forced expiratory volume in
one second. Measurement of
FEV1
is performed during a forced expiratory maneuver using a lung
function device called a spirometer. The outputs from this
procedure can vary depending on the effort put forth by the
patient and the patient’s compliance with instructions for
the procedure, and therefore the highest of three measured
values is reported.
•
Symptom-Free Days
(%SFD). %SFD is the percentage
of days when patients report no wheeze, cough, breathlessness or
mucus during the daytime, and no wheeze, cough or
awakenings due to breathing symptoms
during the nighttime, as recorded by the patient in a daily
diary.
•
Use of Rescue
Medication. Use of rescue
medication refers to the number of puffs of a short-acting
bronchodilator or other rescue medication used to relieve acute
asthma symptoms, as recorded by the patient in a daily diary.
We believe the use of patient-reported
outcomes, such as the AQLQ score, yields results that are
clinically meaningful to healthcare providers, patients and
payors since the results reflect the total impact of the disease
on patient lives. According to FDA draft guidance issued in
February 2006, patient-reported outcomes are increasingly being
used in clinical trials for a variety of medical products
because there is a desire to know the patient’s perspective
about the effectiveness of a treatment. Moreover, a systematic
assessment of the patient’s perspective may provide
valuable information that can be lost when that perspective is
filtered through a clinician’s evaluation of the
patient’s response to clinical interview questions.
Patient-reported outcomes have been used successfully as primary
and secondary endpoints in many clinical trials. The FDA granted
an IDE for our ongoing AIR2 Trial with the AQLQ score as the
primary endpoint. We believe that the use of a quality of life
measure in our AIR2 Trial may provide us with a significant
marketing advantage.
However, clinical trials that use
patient-reported outcomes as endpoints must be carefully
designed to minimize the risk of patient and investigator bias.
Patients and providers who are aware of the treatment may be
more likely to report subjective improvement or side effects
expected from the treatment. To guard against these risks,
clinical studies often utilize blinded controls, in which case
the patient and perhaps the patient’s physician do not know
which treatment is being provided. One method to implement a
blinded control is a sham-controlled study, in which an inactive
treatment is designed to mimic as closely as possible the
treatment being evaluated in the trial. We have designed our
currently ongoing AIR2 Trial as a double-blind, sham-controlled
trial.
We also rely on several pulmonary function
efficacy endpoints in our clinical trials, and have attempted to
focus on those that can provide what we believe to be the best
measures of efficacy of the Bronchial Thermoplasty procedure.
Bronchial Thermoplasty reduces the mass of airway smooth muscle
and is intended to decrease the ability of the airways to
constrict in response to asthma triggers. The methacholine
challenge test, a secondary endpoint in our ongoing AIR2 Trial,
employs a stimulus to trigger constriction of the airway,
thereby simulating an asthma attack. While this test has
limitations and is difficult or impossible to perform in
patients with very low
FEV1,
we believe it is one suitable measure for determining the
efficacy of Bronchial Thermoplasty. While
FEV1
is used as part of the methacholine challenge test, it is also
used as the primary efficacy endpoint in clinical studies for
many asthma drug therapies without the addition of methacholine.
Because we do not expect Bronchial Thermoplasty to change the
airway diameter significantly in the absence of a challenge
(when there is no asthma attack), we do not expect Bronchial
Thermoplasty to have a significant impact on
FEV1.
We generally evaluate our clinical data by
indicating whether or not they are statistically significant.
Statistical significance is measured by the use of a
p-value, which measures
the likelihood that a difference between the treatment group and
control group in a particular study is due to random chance. A
p-value of less than
0.05 means the chance that the difference is due to random
chance is less than 5% and is a commonly accepted threshold for
denoting a statistically significant difference.
In some cases, we also indicate whether a
result is “clinically meaningful,” which generally
means improvement in a specific measure sufficient to cause a
meaningful difference to a patient or to a healthcare provider.
Within this prospectus, where the group of patients receiving
Bronchial
Thermoplasty experiences an improvement in
AQLQ that is at least 0.5 points higher than the change observed
in a control group of patients, we refer to this result as a
clinically meaningful improvement.
Safety Considerations
We evaluate safety in both the short term
and over the longer term by monitoring adverse events, which may
range from coughing or wheezing to hospitalizations and other
serious events. Short-term adverse events are those that occur
during the treatment period, which we define as the period
beginning with the initial Bronchial Thermoplasty session and
ending six weeks after the final treatment session.
Longer-term adverse
events are those occurring after this period. Adverse events are
typically classified as mild, moderate or severe, and are
monitored carefully as part of our clinical trials. In
particular, the occurrence of hospitalizations is evaluated as a
measure of the overall safety of the device. Furthermore, in
some of our trials, we have classified adverse events as
device-related if we believe they were caused by the Alair
System as opposed to those that we believe were caused by the
bronchoscopy procedure itself. In addition, we have also
classified adverse events as those that are respiratory-related
or non-respiratory related. As an additional measure of
longer-term safety, we also evaluate whether any deterioration
in
FEV1
has occurred among patients receiving Bronchial Thermoplasty.
Further, in some cases we conduct a blinded analysis of
computerized axial tomography scans, or CT scans, taken before
and after the administration of Bronchial Thermoplasty, to
identify any airway changes that may have occurred in the
airways.
Clinical Trials
The first clinical trial of the Alair
technology began in January 2000, and to date we have completed
several preclinical studies and clinical trials related to the
Alair System. All of our clinical trials have been overseen by a
Data and Safety Monitoring Board consisting of a minimum of
three physicians who are experts in asthma treatment. Data from
our clinical trials show an encouraging efficacy and safety
profile for the Bronchial Thermoplasty procedure. The experience
gained from these trials has provided the basis for the design
of our currently ongoing pivotal-IDE trial, the AIR2 Trial,
which we commenced in October 2005. If the results from this
clinical trial are favorable, we intend to seek approval from
the FDA to market the Bronchial Thermoplasty procedure using the
Alair System in the United States and to seek additional
regulatory approvals outside of the United States.
The table below and the following
discussion summarize the clinical trials that we have completed
and that are currently ongoing:
Primary
Number of
Title
Objective
Description
Sites
Patients
Status
Lobectomy Study
Safety
Safety study in non-asthmatic patients to show tolerability by
humans and to evaluate histology
1
8
Completed
Feasibility Study
Safety and Feasibility
Safety study in patients with mild-to- severe asthma; follow-up
planned to five years
2
16
Enrollment and procedures completed; follow-up ongoing
AIR Trial
Efficacy and Safety
Randomized trial designed to evaluate efficacy and safety in
patients with moderate-to-severe asthma; follow-up out to one
year
11
109
Completed
AIR Extension Study
Safety
Long term (3 year) follow-up of consenting patients who
completed the AIR Trial
Randomized trial designed to evaluate safety of the procedure in
patients with severe asthma; follow-up out to one year
8
32
Enrollment, procedures and follow-up completed**
AIR2 Trial
Efficacy and Safety
Randomized, double-blind, sham- controlled pivotal-IDE trial
designed to evaluate efficacy and safety in patients with severe
asthma; follow-up of BT group patients planned to five years
40 (planned)
300
(anticipated)
Enrollment ongoing
*
Estimated based on participation rates, 41
patients having participated, as of June 30, 2006.
**
Although
follow-up has been
completed, patient data from this trial are still being
reviewed, and therefore the results of some measures in this
trial are not final. Results and conclusions are based on data
reviewed to date.
Safety Study in Lobectomy
Patients
In January 2000, we commenced a safety
study on lobectomy patients in order to evaluate the use of
thermal energy in the airways. A lobectomy is a surgical
procedure to remove a part of a lung. We conducted this study at
two sites in Canada, and completed enrollment of this study in
May 2000.
We enrolled eight patients in this study.
Patients received a treatment with the Alair technology one to
three weeks before a scheduled lobectomy in which treated
tissues were excised from the lung. Treatment with the Alair
technology was administered during routine preoperative
bronchoscopy in patients who were scheduled to undergo lung
resection for lung cancer. All patients tolerated the treatment
well, and there were no unanticipated adverse events as a result
of the Alair treatment. Samples of the treated and excised lung
tissue were then analyzed, and this histological analysis helped
confirm that the effect of Alair treatment on the airways is
controlled and reduces the mass of airway smooth muscle. This
analysis also confirmed a temperature dependent effect on airway
smooth muscle in humans with more evidence of reduction at
65°C than at 55°C. The results of the study were
published in the June 2005 issue of CHEST, a peer reviewed
journal.
Feasibility Study
Overview
In November 2000, we commenced a
feasibility study to examine the safety and preliminary efficacy
of Bronchial Thermoplasty for the treatment of asthma in
patients on ICS, and we completed enrollment in June 2002. We
conducted this study at two sites in Canada. We evaluated safety
by studying adverse events, stability of
FEV1
and reviewing CT scans following treatment. We measured efficacy
through the analysis of changes in the methacholine challenge
test, PEF,
FEV1,
symptom-free days and use of rescue medications.
We enrolled 18 patients in this
study, 16 of which received Bronchial Thermoplasty treatment.
The severity of asthma in these patients ranged from mild to
severe. We designed this study to include daily diary
information through three months with
follow-up evaluations
of the methacholine challenge test,
FEV1,
CT scans and safety annually for five years. All
16 patients have completed a three-year
follow-up evaluation
and 11 patients have completed a four-year
follow-up
evaluation.
We published the results from this
clinical study in the February 2006 edition of the American
Journal of Respiratory Critical Care Medicine. The results of
this study included the following:
•
Methacholine Challenge
Testing. We reported
statistically significant increases in the mean methacholine
measures at 12 weeks, one year, and two years after
treatment. The methacholine challenge testing yielded averages
of 2.4 doublings of methacholine concentration over
baseline at 12 weeks after treatment (16 patients;
p<0.001), 3.0 doublings at one year after treatment
(7 patients; p=0.002), 2.3 doublings at two years
after treatment (13 patients; p<0.001),
0.9 doublings at three years after treatment
(13 patients; p<0.114), and 1.1 doublings at four
years after treatment (11 patients; p=0.057).
•
PEF.
We reported statistically significant increases in PEF levels
measured at 12 weeks with an average improvement over
baseline values for morning PEF (p=0.01) and evening PEF
(p=0.007).
•
FEV1.
Pre-bronchodilator
FEV1
values did not increase or decrease meaningfully from baseline
to 12 weeks and one, two, three and four years after
treatment.
•
Symptom-Free
Days. We reported a
statistically significant (p=0.015) increase in the average
percentage of symptom-free days for all patients at the 12-week
follow-up (73% SFD) compared to baseline (50% SFD).
•
Use of Rescue
Medications. Use of rescue
medication was low at baseline in this study and no
statistically significant change from baseline in rescue
medication use was observed at the
12-week
follow-up.
Safety Data
None of the 16 patients who received
Bronchial Thermoplasty experienced any severe device-related
adverse events. During the treatment phase, 84% of the reported
device-related adverse events were mild and 16% were moderate.
There were no unanticipated device-related adverse events.
All patients experienced one or more mild or moderate
adverse events, such as wheeze, cough, difficulty breathing,
increased mucus, chest pain or fever. On average, these side
effects occurred within 1.7 days of treatment and were
resolved within 4.6 days of onset, in each case with
standard treatment techniques. The study did not yield any
deterioration from baseline in
FEV1
for four years following treatment. Moreover, we did not observe
any clinically meaningful adverse findings through evaluation of
CT scans and clinical assessment for three years following
treatment.
Conclusions
We determined Bronchial Thermoplasty to
have achieved our primary safety objective based on what we
believe to be an acceptable profile of adverse events observed
in the study. In further support of this safety determination,
this study yielded no significant deterioration of
FEV1
levels over four years after treatment. There were no adverse
findings upon review of CT scans that we believe to be
clinically meaningful. With respect to efficacy, we observed
significant improvements in morning and evening peak flows and
percent symptom-free days at three months after treatment.
Moreover, we found Bronchial Thermoplasty to be effective in
reducing airway hyperresponsiveness based on improvements in
methacholine challenge testing out to four years after treatment.
In November 2002, we commenced a
controlled, unblinded, randomized, multi-center clinical trial
to evaluate the efficacy and safety of Bronchial Thermoplasty
performed using the Alair technology in patients with
moderate-to-severe asthma. The trial was conducted at 11 sites
in Brazil, Canada, Denmark and the United Kingdom. Of the
109 patients enrolled in the trial, 55 were selected on a
random basis to receive Bronchial Thermoplasty, which we refer
to as the BT group, and 54 patients were enrolled in
the control group. We completed enrollment in this trial in
August 2004.
Design/Objectives.
We designed this trial primarily to evaluate the efficacy of
Bronchial Thermoplasty on exacerbations. Exacerbations
demonstrate the lack of control of a patient’s asthma and
are important metrics in the management of the patient’s
disease. This trial was designed primarily to measure mild
exacerbations. We also measured severe exacerbations, although
we expected mild exacerbations to occur at a greater frequency,
thereby affording a greater opportunity to measure the effect of
Bronchial Thermoplasty and to demonstrate a statistically
significant decrease in exacerbations. Because exacerbations do
not occur frequently enough to provide statistically useful
measurements when patients are taking medication, patients
temporarily ceased taking LABA to facilitate the measurement of
this endpoint. We collected data on several other endpoints
while patients were not taking LABA, including the AQLQ score,
PEF, percentage of symptom-free days and
FEV1.
We also performed methacholine challenge testing, which could
only be performed while patients were not taking LABA. Another
objective of this trial was to evaluate the incremental benefit
of Bronchial Thermoplasty over standard medical care. To
accomplish this, we evaluated patients when they were on
baseline levels of ICS in combination with LABA, by measuring
AQLQ scores, PEF, percentage of symptom-free days and
FEV1.
Finally, we evaluated safety by studying
adverse events, and in particular respiratory-related adverse
events, following treatment. We expected that
respiratory-related adverse events would occur as a result of
bronchoscopy in these asthma patients. In order to account for
this, we divided respiratory-related adverse events into those
that occurred during the treatment period, and those that
occurred following the treatment period.
Implementation.
All patients were taking ICS and LABA at the time of enrollment.
To establish a baseline, patients in both the BT and control
groups ceased taking LABA for two weeks, but continued taking
ICS. Patients in both groups resumed taking LABA prior to
administration of Bronchial Thermoplasty for the BT group or
prior to their first office visit for the control group, and
continued taking ICS and LABA until three months after
treatment. After three months, patients in both groups ceased
taking LABA for the duration of the trial, unless they could not
tolerate the LABA cessation due to asthma symptoms. Patients who
could not tolerate complete cessation of LABA resumed taking
LABA, but did again abstain from taking LABA for two-week
periods leading up to the six and
12-month post-treatment
measurement dates. This allowed us to evaluate all patients at
three, six and 12 months after treatment when they were not
taking LABA.
Patients in the BT group received
Bronchial Thermoplasty in three separate bronchoscopy sessions
each approximately three weeks apart, together with standard
medical management. Patients in the control group were also on
standard medical management, and completed three office visits
to coincide with the Bronchial Thermoplasty sessions, but did
not undergo any bronchoscopic procedure. Patients in both groups
were administered prednisone on the day before each session, and
the day of each session in order to minimize potential
inflammation as a result of the procedure. A total of
101 patients (52 in the BT group, and 49 in the control
group) completed
follow-up out to
12 months after treatment.
Exacerbations.
The reduction in mild exacerbations in the BT group relative to
baseline yielded a statistically significant decrease as
compared to the control group relative to baseline for the
average of the three, six and
12-month post-treatment
periods while patients were not taking LABA. Extrapolating over
a 52-week period, this
equates to a reduction of approximately eight exacerbations per
year (representing approximately 47% reduction) for the BT
group, compared with no reduction in the control group.
As expected, the rate of severe
exacerbations at baseline was low. The BT group experienced a
larger reduction of severe exacerbations relative to baseline
than did the control group relative to baseline, but the
difference was not statistically significant.
Secondary Efficacy Endpoints
(patients taking ICS without LABA)
The following graphics demonstrate
efficacy results for Bronchial Thermoplasty on patients taking
ICS only, without LABA. Values are shown as the change from
baseline to three months, six months and 12 months after
treatment.
AQLQ Score. We observed a
statistically significant, and we believe clinically meaningful,
improvement of 0.9 points on a 7-point scale in the AQLQ
scores of the BT group over baseline compared to the control
group at three months after treatment. This statistically
significant increase persisted at the six and
12-month
post-treatment
follow-ups, with increases of 0.7 and 0.7 points,
respectively, indicating improved quality of life.
%SFD.
We observed a statistically significant improvement in %SFD in
the BT group over baseline compared to the control group at the
three and 12-month post-treatment evaluations. The improvement
at six months after treatment was not statistically significant.
The change from baseline in %SFD in the BT group relative to the
control group at each measurement date extrapolates to
approximately 60-90 additional symptom-free days per year
compared to the control group.
PEF. We observed a
statistically significant increase in morning PEF in the BT
group compared with the control group at three months after
treatment. This statistically significant increase persisted at
the six and 12-month
post-treatment follow-ups.
Use of Rescue Medications.
Results indicated an improvement (reduction) in the use of
rescue medications by the BT group over baseline compared to the
control group over baseline at each of the three, six and
12-month post-treatment
follow-ups. The improvement at each of the three and
12-month follow-ups was
statistically significant, while the improvement at the
six-month follow-up was
not statistically significant.
Methacholine Challenge
Test. Methacholine challenge testing indicated an
improvement in
PC20
in the BT group compared to the control group at each of the
three, six and 12-month
post-treatment follow-ups. However, these changes were not
statistically significant.
FEV1.
FEV1
testing indicated an improvement from baseline in
pre-bronchodilator
FEV1
% predicted values at each of the three, six and
12-month post-treatment
follow-ups as compared to the control group. However, these
changes were not statistically significant.
Secondary Efficacy Endpoints
(patients taking ICS and LABA)
The following graphics demonstrate
efficacy results for Bronchial Thermoplasty on patients taking
ICS and LABA. Values are shown as the change for each of the BT
group and control group relative to baseline at three months
after treatment and prior to removal of LABA. We have not
presented six and 12 month results, which yield both
positive and negative results that in each case are not
statistically significant, due to the variation of patients
taking ICS and LABA at these measurement dates, and in
particular the trend of control group patients taking more LABA
than BT group patients.
AQLQ Score. We observed a
statistically significant increase in AQLQ scores of slightly
less than 0.5 points on a 7-point scale in the BT group
over baseline compared with the control group at three months
after treatment. This increase fell just short of the threshold
generally considered to be clinically meaningful.
%SFD. We observed a
statistically significant increase in %SFD in the BT group over
baseline compared with the control group at three months after
treatment, indicating improved asthma control. The change from
baseline in %SFD in the BT group extrapolates to approximately
60 additional symptom-free days per year compared to the control
group.
PEF. We observed a
statistically significant increase in morning PEF in the BT
group over baseline compared with the control group at three
months after treatment.
Use of Rescue Medications.
We observed an improvement (reduction) in the use of rescue
medications in the BT group over baseline compared with the
control group at three months after treatment, but the
difference was not statistically significant.
FEV1.
We observed a trend towards improvement in pre-bronchodilator
FEV1
% predicted values in the BT group compared to the control group
at three months after treatment. However, this difference in
improvement was not statistically significant.
AIR2-Eligible Subset
During the process of designing our AIR2
Trial, we retrospectively examined the AIR Trial data from the
subset of AIR Trial patients with more severe asthma meeting the
eligibility criteria that we were considering (and ultimately
selected) for our AIR2 Trial. These patients consisted of
patients taking ICS without LABA and patients taking ICS and
LABA, and included both BT group and control group patients. We
observed an improvement in AQLQ scores among the BT group
patients in the AIR2-eligible subset compared to the control
group patients that was clinically meaningful and more
pronounced than the results that we observed for the AIR Trial
as a whole. We also observed positive results for each other
endpoint measured, including %SFD, PEF, and use of rescue
medications. In most cases, with AQLQ scores for the ICS-only
patients as a notable exception, the results were not
statistically significant, which we believe was due primarily to
small sample sizes.
Safety Data
Substantially all of the BT group patients
experienced one or more respiratory-related adverse events, such
as wheezing, cough, chest discomfort, difficulty breathing,
productive cough or discolored mucus. Of the adverse events
reported during the treatment period, the vast majority of
respiratory-related adverse events were mild (69% in both
groups) and moderate (28% in the BT group and 30% in the control
group), with 3% in the BT group and 1% in the control group
having severe events. Four patients in the BT group required an
aggregate of six hospitalizations and two patients in the
control group required an aggregate of two hospitalizations for
respiratory-related adverse events.
During the treatment period, the median
time to onset of respiratory-related adverse events was one day
after the procedure (the mean time was 5.6 days), and
average time to resolution was seven days after onset. Adverse
events were of the type anticipated following bronchoscopy in
patients with asthma. All adverse events were resolved with
standard treatment techniques, and none were unanticipated.
Beyond the treatment period, the
respiratory-related adverse event profile was comparable between
groups. The rate of hospitalizations was low and not
meaningfully different between groups (three BT group patients
required three hospitalizations and two control patients
required three hospitalizations). None of these
respiratory-related adverse events were unanticipated.
Conclusions
We found that Bronchial Thermoplasty
provided a statistically significant reduction in the frequency
of mild exacerbations in patients taking ICS without LABAs, by
approximately eight exacerbations per patient per year on
average, and provided an average of approximately 60-90
additional symptom-free days when extrapolated over one year.
Bronchial Thermoplasty also demonstrated persistently positive
impacts on other endpoints for these
patients, as following Bronchial Thermoplasty, there were
statistically significant improvements in AQLQ and morning PEF
in the BT group compared to the control group at three months
that persisted out to one year.
While patients were on both ICS and LABA,
there were statistically significant improvements in AQLQ, %SFD
and morning PEF in the BT group compared with the control group.
We believe these outcomes demonstrate the ability of Bronchial
Thermoplasty to add significant incremental benefit over
standard medical care.
The impact of Bronchial Thermoplasty was
evident at three months after treatment. Moreover, the
improvements in patient-reported and pulmonary function measures
generally did not diminish over the course of the trial, so that
outcomes assessed at one year indicated the same general
degree of improvement as at three and six months after
treatment. We believe this is the first indication in a clinical
trial of a persistent reduction in asthma symptoms following a
single course of treatment. However, the ultimate duration of
the effect of Bronchial Thermoplasty will remain uncertain until
we have a longer track record of patient data to analyze.
Treatment with Bronchial Thermoplasty was
associated with adverse events that were related primarily to
airway irritation. As expected for a bronchoscopic treatment,
there were more adverse events in the BT group than in the
control group in the short-term following bronchoscopy. These
respiratory-related adverse events were consistent with the
types of events experienced by patients with asthma undergoing
other bronchoscopic procedures. At later time points,
respiratory-related adverse events were similar in both groups,
indicating no longer-term negative effects. As another
indication of safety, the average
FEV1
level for the BT group over time did not deteriorate relative to
baseline.
AIR Extension Study
The AIR Extension Study is a follow-on
study of the patients who completed the AIR Trial. We commenced
the AIR Extension Study in March 2005, and enrollment of
patients from the AIR Trial and follow-up are ongoing. The goal
of this study is to evaluate the long-term safety of Bronchial
Thermoplasty by gathering additional, longer-term safety data in
patients who participated in the AIR Trial. Subject to the
exclusion of patients described below, all participants in the
AIR Trial have been or will be asked to participate in the AIR
Extension Study. As of June 30, 2006, 41 patients, or
approximately 70% of those AIR Trial patients who had become
eligible to participate in the AIR Extension Study and who were
not excluded, had consented to participate. Based on this
participation rate, we expect that a total of approximately 75
patients will participate in this study.
This study extends the
follow-up evaluation of
patients from the AIR Trial to three years after treatment with
the Alair System. These evaluations will consist of two study
visits corresponding to the two-year and three-year
anniversaries following completion of Bronchial Thermoplasty (or
similar time points for control patients) in the AIR Trial. For
consistency with the AIR Trial, we have recommended that the
patient’s drug therapy continue to be consistent with
standard guidelines, and that any changes in medications and
medication levels should be documented.
The study will exclude patients
participating in another clinical trial involving a respiratory
intervention that could affect the outcome measures of this
study, either within six weeks of study enrollment or during the
study period. In addition, any patient with a newly diagnosed
(since completion of the AIR Trial) psychiatric disorder that in
the judgment of the investigator could interfere with provision
of informed consent, completion of tests, therapy or
follow-up will be
excluded.
In April 2004, we commenced a
multi-center, randomized clinical trial designed primarily to
examine the safety of Bronchial Thermoplasty with the Alair
System in patients with severe asthma. We enrolled
32 patients in this trial, and conducted this trial at
eight investigational sites in Brazil, Canada, and the United
Kingdom. Of these patients, 15 were randomly selected to receive
Bronchial Thermoplasty, and 17 were enrolled in a control group.
All patients completed
follow-up out to
12 months after treatment. We completed enrollment in this
trial in December 2004.
Follow-up is complete,
although some patient responses are still being reviewed and
therefore the following conclusions are based on data received
and analyzed to date. Because of the relatively small pool of
patients in this trial, changes arising out of our final review
of the data may change the results as presented.
We focused on evaluating severe asthmatics
in this trial due in large part to what we believe is a strong
desire within the medical community to aid patients whose asthma
is not well-controlled by existing drug therapies. We limited
enrollment to asthmatic patients who remained symptomatic
despite regular maintenance medication, including high-dose ICS
and LABA. In some cases, these patients were also taking oral
corticosteroids, or OCS. We assessed safety by comparing the
incidence and types of adverse events reported for the patients
in the BT group compared with the control group during the
treatment period.
Our secondary objective was to evaluate
whether asthma symptoms and/or medication levels can be reduced
in this population following Bronchial Thermoplasty. The first
measure was whether particularly severe patients taking OCS in
addition to ICS were able to reduce dosages of OCS, with a
second measure being whether patients could then reduce
underlying ICS dosages, To accomplish this goal, we assessed
efficacy through analysis of several endpoints, including AQLQ,
FEV1,
PEF, percent symptom-free days, use of rescue medications and
others. We also performed methacholine challenge testing,
although this could only be performed in approximately half of
the patients since some patients had
FEV1
levels below the minimum threshold required to perform this
test. Also, while we measured symptom-free days (%SFD), we did
not expect to yield reliable data regarding this measure given
the severity of asthma suffered by these patients, as this
endpoint would not measure any improvement less than complete
elimination of symptoms in any particular day.
To support this secondary objective, we
first monitored patients while having them maintain their
regular dosages of maintenance medication for a period of
22 weeks after treatment, a period which we refer to as the
“Steroid Stable Phase,” to gauge whether asthma
symptoms were reduced while patients were on their standard drug
therapies. Patients then reduced their use of OCS and/or ICS
over the next 14 weeks to the minimum level tolerable, and
these reduced dosages were held stable over a
16-week period (weeks
36-52 after treatment), a period which we refer to as the
“Reduced Steroid Phase,” to gauge their ability to
reduce medication levels.
At 22 weeks after treatment, we
evaluated quality of life and several measures of pulmonary
function in severe asthmatics while on their regular dosages of
maintenance medications. The following graphs display the
results at 22 weeks after completion of Bronchial
Thermoplasty:
AQLQ Score. We observed a
statistically significant, and we believe clinically meaningful,
improvement of 1.1 points on a
7-point scale in the
AQLQ scores of the BT group over baseline compared to the
control group at 22 weeks after treatment, indicating
improved quality of life.
FEV1.
We observed a statistically significant increase in
pre-bronchodilator
FEV1
% predicted values for the BT group over baseline compared to
the control group at 22 weeks after treatment, indicating
improved (reduced) airflow obstruction.
PEF. We observed a trend
towards improvement in morning PEF in the BT group over baseline
compared to the control group at 22 weeks. However, the
difference in improvement was not statistically significant.
Use of Rescue Medications.
We observed a statistically significant improvement (reduction)
in the weekly use of rescue medications for the BT group over
baseline compared to the control group at 22 weeks,
indicating improved asthma control.
The BT group did not demonstrate
statistically significant differences from the control group
over baseline for other efficacy measures, including
methacholine challenge testing and symptom-free days.
Efficacy
Data — Reduced Steroid Phase
Following the
22-week steroid stable
phase, we attempted to wean patients off OCS and ICS. Four of
the eight BT group patients on OCS, and only one of seven
control patients on OCS, were able to completely eliminate OCS.
We observed a trend of greater overall reduction in OCS dosages
in the BT group compared with the control group at week 52,
although this trend was not statistically significant (p=0.120).
We did not observe a meaningful decrease in ICS reduction
between the BT group and the control group. At 52 weeks
after treatment, we evaluated quality of life and several
measures of pulmonary function in severe asthmatics while on
reduced dosages of maintenance medication that were lower on
average in the BT group than those taken by the control
group. The following graphs display the results at 52 weeks
after completion of Bronchial Thermoplasty:
AQLQ Score. We observed a
statistically significant, and we believe clinically meaningful,
improvement of 1.1 points on a
7-point scale in the
AQLQ scores of the BT group over baseline compared to the
control group at 52 weeks after treatment, indicating
improved quality of life.
FEV1.
We observed a trend towards improvement in
FEV1
% predicted values in the BT group over baseline compared
to the control group at 52 weeks after treatment. However,
the difference in improvement was not statistically significant.
PEF. We observed a lesser
improvement in morning PEF in the BT group over baseline
compared to the control group at 52 weeks after treatment.
While this result indicated a negative trend, the difference in
improvement was not statistically significant.
Use of Rescue Medications.
We observed a statistically significant improvement (reduction)
in the weekly use of rescue medications for the BT group over
baseline compared to the control group at 52 weeks,
indicating improved asthma control.
The BT group did not demonstrate
statistically significant differences from the control group
over baseline for other efficacy measures, including
methacholine challenge testing and symptom-free days.
Following Bronchial Thermoplasty treatment
there was an increase in respiratory-related adverse events
during the treatment period, with a return to baseline levels
thereafter. All adverse events were managed with standard
techniques. The median onset of these respiratory-related
adverse events was one day after the Bronchial Thermoplasty
procedure (the mean time was 5.6 days), and they resolved
on average within 6.6 days.
All of the BT group patients experienced
one or more adverse events, such as wheezing, cough, chest
discomfort, difficulty breathing, productive cough or discolored
mucus. Of the respiratory-related adverse events reported by the
BT group during the treatment period, 48% were mild, 41% were
moderate and 11% were severe. In the control group, 82% of the
patients had adverse events, and 46% of the respiratory-related
adverse events were mild, 50% were moderate and 4% were severe.
During the year prior to the trial, both
groups experienced hospitalizations for respiratory-related
symptoms: six patients required an aggregate of ten
hospitalizations in the BT group, and two patients required an
aggregate of five hospitalizations in the control group. During
the treatment phase, there was a higher rate of hospitalizations
for respiratory-related adverse events in the BT group (five
patients requiring an aggregate of eight hospitalizations)
compared with the control group (no patients requiring
hospitalizations).
The rate of hospitalizations for
respiratory symptoms following the treatment period out to
52 weeks after treatment was similar between groups. During
the steroid stable phase (6-22 weeks after treatment),
three patients required three hospitalizations in the BT group,
and one patient required one hospitalization in the control
group. From 22-36 weeks after treatment, one patient
required one hospitalization in the BT group, and one patient
required one hospitalization in the control group. During the
reduced steroid phase, one patient required one hospitalization
in the BT group, and one patient required two hospitalizations
in the control group.
Conclusions
In patients with severe asthma requiring
high doses of ICS, LABA and in some cases OCS, Bronchial
Thermoplasty treatment did not cause any unanticipated adverse
events. In general the reported adverse events were primarily
transient respiratory-related events of the type experienced
with other bronchoscopic procedures in severe asthma patients.
We observed a higher rate of respiratory-related
hospitalizations in the BT group during the treatment period,
but this was expected given that these were patients with severe
asthma, and complex medical regiments and because they were
undergoing a bronchoscopy.
Results from the RISA Trial also suggest
that, for severe asthmatics taking high dosages of maintenance
medications, Bronchial Thermoplasty treatment provided what we
believe to be a meaningful, and in most cases statistically
significant, improvement in the quality of life and control of
asthma symptoms over and above standard medical care. In
addition, the 52 week results indicated a trend, although
not statistically significant, of patients receiving Bronchial
Thermoplasty being able to tolerate a greater reduction in
maintenance medications. With these reduced medications, the BT
group showed a statistically significant improvement in quality
of life and asthma control, although changes in pulmonary
function measures were not statistically significant.
AIR2 Trial
Considerations in the Design of the
AIR2 Trial
Two parameters that are important to the
design of our AIR2 Trial are the primary endpoint and the
element of the asthmatic population to be evaluated. In
determining a primary endpoint, we wanted to
choose a measure that we believe provides
the best overall measure of asthma control. While we believe
that some measures of pulmonary function, in particular
methacholine challenge testing, would also be an appropriate
measure for the efficacy of Bronchial Thermoplasty, AQLQ
provides what we believe to be the most meaningful results to
patients. We consulted the FDA regarding the design of this
trial, and the FDA granted an IDE with AQLQ as the primary
endpoint.
In terms of patient population for the
trial, we have consistently held the view that Bronchial
Thermoplasty would provide the most benefit in patients with
severe asthma. Data from our previous clinical trials support
this premise. To further examine this, we performed a subgroup
analysis of the AIR Trial data to evaluate the more severe
asthmatic patients in that trial. The AQLQ score and
methacholine challenge results for the severe asthmatic subgroup
were particularly instructive. BT group patients in the severe
patient subset of the AIR Trial experienced a greater
improvement in AQLQ scores than in the overall AIR Trial
population, although not statistically significant relative to
the control group, which we expect was due in part to the small
sample size. Moreover, BT group patients in the severe subset
experienced greater and statistically significant (p=0.028 at
one year post-treatment) improvement in methacholine challenge
test results compared with the control group than did the
overall AIR Trial population.
The following graph illustrates the
improvement at three months (AIR and AIR2 Eligible) and
22 weeks (RISA) following Bronchial Thermoplasty in AQLQ
scores, one of the endpoints used in our trials to date and the
primary endpoint for our AIR2 Trial, for patients on asthma
medications in our past trials, in order of increasing severity
of asthma:
Accordingly, we determined to focus our
AIR2 Trial on severe asthmatics, since we believe focusing the
AIR2 Trial on this group affords a greater opportunity to
demonstrate statistically significant improvements. A corollary
benefit of this approach is the possibility of having to enroll
fewer patients to achieve statistically meaningful results.
Moreover, similar to the considerations involved in structuring
our RISA Trial, the demand to address this patient segment
appears to be quite strong since existing drug therapies provide
less relief to these patients, and because these patients
require significant medical resources. However, we designed the
enrollment parameters to exclude severe asthma patients with the
most extreme symptoms, in order to strike a balance between
minimizing the risks of bronchoscopy for these patients while
preserving the strongest opportunity for demonstrating
meaningful efficacy.
Overview
We are currently enrolling patients in a
multi-center, double-blind, sham controlled trial comparing the
effects of Bronchial Thermoplasty treatment to conventional drug
therapy in severe asthma patients.
This is our first clinical trial involving
centers in the United States. We intend that this trial will be
a pivotal trial and will be used as a basis for our application
for FDA approval to market the Alair System for asthma treatment
in the United States. We initiated this trial in October 2005.
We currently plan to enroll approximately 300 patients at
approximately 40 sites in North America, Europe, Australia
and South America. As of August 31, 2006, we had enrolled a
total of 115 patients. Our rate of attrition in prior
studies executed at international sites was less than 10% of
those patients enrolled. Based upon our previous experience, we
expect 300 patients will be sufficient to absorb any
unexpected attrition to meet our minimum enrollment goal of
225 patients. We will monitor attrition during the trial
and our trial design allows us to enroll beyond
300 patients if needed. We currently have approval from the
FDA to treat up to 600 patients in this trial.
Consistent with the above design
considerations, enrollment will be limited to severe asthmatic
patients who require regular maintenance medication, including
ICS and LABA, and in some cases low doses of OCS, and who still
remain symptomatic despite this medication. However, we have
designed these parameters to exclude severe asthma patients with
the most extreme symptoms. The trial will include a
BT group and a sham control group, both of which will
continue to take their maintenance asthma medications throughout
the trial. Two patients will be selected at random for the BT
group for every one patient in the control group. The
BT group will receive Bronchial Thermoplasty treatment
during three outpatient bronchoscopy sessions, while the sham
control group will also undergo three outpatient bronchoscopy
sessions, including delivery of the Alair Catheter, but will not
receive active Bronchial Thermoplasty treatment.
Following Bronchial Thermoplasty or sham
treatment, patients will be evaluated at three, six, nine and
12 months while they are taking their maintenance asthma
medications of ICS and LABA, and OCS if taken prior to
treatment. Following the
12-month evaluation,
all patients will cease taking LABA (but will continue taking
ICS) for a period of two weeks, and will be evaluated at the end
of this period. Upon completion of this evaluation, each patient
in the control group will be exited from the trial and the blind
will be broken for that patient. Patients who were treated in
the BT group will enter into a post-trial safety
follow-up and will
continue to undergo yearly
follow-up visits for
safety for a period of four years following the ICS-only
evaluation. In total, patients in the BT group will be followed
for approximately five years.
Primary and Secondary
Endpoints
The primary efficacy outcome will be the
difference between the BT group and the control group in the
change between baseline and the average of the six, nine and
12-month
follow-up AQLQ scores.
The FDA has specified that the AIR2 Trial must yield a positive
difference in the AQLQ score of at least 0.5 to demonstrate
efficacy. However, the FDA will also consider the results of
secondary endpoint measures in determining whether to grant
premarket approval for the Alair System. We also plan to
evaluate several secondary efficacy endpoints, including, among
others, methacholine challenge testing, PEF, percentage of
symptom-free days, symptoms score, individual components of the
AQLQ, use of rescue medication and
FEV1.
Statistical Analysis
We plan to use a Bayesian adaptive
approach to statistical analysis in our AIR2 Trial. This
approach to data analysis provides an opportunity to learn from
evidence as it accumulates. Traditional statistical methods use
prior information only in the design of a clinical trial. In
contrast, the adaptive approach uses a formal and consistent
mathematical method called Bayes’ Theorem for combining
prior information with current information in both the design
and analysis stages of a trial. The FDA has indicated its
acceptance of adaptive statistics in clinical trials, as
indicated by its issuance in May 2006 of draft guidance on the
use of the adaptive approach in the design and analysis of
medical device clinical trials, and the FDA has indicated that
it plans to develop and issue further guidance. In
addition, the FDA approved our
AIR2 Trial IDE containing our adaptive statistical plan.
The primary efficacy endpoint in our AIR2 Trial will be
based on the average change from baseline of the six, nine and
12 month follow-up AQLQ scores, and we believe that the use
of a Bayesian approach will enable us to assess this endpoint
before we have 12 month follow-up data for all of the
patients in the study.
We plan to enroll and collect data from
approximately 225 patients in our AIR2 Trial before filing
a PMA application with the FDA. We currently anticipate
enrollment in the AIR2 Trial to reach 225 patients by the
first quarter of 2007, although this timing may vary depending
on enrollment and attrition rates. Based on this timing, and
allowing time to collect and analyze post-treatment data, we
anticipate that we will file our PMA application with the FDA by
the end of 2007.
Sales and Marketing
We intend to establish a specialized
direct sales force to call on the pulmonologists who will use
the Alair System and educate and influence adoption of our
technology. We estimate that there are 6,000 pulmonologists
in the United States, primarily located in metropolitan areas,
who are trained to perform bronchoscopy. We believe that a sales
force composed of approximately 75 representatives can
effectively target this group of physicians. To complement our
sales efforts, we intend to employ clinical managers who will
educate, train and provide support to pulmonologists until they
are competent using the Alair System. Our marketing and sales
teams will implement marketing programs targeted at the primary
care physicians and allergists who treat a significant number of
asthmatics.
We intend to use a variety of marketing
tools to drive initial adoption, ensure continued usage, and
establish brand loyalty for the Alair System by:
•
creating awareness of the benefits of
Bronchial Thermoplasty and the advantages of our technology with
pulmonologists and patients;
•
providing strong educational and training
programs to healthcare providers to ensure easy, safe and
effective use of the Alair System;
•
employing a variety of media to promote
and brand the Bronchial Thermoplasty procedure, the Alair System
and our company to patients, caregivers, treating physicians,
referring physicians and allied healthcare professionals;
•
capitalizing on the media leverage and the
branding potential of being the first and only procedure for the
persistent treatment of asthma; and
•
supporting the clinical adoption of
Bronchial Thermoplasty with treating and referring physicians
through the development of educational and marketing programs.
Following the launch of the Alair System
in the United States, we will explore the expansion of
distribution into selected European and Asian markets. We plan
to enter these markets by establishing strategic relationships
with established participants in those markets or by developing
a direct sales force.
Competition
We may face competition from companies
that develop and market medications for the management of asthma
and from medical device companies that may develop alternative
systems for the treatment of asthma. We are not aware of any
interventional procedures to treat asthma that are currently in
use or development other than Bronchial Thermoplasty performed
using the Alair System. However, new technologies may be
developed to treat the airways, and we may face competition from
any devices
that may be developed based on any such
new technologies. In addition, competitors may develop
approaches to Bronchial Thermoplasty that do not infringe our
patents.
In addition, while we believe that
Bronchial Thermoplasty will be complementary to many asthma
medications, Bronchial Thermoplasty may be perceived by
pharmaceutical companies as being competitive with their
products, and may directly compete with some asthma medications.
The pharmaceutical market for asthma medication is intensely
competitive and significantly affected by new product
introductions. The leading medications for asthma include Advair
from GlaxoSmithKline, Singulair from Merck, Pulmicort and
Symbicort from AstraZeneca and Xolair from Genentech and
Novartis.
We anticipate that companies will dedicate
significant resources to developing new products and therapies.
Current or future competitors may develop technologies and
products that demonstrate better safety and efficacy, clinical
results, ease of use or lower cost than Bronchial Thermoplasty
or the Alair System. Bronchial Thermoplasty or the Alair System
may be rendered obsolete or uneconomical by technological
advances or entirely different approaches developed by a
competitor. Many of our potential competitors have competitive
advantages over us, including:
•
significantly greater name recognition;
•
established relations with healthcare
professionals, customers and third-party payors;
•
established distribution networks;
•
additional product lines, and the ability
to offer rebates or bundle products to offer higher discounts or
incentives to gain a competitive advantage;
•
greater experience in conducting research
and development, manufacturing, clinical trials, obtaining
regulatory approval for products and marketing approved
products; and
•
greater financial and human resources for
product development, sales and marketing, and patent litigation.
Smaller or early-stage companies may also
prove to be significant competitors, particularly through
collaborative arrangements with large and established companies.
These third parties also compete with us in recruiting and
retaining qualified scientific and management personnel,
establishing clinical trial sites and patient registration for
clinical trials, as well as in acquiring technologies and
technology licenses complementary to our programs or
advantageous to our business.
We believe that the principal competitive
factors for asthma therapy include:
•
proven clinical efficacy and safety;
•
cost of products and eligibility for
reimbursement;
•
brand awareness and strong acceptance by
healthcare professionals and patients;
•
effective marketing and distribution;
•
comprehensive education for patients and
asthma care providers;
speed of product innovation and time to
market; and
•
customer focus, service and support.
Manufacturing
For purposes of our clinical trials, the
Alair System is manufactured by two contract manufacturers.
Stellartech Research Corporation, a company based in Sunnyvale,
California that specializes in the development, manufacturing
and testing of electro-medical durable equipment, currently
manufactures the Alair RF Controller. Life Science Outsourcing,
a company based in Brea, California that specializes in the
manufacturing and testing of disposable medical devices,
currently manufactures the Alair Catheter. Both companies are
responsible for the purchasing, testing and inspection of the
components that are assembled into our finished devices. At this
time, we stock all clinical evaluation units internally and
distribute our devices to our clinical sites. We plan to assess
the feasibility of also stocking devices at our contract
manufacturers, so that devices can be distributed to clinical
sites and customers directly from our manufacturers with shorter
lead times and reduced inventory levels.
We believe that our current contract
manufacturers will be adequate to manufacture our devices at
least through the first year of commercial production. We
currently have limited resources, facilities and experience to
commercially manufacture our devices. In order to produce our
devices in the quantities we anticipate will be necessary to
meet market demand, we may need to increase our manufacturing
capacity significantly over the current level by adding or
changing contract manufacturers, or by leasing and staffing a
facility to manufacture the product ourselves. If we are
required to change manufacturers or manufacture the product
ourselves, we will have to obtain pre-approval by the FDA and
corresponding state agencies. If we were to manufacture the
device ourselves, developing commercial-scale manufacturing
facilities would require the investment of substantial
additional funds and the hiring and retaining of additional
management, quality assurance, quality control and technical
personnel who have the necessary manufacturing experience. Also,
the scaling of manufacturing capacity is subject to numerous
risks and uncertainties, such as the availability and
suitability of facility space, construction timelines, design,
installation and maintenance of manufacturing equipment, among
others, which can lead to unexpected delays. Although we expect
that suitable alternative contract manufacturers exist, we
cannot assure you that we will be able to change manufacturers
or develop our own manufacturing process and operations, or
obtain FDA and state agency approval in either case, in a timely
manner or at all. If we are unable to manufacture a sufficient
supply of the Alair System, maintain control over expenses or
otherwise adapt to anticipated growth, or if we underestimate
growth, we may not have the capability to satisfy market demand
and our business will suffer.
We currently lease an 8,400 square
foot facility located in Mountain View, California, where we
conduct final product testing and stock finished goods. We have
not yet registered or listed with FDA nor have we been inspected
by the FDA. However, since we are responsible for the design of
our device and we conduct final product testing, we will have to
register and list with FDA and successfully complete an FDA
inspection before we can ship any commercial products under a
PMA application. Our facility was approved for medical device
manufacturing in June 2005 by the Food and Drug Branch of the
State of California Department of Health Services.
Patents and Intellectual
Property
Protection of our intellectual property is
a strategic priority for our business. Our policy is to seek to
protect our proprietary position by, among other methods, filing
U.S. and foreign patent applications related to our technology,
inventions, and improvements that are important to the
development of our business. As of August 31, 2006, we had
obtained 11 issued U.S. patents, and had 25 additional
U.S. patent applications pending. We believe it will take
up to five years, and possibly longer, for these
pending U.S. patent applications to
result in issued patents. Not including any term extensions that
may be available, our 11 issued U.S. patents expire between
2017 and 2018. As of August 31, 2006, we also had obtained
14 foreign patents and had 15 additional foreign patent
applications pending.
We also rely upon a combination of
trademarks, trade secrets, non-disclosure agreements, technical
know-how, continuing technological innovation, and other
measures to protect our proprietary rights and to develop and
maintain our competitive position. We typically require our
employees, consultants, contractors, outside scientific
collaborators, and other advisors to execute confidentiality and
assignment of inventions agreements in connection with their
employment, consulting, or advisory relationships with us. There
can be no assurance, however, that these agreements will not be
breached or that we will have adequate remedies for any breach.
Agreements with our employees also forbid them from bringing the
proprietary rights of third parties to us.
We believe that our intellectual property
position will provide us with sufficient rights to develop,
sell, and protect the Alair System. However, our patent
applications may not result in issued patents, and there can be
no assurance that any patents that have issued or might issue
will protect our intellectual property rights. Furthermore,
there can be no assurance that all of our patents will be
upheld. Any patents issued to us may be challenged by third
parties as being invalid or unenforceable, or third parties may
independently develop similar or competing technology that
avoids our patents. We cannot be certain that the steps we have
taken will prevent the misappropriation of our intellectual
property, particularly in foreign countries where the laws may
not protect our proprietary rights as fully as in the United
States. Furthermore, there can be no assurance that competitors
will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access
to our proprietary technology.
While we believe that we have the ability
to develop, sell, and protect the Alair System, patents issued
and patent applications filed relating to medical devices are
numerous, and there can be no assurance that current and
potential competitors and other third parties have not filed or
in the future will not file applications for, or have not
received or in the future will not receive, patents or obtain
additional proprietary rights relating to products, devices, or
processes used or proposed to be used by us. We are currently
not aware of patents issued to third parties that would be
infringed by the technologies we employ in the Alair System.
There can be no assurance, however, that third parties will not
seek to assert that our devices and systems infringe their
patents or seek to expand their patent claims to cover aspects
of the Alair System.
The medical device industry in general,
and the industry segments that include interventional products
which deliver energy to body tissues in particular, has been
characterized by substantial litigation regarding patents and
other intellectual property rights. Any such claims, regardless
of their merit could be time-consuming and expensive to respond
to and could divert our technical and management personnel. We
may be involved in litigation to defend against claims of
infringement by other patent holders, to enforce patents issued
to us, or to protect our trade secrets. If any relevant claims
of third-party patents are upheld as valid and enforceable in
any litigation or administrative proceeding, we could be
prevented from practicing the subject matter claimed in such
patents, or would be required to obtain licenses from the patent
owners of each such patent, or to redesign our products, devices
or processes to avoid infringement. There can be no assurance
that such licenses would be available or, if available, would be
available on terms acceptable to us or that we would be
successful in any attempt to redesign our products or processes
to avoid infringement. Accordingly, an adverse determination in
a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent us from manufacturing and
selling our devices, which would have a materially adverse
effect on our business, financial condition, and results of
operations. We intend to vigorously protect and defend our
intellectual property. Costly and time-consuming litigation
brought by us may be necessary to enforce
patents issued to us, to protect trade
secrets or know-how owned by us, or to determine the
enforceability, scope, and validity of the proprietary rights of
others.
As of August 31, 2006, we had three
registered U.S. trademarks, two U.S. trademark
applications pending, and three registered foreign trademarks.
Intellectual Property Related
Agreements
Pursuant to a Corporate Formation
Agreement, Broncus transferred to us intellectual property
(including several U.S. and international patents and patent
applications) related to the Alair System technology. In
conjunction with the division of intellectual property assets
between us and Broncus pursuant to the Corporate Formation
Agreement, and in addition to the assignment of patent rights
pursuant to that agreement, we and Broncus provided each other
with a perpetual, royalty-free license to each other’s
then-existing intellectual property for use by each of us solely
in our respective fields of use. Our field of use is devices and
procedures for providing asthma therapy, and the Broncus field
of use is devices and procedures for providing emphysema
therapy. We and Broncus also provided each other with a
perpetual, royalty-free license to certain intellectual property
developed after our inception during a collaboration period
between the companies that ended in June 2005 for use by each of
us in our respective fields of use. The licenses are not
transferable by either party except in connection with an
acquisition of such party.
In collaboration with Johns Hopkins
University, or JHU, we applied to the National Institutes of
Health, or NIH, for a grant to research our products. NIH
awarded the grant to JHU and we entered into an agreement with
JHU in June 2004 to serve as a subcontractor on the grant. The
grant involves analysis, modeling, bench experiments,
in vitro experiments and animal experiments. Under the
terms of the subcontract, we own all inventions arising from the
grant research that relate to delivering energy to an airway
wall. We also have the first right to an exclusive, perpetual,
worldwide license to any other invention JHU may have rights in
or to primarily as a result of work performed as part of the
grant research. The agreement expired in August 2006. We are
currently seeking a renewal of this agreement, although any such
renewal may not lead to a new grant.
Government Regulation
Our products are medical devices subject
to extensive and ongoing regulation by the Food and Drug
Administration, or FDA, and regulatory bodies in other countries.
FDA Regulation
The Federal Food, Drug and Cosmetic Act,
or FDCA, and the FDA’s implementing regulations govern,
among other things, medical device design and development,
preclinical and clinical testing, premarket clearance or
approval, manufacturing, labeling, storage, advertising and
promotion, sales and distribution, and post-market clinical
surveillance. We do not have the necessary regulatory approval
to market the Alair System for the treatment of asthma in the
United States.
FDA Requirements for 510(k)
Clearance or Premarket
Approval. Unless an
exemption applies, each medical device we wish to commercially
distribute in the United States will require marketing
authorization from FDA prior to distribution. The two primary
types of FDA marketing authorization are premarket clearance
(also called 510(k) clearance) and premarket approval (also
called PMA approval). The type of marketing authorization
applicable to a device — 510(k) clearance or PMA
approval — is generally linked to classification of
the device.
The FDA classifies medical devices into
one of three classes (Class I, II or III) based on the
degree of risk FDA determines to be associated with a device and
the extent of control deemed necessary to
ensure the device’s safety and
effectiveness. Devices requiring fewer controls because they are
deemed to pose lower risk are placed in Class I or II.
Class I devices are deemed to pose the least risk and are
subject only to general controls such as requirements for device
labeling, premarket notification, and adherence to the
FDA’s current good manufacturing practice requirements, as
reflected in its Quality System Regulation, or QSR.
Class II devices are intermediate risk devices that are
subject to general controls and may also be subject to special
controls such as performance standards, product-specific
guidance documents, special labeling requirements, patient
registries, or postmarket surveillance. Class III devices
are those deemed by FDA to pose the greatest risk and include
life-sustaining, life-supporting, or implantable devices, and
devices not “substantially equivalent” to a device
that is already legally marketed.
Most Class I devices and some
Class II devices are exempted by regulation from the 510(k)
clearance requirement and can be marketed without prior
authorization from FDA. Class I and Class II devices
that have not been so exempted are eligible for marketing
through the 510(k) clearance pathway. By contrast, devices
placed in Class III generally require PMA approval prior to
commercial marketing. The PMA approval process is generally more
stringent, time-consuming, and expensive than the 510(k)
clearance process.
510(k)
Clearance. To obtain 510(k)
clearance for a medical device, an applicant must submit a
premarket notification (or 510(k)) to the FDA demonstrating that
the device is “substantially equivalent” to a legally
marketed predicate device. A device is substantially equivalent
if it has: (1) the same intended use as the predicate
device and (2) the same technological characteristics, or
different technological characteristics that do not raise new
questions of safety or effectiveness, and the device is as safe
and effective as the predicate device. A showing of substantial
equivalence sometimes, but not always, requires clinical data.
Generally, the 510(k) clearance process can exceed 90 days
and may extend to a year or more.
After a device has received 510(k)
clearance for a specific intended use, any modification that
could significantly affect its safety or effectiveness, such as
a significant change in the design, materials, or method of
manufacture of the device, or that would constitute a major
change in its intended use, will require a new 510(k) clearance
or (if the device as modified is not substantially equivalent to
a legally marketed predicate device) PMA approval. While the
determination as to whether new authorization is needed is left
to the manufacturer, the FDA may review this determination and
require the manufacturer to cease marketing and/or recall the
modified device until 510(k) clearance or PMA approval is
obtained. The manufacturer may also be subject to significant
regulatory fines or penalties.
Currently, the Alair System can be
commercially distributed in the United States under the existing
510(k) clearance for the
Broncustm
Coagulation Electrode System (K993900). This 510(k) clearance
allows us to market the Alair System as a Class II device
intended for coagulation or hemostasis in the tracheobronchial
tree. However, we have yet to market the Alair System pursuant
to this clearance.
Premarket
Approval. A PMA application
must be submitted if a device cannot be cleared for that
intended use through the 510(k) process. The PMA process is
usually significantly more demanding than then 510(k) clearance
process. We believe that marketing of the Alair System for the
treatment of asthma will require premarket approval.
A PMA application must be supported by
valid scientific evidence, which typically requires extensive
data, including technical, preclinical, clinical and
manufacturing data, to demonstrate to the FDA’s
satisfaction the safety and efficacy of the device. A PMA
application also must include a complete description of the
device and its components, a detailed description of the
methods, facilities and controls used to manufacture the device,
and proposed labeling. After a PMA application is submitted and
found to be sufficiently complete, the FDA begins an in-depth
review of the submitted
information. During this review period,
the FDA may request additional information or clarification of
information already provided. Also during the review period, an
advisory panel of experts from outside the FDA may be convened
to review and evaluate the application and provide
recommendations to the FDA as to the approvability of the
device. In addition, the FDA generally will conduct a
pre-approval inspection of the manufacturing facility to ensure
compliance with the QSR, which requires manufacturers to follow
design, testing, control, documentation and other quality
assurance procedures.
FDA review of a PMA application is
required by statute to take no longer than 180 days,
although the process typically takes significantly longer, and
may require several years to complete. The FDA can delay, limit
or deny approval of a PMA application for many reasons,
including:
•
our systems may not be safe or effective
to the FDA’s satisfaction;
•
the data from our preclinical studies and
clinical trials may be insufficient to support approval;
•
the manufacturing process or facilities we
use may not meet applicable requirements; and
•
changes in FDA approval policies or
adoption of new regulations may require additional data.
If the FDA evaluations of both the PMA
application and the manufacturing facilities are favorable, the
FDA will either issue an approval letter, or approvable letter,
which usually contains a number of conditions which must be met
in order to secure final approval of the PMA. When and if those
conditions have been fulfilled to the satisfaction of the FDA,
the agency will issue a PMA approval letter authorizing
commercial marketing of the device for certain indications. If
the FDA’s evaluation of the PMA or manufacturing facilities
is not favorable, the FDA will deny approval of the PMA or issue
a not approvable letter. The FDA may also determine that
additional clinical trials are necessary, in which case the PMA
approval may be delayed for several months or years while the
trials are conducted and then the data submitted in an amendment
to the PMA. The PMA process can be expensive, uncertain and
lengthy and a number of devices for which FDA approval has been
sought by other companies have never been approved for
marketing. Even if a PMA application is approved, the FDA may
approve the device with an indication that is narrower or more
limited than originally sought. The agency can also impose
restrictions on the sale, distribution, or use of the device as
a condition of approval, or impose postapproval requirements
such as continuing evaluation and periodic reporting on the
safety, efficacy and reliability of the device for its intended
use.
New PMA applications or PMA supplements
may be required for modifications to the manufacturing process,
labeling, device specifications, materials or design of a device
that is approved through the PMA process. PMA approval
supplements often require submission of the same type of
information as an initial PMA application, except that the
supplement is limited to information needed to support any
changes from the device covered by the original PMA application
and may not require as extensive clinical data or the convening
of an advisory panel.
Clinical
Trials. Clinical trials are
almost always required to support a PMA application and are
sometimes required for a 510(k) clearance. These trials
generally require submission of an application for an
investigational device exemption, or IDE, to the FDA. The IDE
application must be supported by appropriate data, such as
animal and laboratory testing results, showing that it is safe
to test the device in humans and that the testing protocol is
scientifically sound. The IDE application must be approved in
advance by the FDA for a specified number of patients, unless
the product is deemed a non-significant risk device and eligible
for more abbreviated IDE requirements. Generally, clinical trials
for a significant risk device may begin
once the IDE application is approved by the FDA and the study
protocol and informed consent are approved by appropriate
institutional review boards at the clinical trial sites.
Our AIR2 pivotal trial is being conducted
pursuant to an approved IDE. The FDA’s approval of an IDE
allows clinical testing to go forward, but does not bind the FDA
to accept the results of the trial as sufficient to prove the
product’s safety and efficacy, even if the trial meets its
intended success criteria. With certain exceptions, changes made
to an investigational plan after an IDE is approved must be
submitted in an IDE supplement and approved by FDA (and by
governing institutional review boards when appropriate) prior to
implementation. All clinical trials must be conducted in
accordance with the FDA’s IDE regulations which govern
investigational device labeling, prohibit promotion, test
marketing, or commercialization of an investigational device,
and any representation that such a device is safe or effective
for the purposes being investigated and specify an array of
recordkeeping, reporting and monitoring responsibilities of
study sponsors and study investigators. Clinical trials must
further comply with the FDA’s regulations for institutional
review board approval and for informed consent, as well as with
other FDA requirements for good clinical practices, such as
disclosure of financial interests by clinical investigators.
Required records and reports are subject to inspection by the
FDA. The results of clinical testing may be unfavorable or, even
if the intended safety and efficacy success criteria are
achieved, may not be considered sufficient for the FDA to grant
approval or clearance of a product. The commencement or
completion of any of our clinical trials may be delayed or
halted, or be inadequate to support approval of a PMA
application, for numerous reasons, including, but not limited
to, the following:
•
the FDA or other regulatory authorities do
not approve a clinical trial protocol or a clinical trial (or a
change to a previously approved protocol or trial that requires
approval), or place a clinical trial on hold;
•
patients do not enroll in clinical trials
at the rate we expect;
•
patients do not comply with trial
protocols;
•
patient
follow-up is not at the
rate we expect;
•
patients experience adverse side effects;
•
institutional review boards and
third-party clinical investigators may delay or reject our trial
protocol or changes to our trial protocol;
•
third-party clinical investigators decline
to participate in a trial or do not perform a trial on our
anticipated schedule or consistent with the clinical trial
protocol, investigator agreements, good clinical practices or
other FDA requirements;
•
third-party organizations do not perform
data collection and analysis in a timely or accurate manner;
•
regulatory inspections of our clinical
trials or manufacturing facilities, which may, among other
things, require us to undertake corrective action or suspend or
terminate our clinical trials;
•
changes in governmental regulations or
administrative actions;
the interim or final results of the
clinical trial are inconclusive or unfavorable as to safety or
efficacy; and
•
the FDA concludes that our trial design is
inadequate to demonstrate safety and efficacy.
We expect to file a PMA application for
the Alair System by the end of 2007. We do not expect the Alair
System to be approved for sale before at least the end of 2008.
Our clinical trials may not generate favorable data to support
any further PMA applications, and we may not be able to obtain
such approvals on a timely basis, or at all. Delays in receipt
of or failure to receive such approvals, the loss of previously
received approvals, or failure to comply with existing or future
regulatory requirements would have a material adverse effect on
our business, financial condition and results of operations.
Even if granted, the approvals may include significant
limitations on the intended use and indications for use for
which our products may be marketed.
Continuing FDA
Regulation. After a device
is approved and placed in commercial distribution, numerous
regulatory requirements apply. These include:
•
establishment registration and device
listing;
•
the QSR, which requires manufacturers to
follow design, testing, control, documentation and other quality
assurance procedures;
•
labeling regulations, which prohibit the
promotion of products for unapproved or “off-label”
uses and impose other restrictions on labeling;
•
medical device reporting regulations,
which require that manufacturers report to the FDA if a device
may have caused or contributed to a death or serious injury or
malfunctioned in a way that would likely cause or contribute to
a death or serious injury if malfunctions were to recur; and
•
corrections and removal reporting
regulations, which require that manufacturers report to the FDA
field corrections and product recalls or removals if undertaken
to reduce a risk to health posed by the device or to remedy a
violation of the FDCA caused by the device that may present a
risk to health.
Also, the FDA may require us to conduct
postmarket surveillance studies or order us to establish and
maintain a system for tracking our products through the chain of
distribution to the patient level. The FDA and the Food and Drug
Branch of the California Department of Health Services enforce
regulatory requirements by conducting periodic, announced and
unannounced inspections and market surveillance. Inspections may
include the manufacturing facilities of our subcontractors.
Failure to comply with applicable
regulatory requirements, including those applicable to the
conduct of our clinical trials, can result in enforcement action
by the FDA, which may lead to any of the following sanctions:
delays in clearing or approving or refusal
to clear or approve, the Alair System or other products;
•
withdrawal or suspension of FDA approval;
•
product recall or seizure;
•
orders for physician notification or
device repair, replacement, or refund;
•
interruption of production;
•
operating restrictions;
•
injunctions; and
•
criminal prosecution.
We and our contract manufacturers,
specification developers, and some suppliers of components or
device accessories, are also required to manufacture our
products in compliance with current Good Manufacturing Practice,
or GMP, requirements set forth in the QSR. The QSR requires a
quality system for the design, manufacture, packaging, labeling,
storage, installation and servicing of marketed devices, and
includes extensive requirements with respect to quality
management and organization, device design, buildings,
equipment, purchase and handling of components, production and
process controls, packaging and labeling controls, device
evaluation, distribution, installation, complaint handling,
servicing, and record keeping. The FDA enforces the QSR through
periodic announced and unannounced inspections that may include
the manufacturing facilities of our subcontractors. If the FDA
believes we or any of our contract manufacturers or regulated
suppliers is not in compliance with these requirements, it can
shut down our manufacturing operations, require recall of our
products, refuse to clear or approve new marketing applications,
institute legal proceedings to detain or seize products, enjoin
future violations, or assess civil and criminal penalties
against us or our officers or other employees. Any such action
by the FDA would have a material adverse effect on our business.
We cannot assure you that we will be able to comply with all
applicable FDA regulations.
International
Regulation
International sales of medical devices are
subject to foreign government regulations, which may vary
substantially from country to country. The time required to
obtain approval in a foreign country may be longer or shorter
than that required for FDA approval, and the requirements may
differ. There is a trend towards harmonization of quality system
standards among the European Union, United States, Canada and
various other industrialized countries. The primary regulatory
environment in Europe is that of the European Union, which
includes most of the major countries in Europe. Other countries,
such as Switzerland, have voluntarily adopted laws and
regulations that mirror those of the European Union with respect
to medical devices. The European Union has adopted numerous
directives and standards regulating the design, manufacture,
clinical trials, labeling and adverse event reporting for
medical devices. Devices that comply with the requirements of a
relevant directive will be entitled to bear the CE conformity
marking, indicating that the device conforms to the essential
requirements of the applicable directives and, accordingly, can
be commercially distributed throughout Europe. The method of
assessing conformity varies depending on the class of the
product, but normally involves a combination of self-assessment
by the manufacturer and a
third-party assessment
by a “Notified Body.” This
third-party assessment
may consist of an audit of the manufacturer’s quality
system and specific testing of the manufacturer’s product.
An assessment by a Notified Body of one country within the
European Union is required in order for a manufacturer to
commercially distribute the product
throughout the European Union. The Alair
System has received approval to bear the CE conformity marking.
Outside of the European Union, regulatory approval needs to be
sought on a country-by-country basis in order for us to market
our products.
Fraud and Abuse
Our operations will be directly, or
indirectly through our customers, subject to various state and
federal fraud and abuse laws, including, without limitation, the
federal Anti-Kickback Statute and False Claims Act. These laws
may impact, among other things, our proposed sales, marketing
and education programs.
The federal Anti-Kickback Statute
prohibits persons from knowingly and willfully soliciting,
offering, receiving or providing remuneration, directly or
indirectly, in exchange for or to induce either the referral of
an individual, or the furnishing or arranging for a good or
service, for which payment may be made under a federal
healthcare program such as the Medicare and Medicaid programs.
Several courts have interpreted the statute’s intent
requirement to mean that if any one purpose of an arrangement
involving remuneration is to induce referrals of federal
healthcare covered business, the statute has been violated. The
Anti-Kickback Statute is broad and prohibits many arrangements
and practices that are lawful in businesses outside of the
healthcare industry. Many states have also adopted laws similar
to the federal Anti-Kickback Statute, some of which apply to the
referral of patients for healthcare items or services reimbursed
by any source, not only the Medicare and Medicaid programs.
The federal False Claims Act prohibits
persons from knowingly filing or causing to be filed a false
claim to, or the knowing use of false statements to obtain
payment from, the federal government. Various states have also
enacted laws modeled after the federal False Claims Act.
In addition to the laws described above,
the Health Insurance Portability and Accountability Act of 1996
created two new federal crimes: healthcare fraud and false
statements relating to healthcare matters. The healthcare fraud
statute prohibits knowingly and willfully executing a scheme to
defraud any healthcare benefit program, including private
payors. The false statements statute prohibits knowingly and
willfully falsifying, concealing or covering up a material fact
or making any materially false, fictitious or fraudulent
statement in connection with the delivery of or payment for
healthcare benefits, items or services.
If our operations are found to be in
violation of any of the laws described above or other applicable
state and federal fraud and abuse laws, we may be subject to
penalties, including civil and criminal penalties, damages,
fines, exclusion from government healthcare programs, and the
curtailment or restructuring of our operations.
Third-Party
Reimbursement
The availability of insurance coverage and
reimbursement for newly approved medical devices is uncertain.
In the United States, patients using existing
pharmaceutical-based therapies for asthma are generally
reimbursed all or part of the product cost by Medicare or other
third-party payors. The commercial success of our products in
both domestic and international markets will be substantially
dependent on whether third-party coverage and reimbursement is
available for patients that use our products. Third-party
coverage may be particularly difficult to obtain if our systems
are not approved by the FDA as a therapy for asthma patients.
Medicare, Medicaid, health maintenance organizations and other
third-party payors are increasingly attempting to contain
healthcare costs by limiting both coverage and the level of
reimbursement of new medical devices, and, as a result, they may
not cover or provide adequate payment for our products. In order
to position our device for acceptance by third-party payors, we
may have to agree to a lower net sales price than we might
otherwise charge. The
continuing efforts of governmental and
commercial third-party payors to contain or reduce the costs of
healthcare may limit our revenue. Our initial dependence on the
commercial success of the Alair System makes us particularly
susceptible to any cost containment or reduction efforts.
Accordingly, even if the Alair System for asthma or future
products are approved for commercial sale, unless government and
other third-party payors provide adequate coverage and
reimbursement for our products, patients may not have adequate
access to them.
In some foreign markets, pricing and
profitability of medical devices are subject to government
control. In the United States, we expect that there will
continue to be federal and state proposals for similar controls.
Also, the trends toward managed healthcare in the United States
and proposed legislation intended to reduce the cost of
government insurance programs could significantly influence the
purchase of healthcare services and products and may result in
lower prices for our products or the exclusion of our products
from reimbursement programs.
Employees
As of August 31, 2006, we had 40
employees, of which ten employees are engaged in research
and development, six are engaged in manufacturing, twelve are
engaged in clinical, regulatory and quality assurance, and
twelve are engaged in general and administrative functions. None
of our employees is represented by a labor union or is covered
by a collective bargaining agreement. We have never experienced
any employment-related work stoppages and consider our employee
relations to be good.
Facilities
We maintain our headquarters in Mountain
View, California in one leased facility of approximately
8,400 square feet, which includes our laboratory, research
and development, manufacturing and general administration
functions. The lease for this facility expires in December 2007.
We have the right to extend the term of this lease for an
additional year. We believe that our existing facility is
adequate to meet our needs through at least 2006. We expect we
will need to move into a larger facility over time, and
currently we anticipate that suitable additional space will be
available in the future on commercially reasonable terms as
needed.
Legal Proceedings
We are not party to any material pending
or threatened litigation.
Vice President, Finance and Administration and Chief Financial
Officer
Gary S. Kaplan
40
Senior Vice President, Technology and Operations
Debera M. Brown
53
Vice President, Regulatory Affairs
Karen M. Passafaro
46
Vice President, Marketing
Dr. Narinder S. Shargill
51
Vice President, Clinical Affairs
Dr. Michael D. Laufer
48
Director
Annette J.
Campbell-White(2)(3)
59
Director
Brian E.
Chee(2)(3)
40
Director
W. James
Fitzsimmons(1)
50
Director
Thomas C.
McConnell(1)(3)
52
Director
Dr. Beat R.
Merz(2)
45
Director
Lowell E.
Sears(1)
55
Director
(1)
Member of the Audit Committee.
(2)
Member of the Compensation Committee.
(3)
Member of the Nominating and Corporate
Governance Committee.
Glendon E. French
has served as our President
and Chief Executive Officer and as a director of our company
since our inception. Mr. French served as President and
Chief Executive Officer and as a director of Broncus
Technologies, Inc. from its formation in March 1997 until our
inception. Prior to joining Broncus, Mr. French served as
Vice President, Marketing for C.R. Bard, Inc., Davol Division, a
medical technology company, from July 1993 until March 1997.
Mr. French serves on the boards of directors of several
private companies. Mr. French holds a B.A. in history from
Dartmouth College and an M.B.A. from the Wharton School at the
University of Pennsylvania.
Christopher P. Lowehas served as our Vice
President, Finance and Administration since September 2005 and
our Chief Financial Officer since January 2006. Prior to joining
us, Mr. Lowe served with Peninsula Pharmaceuticals, Inc., a
pharmaceutical company, as Corporate Controller from June 2004
to October 2004 and Chief Accounting Officer from October 2004
until its acquisition by Johnson & Johnson in June
2005. From January 2003 to June 2004, Mr. Lowe served as
Global Divisional Controller — Trane Division with
American Standard Corporation, a producer of bathroom and
kitchen fixtures and fittings. From July 2000 to January 2003,
Mr. Lowe served as Vice President, Finance of Fairchild
Dornier, an aerospace technology firm. Mr. Lowe holds a
B.S. in business administration from California Polytechnic
State University, San Luis Obispo and an M.B.A. from Saint
Mary’s University, Texas.
Gary S. Kaplan
has served as our Senior
Vice President, Technology and Operations since August 2005 and
as our Vice President, Operations and Quality Assurance from our
inception to that date. Mr. Kaplan served as Vice
President, Operations and Quality Assurance for Broncus from
October 2000 until our inception. From February 1998 to October
2000, Mr. Kaplan served as Vice President, Operations of
Broncus. Prior to joining Broncus, Mr. Kaplan served as
Vice President, Operations for
Medtronic, Inc., CardioRhythm Division, a
medical technology company, from July 1997 until January 1998.
Mr. Kaplan holds a B.S. in mechanical engineering from
Rensselaer Polytechnic Institute.
Debera M. Brown
has served as our Vice
President, Regulatory Affairs since our inception.
Ms. Brown served as Vice President, Regulatory Affairs at
Broncus from July 2001 until our inception. Prior to joining
Broncus, from May 1997 to July 2001, Ms. Brown served as
Vice President, Regulatory Affairs and Quality Assurance, and
from May 1995 to May 1997, as Vice President, Regulatory and
Clinical Affairs of Fusion Medical Technologies, Inc., a medical
device company. From July 2000 to August 2003, Ms. Brown
was the Industry Representative for the Center for Devices and
Radiological Health, General and Plastic Surgery Devices Panel
at the U.S. Food and Drug Administration. Ms. Brown
holds a B.A. in human biology from Stanford University.
Karen M. Passafaro
has served as our Vice
President, Marketing since January 2005. Prior to joining us,
Ms. Passafaro served as Senior Director of Marketing for
Novacept Inc., a medical device company, from August 2001 until
December 2004. Ms. Passafaro managed her own consulting
business from August 1997 to August 2001. Prior to that,
Ms. Passafaro was Director of Marketing for Baxter Edwards
Critical Care, now a division of Edwards Lifesciences LLC, a
medical device company. Ms. Passafaro holds a B.S. in
bioengineering from the University of California, San Diego
and an M.B.A. from the University of Phoenix.
Dr. Narinder S. Shargill
has served as our Vice
President, Clinical Affairs since our inception.
Dr. Shargill served as Vice President, Clinical Affairs at
Broncus from November 2003 until our inception. Prior to joining
Broncus, Dr. Shargill served as Senior Director, Clinical
Development of Baxter Healthcare Corporation, Bioscience
Division, a medical technology company, from May 2002 until
November 2003. From May 2000 to May 2002, Dr. Shargill
served as Senior Director, Clinical Affairs for Fusion Medical
Technologies, Inc., a medical device company. Dr. Shargill
holds a B.Sc. in physiology and biochemistry and a Ph.D. in
nutrition and biochemistry, both from the University of
Southampton, England.
Dr. Michael D. Laufer
has served as a director of
our company since its inception, and served as a director of
Broncus since founding Broncus in 1997. Since April 2006,
Dr. Laufer has served as a Founder and Managing Member of
Mach Ventures, a venture capital firm. Since 1988,
Dr. Laufer also has served as a member of the academic and
clinical faculty at Stanford University. From December 1995 to
December 2002, Dr. Laufer was also a General Partner and
Managing Member of Menlo Ventures, a venture capital firm, where
he was an Associate from October 1993 to December 1995. From
1986 to 1996, Dr. Laufer was a practicing physician.
Dr. Laufer has founded more than ten medical technology
companies including our company, Broncus, NDO Surgical and VNUS
Medical Technologies, Inc. Dr. Laufer serves on the board
of directors of several private companies. From 1989 to 1994,
Dr. Laufer served as Medical Director of Emergency Medicine
at UCSF-Mount Zion Medical Center. Dr. Laufer holds a B.S.
in biological sciences (MCDB) from the University of
Colorado and an M.D. from Stanford University.
Annette J. Campbell-White
has served as a director of
our company since March 2004. Ms. Campbell-White has served
as the Managing General Partner of MedVenture Associates L.P., a
venture capital firm focused primarily on investments in early
stage healthcare businesses, since forming this firm in 1986.
Prior to forming MedVenture Associates, Ms. Campbell served
in multiple capacities with Hambrecht & Quist,
including General Partner and Analyst focusing on biotechnology.
Ms. Campbell-White currently serves on the board of
directors of Cutera, Inc., a medical device company, as well as
the boards of directors of several private companies.
Ms. Campbell-White holds a B.S. in chemical engineering and
an M.S. in chemistry, both from the University of Cape Town,
South Africa.
Brian E. Chee
has served as a director of
our company since March 2004. Since April 1998, Mr. Chee
has served as a General Partner of Polaris Venture Partners, a
venture capital firm focused on investments in seed, early stage
and high growth middle market companies. Mr. Chee joined
Polaris Venture Partners in August 1996 and focuses on
investments in healthcare and medical technology. Before joining
Polaris Venture Partners, Mr. Chee served as Captain in the
United States Army Corps of Engineers, during which time he was
awarded the Bronze Star and the Army Commendation Medal with
Valor for service during the Gulf War. Mr. Chee
currently serves on the boards of directors of several private
companies. Mr. Chee holds a B.S. in engineering and
economics from the United States Military Academy at West Point
and an M.B.A. from the Amos Tuck School of Business at Dartmouth
College.
W. James Fitzsimmons
has served as a director of
our company since its inception, and served as a director of
Broncus since May 1999. Since April 2003, Mr. Fitzsimmons
has served as Chairman and Chief Executive Officer of Archus
Orthopedics, Inc., a private spinal implant company. From August
2000 to April 2003, Mr. Fitzsimmons served as Managing
Director of Scout Medical Technologies LLC, a medical
device incubation firm. From December 1999 to August 2000,
Mr. Fitzsimmons pursued personal business opportunities.
From December 1997 to December 1999, Mr. Fitzsimmons served
as Senior Vice President and General Manager of Guidant
Corporation, Cardiac and Vascular Surgery Group, a medical
device company. Mr. Fitzsimmons served as President and Chief
Executive Officer of EndoVascular Technologies, Inc., a medical
device company, from October 1991 to December 1997 (when it was
acquired by Guidant). Mr. Fitzsimmons currently serves on
the board of directors of VNUS Medical Technologies, Inc., a
medical device company, as well as boards of directors of
several private companies. Mr. Fitzsimmons also serves on
the Advisory Board of the Entrepreneurship Center of the Albers
School of Business at Seattle University. Mr. Fitzsimmons
holds a B.S. in biology-premedical and an M.B.A., both from
Seattle University.
Thomas C. McConnell
has served as a director of
our company since December 2005. Mr. McConnell has served
as a Managing Member at Vanguard Ventures, a venture capital
firm, since June 2004. From May 1989 to May 2004,
Mr. McConnell served as a General Partner of New Enterprise
Associates, a venture capital firm. Mr. McConnell also
served as Chairman of the National Venture Capital Association
from May 2001 to May 2002 and as president of the Western
Association of Venture Capitalists from July 1995 to June 1996.
Mr. McConnell currently serves on the board of directors of
Hansen Medical, a company specializing in robotic catheter
technology. Mr. McConnell holds an A.B. in engineering
science from Dartmouth College and an M.B.A. from Stanford
University.
Dr. Beat R. Merz
has served as a director of
our company since December 2005. Dr. Merz has served as
Chairman and President of Thommen Medical AG, a dental implant
company, since December 2001. Since March 2003, Dr. Merz
has also served as an investment advisor with HBM Partners AG,
an investment advisory firm specializing in the global life
sciences sector. From September 1999 until February 2003,
Dr. Merz served as Investment Manager and later as Managing
Director of NMT Management AG, a venture capital firm.
Dr. Merz also served as group manager and a senior engineer
with Institute Straumann AG, a producer of dental implants, from
January 1994 until September 1999. Dr. Merz has co-founded
several medical technology companies, and he currently serves on
the board of directors of Micrus Endovascular Corporation, a
medical device company, as well as the boards of directors of
several private medical device companies. Dr. Merz holds a
Ph.D. in mechanical engineering from the Swiss Federal Institute
of Technology (ETH) in Zurich, Switzerland, and an M.B.A.
from the University of Strathclyde in Glasgow, U.K.
Lowell E. Sears
has served as a director of
our company since July 2006. Mr. Sears has served as
Chairman, Chief Executive Officer and Chief Investment Officer
of Sears Capital Management, Inc., a venture investment
corporation, including roles in venture investing and portfolio
management, since April 1994. From October 1988 to March 1994,
Mr. Sears served as Chief Financial Officer of Amgen, Inc.,
a pharmaceutical company. From March 1992 to January 1994,
Mr. Sears also held the position of
Senior Vice President responsible for the
Asia Pacific Region of Amgen. From August 1986 until September
1988, Mr. Sears served as Treasurer and Director of
Planning for Amgen. Mr. Sears currently serves on the board
of directors of Neose Technologies, a biotechnology company.
Mr. Sears holds a B.A. in economics from Claremont McKenna
College and an M.B.A. from Stanford University.
Board Composition
Our board of directors currently consists
of eight members. Each director is appointed by our board of
directors or elected at a meeting of stockholders and serves
until our next annual meeting or until his successor is duly
elected and qualified or until his earlier death, resignation or
removal. Any vacancy on our board of directors will be filled by
a person selected by a majority of the remaining directors then
in office, or by a sole remaining director, unless the board of
directors determines that the particular vacancy will be filled
by the vote of the stockholders. Pursuant to a voting agreement
among us and our stockholders, investors affiliated with Polaris
Venture Partners, of which Mr. Chee is an affiliate,
MedVenture Associates L.P., of which Ms. Campbell-White is
an affiliate, HBM Partners AG, of which Dr. Merz is an
affiliate, and Vanguard Ventures, of which Mr. McConnell is
an affiliate, each has the right to designate a representative
to our board of directors. Upon the completion of this offering,
this voting agreement will terminate, and no stockholders will
have any contractual rights regarding the election of our
directors.
Effective upon the closing of this
offering, our board of directors will be divided into three
classes of directors who will serve in staggered three-year
terms, as follows:
•
the Class I directors will be
Messrs. Chee and Fitzsimmons and Dr. Laufer, and their
terms will expire at the annual meeting of stockholders to be
held in 2007;
•
the Class II directors will be
Mr. McConnell, Dr. Merz and Ms. Campbell-White,
and their terms will expire at the annual meeting of
stockholders to be held in 2008; and
•
the Class III directors will be
Messrs. French and Sears, and their terms will expire at
the annual meeting of stockholders to be held in 2009.
Effective upon the closing of this
offering, our restated certificate of incorporation will provide
that the authorized number of directors may be changed only by
resolution of the board of directors. Any additional
directorships resulting from an increase in the number of
directors will be distributed among the three classes with
three-year terms so that, as nearly as possible, each class will
consist of one-third of the directors. At each annual meeting of
stockholders, the successors to directors whose terms then
expire will be elected to serve from the time of election and
qualification until the third annual meeting following election.
As a result, only one class of directors will be elected at each
annual meeting of our stockholders, with the other classes
continuing for the remainder of their respective three-year
terms. The division of our board of directors into these three
classes may delay or prevent a change of our management or a
change in control. Please see Description of Capital
Stock — Anti-Takeover Provisions.
Board Committees
Upon the completion of this offering, our
board of directors will have an audit committee, a compensation
committee and a nominating and corporate governance committee.
The composition and responsibilities of each committee are
described below. Members serve on these committees until their
resignation or until otherwise determined by our board of
directors.
Our audit committee oversees our corporate
accounting and financial reporting process. Among other matters,
our audit committee:
•
evaluates the qualifications, independence
and performance of our independent registered public accounting
firm;
•
approves the engagement of our independent
registered public accounting firm and reviews and approves the
scope of the annual audit and the audit fee;
•
discusses with management and our
independent registered public accounting firm the results of the
annual audit and the review of our quarterly financial
statements;
•
approves the retention of our independent
registered public accounting firm to perform any proposed
permissible non-audit services;
•
reviews our critical accounting policies
and estimates; and
•
annually reviews the audit committee
charter and the committee’s performance.
Upon the completion of this offering, our
audit committee will consist of Mr. Sears, who will be the
chair of the committee, and Messrs. Fitzsimmons and
McConnell. Each of these individuals meets the requirements for
financial literacy under the applicable rules and regulations of
the SEC and The NASDAQ Global Market, or Nasdaq. Our board of
directors has determined that Mr. Sears is an audit
committee financial expert as defined under the applicable rules
of the SEC and therefore has the requisite financial
sophistication required under the applicable rules and
regulations of Nasdaq. Each of Messrs. Sears, Fitzsimmons
and McConnell is an independent director as defined under the
applicable regulations of the SEC and under the applicable rules
of Nasdaq.
Compensation Committee
Our compensation committee reviews and
recommends policy relating to compensation and benefits of our
officers, employees and directors. Our compensation committee
reviews and approves corporate goals and objectives relevant to
compensation of our chief executive officer and other executive
officers, evaluates the performance of these officers in light
of those goals and objectives and sets the compensation of these
officers based on such evaluations. Our compensation committee
also administers the issuance of stock options and other awards
under our equity award plans. Upon the completion of this
offering, our compensation committee will consist of
Mr. Chee, who will be the chair of the committee, and
Dr. Merz and Ms. Campbell-White. All members of our
compensation committee are independent under the applicable
rules and regulations of the SEC, Nasdaq and the Internal
Revenue Service.
Nominating and Corporate Governance
Committee
Our nominating and corporate governance
committee makes recommendations to our board of directors
regarding candidates for directorships and the size and
composition of our board of directors and its committees. In
addition, our nominating and corporate governance committee
oversees our codes of conduct and makes recommendations to our
board of directors concerning governance matters. Upon the
completion of this offering, our nominating and corporate
governance committee will consist of Mr. McConnell, who
will be the chair of the committee, and Mr. Chee and
Ms. Campbell-White. The composition of our nominating and
corporate governance committee meets
the criteria for independence under, and
the functioning of our nominating and corporate governance
committee complies with, the applicable rules and regulations of
the SEC and NASDAQ.
Compensation Committee Interlocks and
Insider Participation
Before January 2006, our board of
directors did not have a compensation committee and all material
decisions were made by the full board of directors.
Mr. French did not participate in discussions by our board
of directors with respect to his compensation. In January 2006,
we formed a compensation committee, which currently consists of
Messrs. Chee, Fitzsimmons and McConnell. Neither any
current member of our compensation committee, nor any member
joining our compensation committee upon the completion of this
offering, has at any time since our inception been an officer or
employee of our company or any of its subsidiaries, and none has
any related party transaction relationships with our company of
a type that is required to be disclosed under Item 404 of
Regulation S-K.
None of our executive officers has served as a member of the
board of directors, or as a member of the compensation or
similar committee, of any entity that has one or more executive
officers who served on our board of directors or compensation
committee during fiscal year 2005.
Director Compensation
Our directors do not receive cash
compensation for their services as directors. However, all of
our directors, including our non-employee directors, are
reimbursed for their reasonable expenses in attending board and
committee meetings.
Following the closing of this offering,
each non-employee director who is not affiliated with a venture
capital firm that invested in us prior to this offering will
receive an annual retainer of $30,000. In addition, the chairs
of our audit committee, our compensation committee and our
nominating and corporate governance committee will receive
additional annual retainers of $20,000, $5,000 and $5,000,
respectively, unless they are affiliated with a venture capital
firm that invested in our company prior to this offering.
Our 2006 equity incentive plan provides
for automatic, nondiscretionary stock option grants to
non-employee directors. Each non-employee director who has not
received an option to purchase shares of our common stock during
the two-year period immediately preceding the effective date of
this offering will be granted an option to purchase
16,666 shares of our common stock upon the effective date
of this offering at an exercise price per share equal to the
initial offering price. Each non-employee director who becomes a
member of our board of directors after the effective date of
this offering will be granted an initial option to purchase
16,666 shares or our common stock upon election to our
board of directors. On the first business day following each
subsequent annual stockholder meeting, each non-employee
director who continues to serve on the board of directors
immediately following such meeting will automatically be granted
an option to purchase 6,666 shares of our common stock,
subject to pro-ration on a monthly basis in the event the
non-employee director has not served an entire year on the board
of directors since the initial stock option grant to purchase
16,666 shares of our common stock to such non-employee
director. Each option will have an exercise price equal to the
fair market value of our common stock on the date of grant, will
have a ten-year term
and will terminate 90 days following the date the director
ceases to serve on the board of directors or as an employee or
consultant of our company for any reason other than death or
disability, and 12 months following that date if the
termination is due to death or disability. We expect that all
stock options granted to directors under the plan upon the
closing of this offering or upon their initial election to the
board of directors will vest monthly over a
36-month period, and
that all subsequent options granted to such directors will vest
monthly over a 12-month
period, subject in each case to continued service on the board
of directors or as an employee or consultant of our company. In
the event of our dissolution, liquidation, a change in control
transaction or the acquisition of beneficial ownership of 50% or
more of our voting securities by any
third-party
unaffiliated with our company, options
granted to members of our board of
directors under the plan will become fully vested and
exercisable. In addition, our board of directors has the
authority and discretion to grant options to directors in
addition to the automatic and nondiscretionary option grants
provided for under the plan.
Upon his election to the board of
directors in July 2006, Mr. Sears received a stock option
to purchase 41,666 shares of our common stock at an
exercise price of $4.95 per share. This option vests
ratably over 36 months, subject to Mr. Sears’
continued service on our board of directors or as an employee or
consultant of our company.
In March 2004, Dr. Laufer received a
stock option to purchase 31,666 shares of our common stock
in connection with his service as a director at an exercise
price of $0.60 per share and vesting ratably over
48 months. In December 2003, Dr. Laufer received a
stock option to purchase 6,666 shares of our common stock
in connection with his service as a director at an exercise
price of $1.44 per share and vesting ratably over
48 months.
In addition, we entered into an
Independent Consultant Agreement with Dr. Laufer, effective
as of December 26, 2003. Under this agreement,
Dr. Laufer provides us certain consulting services and
provides us with rights to inventions that he makes during the
term of the agreement that are related to or useful in, the
treatment of the airways of the lungs for asthma. We have agreed
to license back to Dr. Laufer any such invention for
non-asthma uses, and if it is believed that the primary use of
any such invention is for non-asthma uses, and none of our
employees or consultants were co-inventors on the invention,
then Dr. Laufer may retain ownership of the invention
provided that he grants to us an exclusive royalty-free license
to the invention for asthma uses. In connection with this
agreement, we granted Dr. Laufer an option to purchase
73,333 shares of our common stock at an exercise price of
$0.60 per share and vesting ratably over 48 months
commencing on April 1, 2004, so long as the agreement is
not terminated. The agreement may be terminated by either party
on ten days’ advance notice.
Mr. Fitzsimmons received two stock
options to purchase an aggregate of 13,332 shares of our
common stock, each at an exercise price of $1.44 per share,
in December 2003, and a stock option to purchase
25,000 shares of our common stock at an exercise price of
$0.60 per share in March 2004. One of the options granted
in December 2003, exercisable for 6,666 shares of our
common stock, is fully vested. The other option granted in
December 2003, and the option granted in March 2004, each vests
ratably over 48 months.
The following table presents compensation
information for the year ended December 31, 2005 for our
chief executive officer and each of our four other most highly
compensated executive officers whose salary and bonus for 2005
was more than $100,000. We refer to these five executive
officers as our named executive officers elsewhere in this
prospectus.
Summary Compensation Table
Long-Term
Compensation
Awards
Annual Compensation
Securities
Underlying
All Other
Name and Principal Position
Salary
Bonus
Options
Compensation(1)
Glendon E. French
President and Chief Executive Officer
$
268,860
$
74,212
—
$17,540
Debera M. Brown
Vice President, Regulatory Affairs
242,357
43,750
—
19,223
Gary S. Kaplan
Senior Vice President, Technology and Operations
179,878
26,406
18,666
13,302
Dr. Narinder S. Shargill
Vice President, Clinical Affairs
170,114
24,178
—
15,441
Karen M. Passafaro
Vice President, Marketing
163,608
22,275
68,333
1,829
(1)
Represents life insurance, health
insurance, dental insurance and long-term disability insurance
benefits.
Option Grants in 2005
The following table presents information
regarding grants of stock options under our 2003 stock
option plan during the year ended December 31, 2005 to our
named executive officers.
Individual Grants
Potential Realizable Value at
Number of
Percent of
Assumed Annual Rates of Stock
Securities
Total Options
Price Appreciation for Option
Underlying
Granted to
Exercise
Term
Options
Employees in
Price Per
Expiration
Name
Granted
2005
Share
Date
5%
10%
Glendon E. French
—
—
%
$
—
—
$
—
$
—
Debera M. Brown
—
—
—
—
—
—
Gary S. Kaplan
18,666
8.1
0.60
7/27/2015
353,660
569,778
Dr. Narinder S. Shargill
—
—
—
—
—
—
Karen M. Passafaro
68,333
29.5
0.60
1/2/2015
1,294,687
2,085,859
Mr. Kaplan’s options vest
ratably over a 48-month
period. Ms. Passafaro’s options vested as to 25% of
the shares on the first anniversary of her start date with the
remainder vesting ratably over a
36-month period
thereafter. Mr. Kaplan’s and Ms. Passafaro’s
stock options are immediately exercisable regardless of vesting;
however, any unvested shares issued upon exercise will be
subject to a right to repurchase by us upon termination of
employment, which right lapses in accordance with the vesting
schedule described above. Mr. Kaplan’s and
Ms. Passafaro’s stock options expire ten years after
the date of grant and were granted at an exercise price equal to
the fair market value of our common stock as determined by our
board of directors on the date of grant. The percentage of
total
options granted to employees in 2005 is
based on options to purchase a total of 231,827 shares of
our common stock.
The potential realizable values identified
in the table above are calculated based on an assumed initial
public offering price of $12.00 per share, the midpoint of
the range on the front cover of this prospectus, compounded at
the annual 5% or 10% rate shown in the table until the
expiration of the option, less the per share exercise price,
multiplied by the number of shares issuable upon exercise of the
option. The 5% and 10% assumed annual rates of stock price
appreciation are required by SEC rules and do not represent our
estimate or projection of future common stock prices. Actual
gains, if any, on stock option exercises will depend on the
future performance of our common stock.
Aggregated Option Exercises in 2005 and
Option Values at December 31, 2005
The following table sets forth certain
information regarding stock options exercised during the year
ended December 31, 2005, and unexercised options held as of
December 31, 2005 by each of our named executive officers.
The values of these options have been calculated based on the
assumed initial public offering price of $12.00 per share,
the midpoint of the range on the front cover of the prospectus,
less the applicable exercise price per share, multiplied by the
number of shares issued or issuable, as the case may be, on the
exercise of the option.
Includes 194,445 shares unvested at
December 31, 2005 that were subject to our lapsing right of
repurchase.
(2)
Includes 56,000 shares unvested at
December 31, 2005 that were subject to our lapsing right of
repurchase.
(3)
Includes 4,792 shares unvested at
December 31, 2005 that were subject to our lapsing right of
repurchase.
(4)
Includes unvested options at
December 31, 2005 to purchase 2,982 shares,
which, if exercised, would be subject to our lapsing right of
repurchase.
(5)
Includes unvested options at
December 31, 2005 to purchase 35,324 shares, which, if
exercised, would be subject to our lapsing right of repurchase.
(6)
Includes unvested options at
December 31, 2005 to purchase 895 shares, which, if
exercised, would be subject to our lapsing right of repurchase.
(7)
Includes unvested options at
December 31, 2005 to purchase 31,944 shares, which, if
exercised, would be subject to our lapsing right of repurchase.
(8)
Consists of unvested options at
December 31, 2005, which, if exercised, would be subject to
our lapsing right of repurchase.
Equity Incentive Plans
This section contains a summary of our
equity incentive plans. To date, we have granted all options to
purchase shares of our common stock from our 2003 stock option
plan. Upon the effective date of this offering, we will no
longer grant options under our 2003 stock option plan, and
instead will grant equity awards from our 2006 equity incentive
plan.
Background.
Our 2006 equity incentive plan, which we refer to as our 2006
plan, will serve as the successor equity compensation plan to
our 2003 stock option plan. Our board of directors adopted our
2006 plan in July 2006 and our stockholders approved the 2006
plan in August 2006. Our 2006 plan will become effective on the
date of our initial public offering and will terminate in July
2016. Our 2006 plan provides for the grant of incentive stock
options, nonqualified stock options, restricted stock awards,
stock appreciation rights, restricted stock units and stock
bonuses.
Administration.
Our 2006 plan will be administered by our compensation
committee. This committee will act as the plan administrator and
will determine which individuals are eligible to receive awards
under our 2006 plan, the time or times when such awards are to
be made, the number of shares subject to each such award, the
status of any granted option as either an incentive stock option
or a nonqualified stock option under United States federal tax
laws, the vesting schedule applicable to an award and the
maximum term for which any award is to remain outstanding
(subject to the limits set forth in our 2006 plan). The
committee will also determine the exercise price of options
granted, the purchase price for rights to purchase restricted
stock and, if applicable, restricted stock units, and the strike
price for stock appreciation rights. Unless the committee
provides otherwise, our 2006 plan does not allow for the
transfer of awards and only the recipient of an award may
exercise an award during his or her lifetime.
Share
Reserve. We have reserved
500,000 shares of our common stock for issuance under our
2006 plan plus:
•
all shares of our common stock reserved
under our 2003 stock option plan, which we refer to as our 2003
plan, that are not issued or subject to outstanding grants as of
the completion of this offering;
•
any shares of our common stock issued
under our 2003 plan that are forfeited or repurchased by us at
the original purchase price; and
•
any shares of our common stock issuable
upon exercise of options granted under our 2003 plan that expire
without having been exercised in full.
Additionally, our 2006 plan provides for
automatic increases in the number of shares available for
issuance under it as follows:
•
on January 1, 2007, the number of
shares of our common stock available for issuance under our
2006 plan will be automatically increased by an amount
equal to the product of 4% of the number of shares of our common
stock issued and outstanding on December 31, 2006
multiplied by a fraction, the numerator of which is the number
of days between the completion of this offering and
December 31, 2006 and the denominator of which is 365;
•
on the first day of each January from 2008
through 2016, the number of shares of our common stock available
for issuance under our 2006 plan will be increased by 4% of
the number of shares of our common stock issued and outstanding
on the preceding December 31st; or
•
a lesser number of shares of our common
stock as determined by our board of directors.
Equity
Awards. Our 2006 plan
permits us to grant the following types of awards:
•
Stock
Options. Our 2006 plan provides
for the grant of incentive stock options (commonly referred to
as ISOs) to employees, and nonqualified stock options (commonly
referred to as NSOs) to employees, directors and consultants.
Options may be granted with terms determined by the committee,
provided that ISOs are subject to statutory limitations. The
committee determines the exercise price for a stock option,
within the terms and conditions of our 2006 plan and applicable
law, provided that the exercise price of an ISO may not be less
than 100% (or higher in the case of certain recipients of ISOs)
of the fair market value of our common stock on the date of
grant. ISOs exercisable for no more than 6,666,666 shares
may be granted over the life of our 2006 plan.
Options granted under our 2006 plan will
vest at the rate specified by the committee and such vesting
schedule will be set forth in the stock option agreement to
which such stock option grant relates. Generally, the committee
determines the term of stock options granted under our 2006
plan, up to a term of ten years, except in the case of certain
ISOs.
After termination of an optionee, he or
she may exercise his or her vested option for the period of time
stated in the stock option agreement to which such option
relates, up to a maximum of five years from the date of
termination. Generally, if termination is due to death or
disability, the vested option will remain exercisable for
12 months. In all other cases, the vested option will
generally remain exercisable for three months. However, an
option may not be exercised later than its expiration date.
Notwithstanding the foregoing, if an
optionee is terminated for cause (as defined in our 2006 plan),
then the optionee’s options shall expire on the
optionee’s termination date or at such later time and on
such conditions as determined by our compensation committee.
•
Restricted
Stock. A restricted stock award
is an offer by us to sell shares of our common stock subject to
restrictions that the committee may impose. These restrictions
may be based on completion of a specified period of service with
us or upon the completion of performance goals during a
performance period. The price of a restricted stock award will
be determined by the committee. Unless otherwise determined by
the committee at the time of award, vesting ceases on the date
the participant no longer provides services to us and unvested
shares are forfeited to us or subject to repurchase by us.
•
Stock Appreciation
Rights. Stock appreciation
rights provide for a payment, or payments, in cash or shares of
common stock, to the holder based upon the difference between
the fair market value of our common stock on the date of
exercise and the stated exercise price. Stock appreciation
rights may vest based on time or achievement of performance
conditions.
•
Restricted Stock
Units. Restricted stock units
represent the right to receive shares of our common stock at a
specified date in the future, subject to forfeiture of such
right due to termination of employment or failure to achieve
specified performance conditions. If the restricted stock unit
has not been forfeited, then on the date specified in the
restricted stock unit agreement, we will deliver to the holder
of the restricted stock unit whole shares of our common stock,
cash or a combination of our common stock and cash.
•
Stock
Bonuses. Stock bonuses are
granted as additional compensation for performance and therefore
are not issued in exchange for cash.
Automatic Stock Option Grants to
Non-Employee Directors. Our
2006 plan provides for the automatic grant of stock options to
our non-employee directors. Each non-employee director who has
not received an option to purchase our common stock in the
two-year period preceding the effective date of this offering
and who is a member of our board of directors on such date will
automatically be
granted an option to
purchase 16,666 shares of our common stock on the
effective date of this offering at an exercise price per share
equal to the initial offering price. Thereafter, each
non-employee director who first becomes a member of our board of
directors after the effective date of this offering will
automatically be granted an option to
purchase 16,666 shares of our common stock on the date
such non-employee director first becomes a member of our board
of directors. These “initial” option grants will vest
monthly over three years. In addition, on the first business day
following our annual meeting of stockholders, each non-employee
director who is then a member of our board of directors will
automatically be granted an option to
purchase 6,666 shares of our common stock. However, in
the event a non-employee director received an initial grant
under our 2006 plan of an option to
purchase 16,666 shares of our common stock in the
12-month period preceding the annual meeting of our
stockholders, then such outside director’s first succeeding
stock option grant will be equal to the product of
(a) 6,666 and (b) a fraction, the numerator of which
is the number of full calendar months such non-employee director
has been a member of our board of directors prior to our annual
stockholder’s meeting and the denominator of which is 12.
These “succeeding” option grants will vest monthly
over a period of one year. All awards granted under the
automatic grant provisions to our non-employee directors will
have a term of ten years and an exercise price equal to the fair
market value on the date of grant. Non-employee directors may
also be granted discretionary awards under our 2006 plan; they
are not limited to receiving only the automatic stock option
grants described above.
Change in
Control. In the event of a
liquidation, dissolution or corporate transaction (as defined in
our 2006 plan), except for options granted to non-employee
directors (which vest and become exercisable in full upon a
change in control event (as defined in our 2006 plan)),
outstanding awards may be assumed or replaced by the successor
company (if any). Outstanding awards that are not assumed or
replaced by the successor company (if any) will expire on the
consummation of the liquidation, dissolution or change in
control transaction at such time and on such conditions as our
board of directors determines (including, without limitation,
full or partial vesting and exercisability of any or all
outstanding awards issued under our 2006 plan).
Transferability of
Awards. Generally, a
participant may not transfer an award other than by will or the
laws of descent and distribution unless, in the case of awards
other than ISOs, the committee permits the transfer of an award
to certain authorized transferees (as set forth in our 2006
plan).
Eligibility.
The individuals eligible to participate in our 2006 plan include
our officers and other employees, our non-employee directors and
any consultants.
Payment for Purchase of Shares of
our Common Stock. Payment
for shares of our common stock purchased pursuant to our 2006
plan may be made by any of the following methods (provided such
method is permitted in the applicable award agreement to which
such shares relate): (i) cash (including by check);
(ii) cancellation of indebtedness; (iii) surrender of
shares; (iv) waiver of compensation due or accrued for
services rendered; (v) through a “same day sale”
program or through a “margin” commitment or
(vi) by any other method approved by our board of directors.
Limit on
Awards. Under our 2006
plan, during any calendar year, no person will be eligible to
receive more than 666,666 shares of our common stock, and
in the case of new employees during their first fiscal year of
employment with us, 1,333,333 shares of our common stock.
Amendment and
Termination. Our board of
directors may amend or terminate our 2006 plan at any time,
subject to stockholder approval where required. In addition, no
amendment that is detrimental to a participant in our 2006 plan
made to an outstanding award without the consent of the affected
participant.
Background.
Our board of directors adopted, and our stockholders approved,
our 2003 plan in December 2003.
Administration.
Our board of directors currently administers our 2003 plan. Our
compensation committee will be responsible for administering all
of our equity compensation plans upon the closing of this
offering. Under our 2003 plan, the plan administrator has the
power to determine the terms of the awards, including the
service providers who will receive awards, the exercise price,
the number of shares subject to each award, the vesting schedule
and exercisability of awards and the form of consideration
payable upon exercise of an option.
Share
Reserve. As of
August 31, 2006, options to
purchase 1,507,503 shares of our common stock at a
weighted average exercise price of $1.22 per share were
outstanding under our 2003 plan and 234,071 shares of our
common stock remained available for issuance upon the exercise
of options that may be granted in the future. Following the
closing of this offering, all shares of our common stock
reserved but not ultimately issued or subject to options that
have expired or otherwise terminated under our 2003 plan without
having been exercised in full will become available for issuance
under our 2006 plan. We intend to grant all future stock option
awards under our 2006 plan upon and after the closing of this
offering. However, all stock options outstanding upon the
closing of this offering will continue to be governed by the
terms and conditions of the 2003 plan.
Eligibility and Types of Option
Grants. With respect to
stock options, our 2003 plan provides for the grant of both
ISOs, which qualify for favorable tax treatment under
Section 422 of the Internal Revenue Code for their
recipients, and NSOs. ISOs may be granted only to employees.
NSOs may be granted to our employees, officers, directors and
consultants.
Terms of Option
Grants. The exercise price
of options is determined by the plan administrator, subject to
applicable statutory requirements. The exercise price of ISOs
granted to a person who directly or by attribution owns more
than 10% of the total combined voting power of all classes of
our stock, or a 10% stockholder, must be at least equal to 110%
of the fair market value of our common stock on the date of
grant. All other ISOs must be granted with an exercise price at
least equal to 100% of the fair market value of our common stock
on the date of grant. Stock options become vested and
exercisable, as applicable, within such periods, or upon such
events, as determined by the plan administrator and as set forth
in the related stock option agreement. To date, as a matter of
practice, options have generally been subject to a four-year
vesting period (25% on the first anniversary of the grant date
and ratably thereafter). Our 2003 plan also allows for the early
exercise of unvested options, provided that right is permitted
in the applicable stock option agreement. All outstanding
unvested shares of our common stock acquired through early
exercised options are subject to repurchase by us. The maximum
permitted term of options granted under our 2003 plan is ten
years (and five years for certain persons holding ISOs).
After termination of an optionee, he or
she may exercise his or her vested option for the period of time
stated in the stock option agreement. Generally, if termination
is due to death or disability, the vested option will remain
exercisable for 12 months. In all other cases, the vested
option will generally remain exercisable for three months.
However, an option may not be exercised later than its
expiration date. Notwithstanding the foregoing, if an optionee
is terminated for cause (as defined in our 2003 plan), then the
optionee’s options shall expire on the optionee’s
termination date or at such later time and on such conditions as
determined by the plan administrator.
Change in
Control. In the event of a
liquidation, dissolution or change in control transaction,
outstanding options under our 2003 plan may be assumed or
replaced by the successor company (if
any). Outstanding options that are not
assumed or replaced by the successor company (if any) will
expire on the consummation of the liquidation, dissolution or
change in control transaction at such time and on such
conditions as our board of directors determines (including the
ability to partially or totally accelerate the vesting of stock
options granted under our 2003 plan).
Transferability of
Awards. Generally, a
participant may not transfer options other than by will or the
laws of descent and distribution. During the lifetime of an
optionee, the option is exercisable only by the optionee.
Payment for Purchase of Shares of
our Common Stock. Payment
for shares of our common stock under our 2003 plan may be in
cash (or check) and, where permitted by the plan administrator,
by: cancellation of indebtedness, surrender of shares (subject
to certain conditions), delivery of a full recourse promissory
note, waiver of compensation due or accrued, implementation of a
“same day sale” program or “margin”
commitment (in the event a public market exists for our common
stock) or any combination of the foregoing.
Amendment and
Termination. Our board of
directors may amend or terminate our 2003 plan at any time,
subject to stockholder approval where required. In addition, no
amendment that is detrimental to a participant in our
2003 plan may be made to an outstanding option without the
consent of the affected participant.
2006 Employee Stock Purchase
Plan
Background.
Our 2006 employee stock
purchase plan is designed to enable eligible employees to
periodically purchase shares of our common stock at a discount.
Purchases are accomplished through participation in discrete
offering periods. Our 2006 employee stock purchase plan is
intended to qualify as an employee stock purchase plan under
Section 423 of the Internal Revenue Code of 1986, as
amended. Our board of directors adopted our 2006 employee stock
purchase plan in July 2006 and our stockholders approved the
plan in August 2006.
Share
Reserve.We have initially reserved
166,666 shares of our common stock for issuance under our
2006 employee stock purchase plan. The number of shares
reserved for issuance under our 2006 employee stock
purchase plan will increase automatically on the first day of
each January, starting with January 1, 2007, by the number
of shares equal to 1% of our total outstanding shares as of the
immediately preceding December 31st (rounded to the nearest
whole share; provided, however, that, for the increase on
January 1, 2007, such addition shall equal the product of
1% of our total outstanding shares as of December 31, 2006,
multiplied by a fraction, the numerator of which is the number
of days between the effective date of this registration
statement and December 31, 2006 and the denominator of
which is 365 (rounded to the nearest whole share)). Our board of
directors or compensation committee may reduce the amount of the
increase in any particular year. No more than
2,333,333 shares of our common stock may be issued under
our 2006 employee stock purchase plan and no other shares
may be added to this plan without the approval of our
stockholders.
Administration.Our compensation committee will
administer our 2006 employee stock purchase plan. Our employees
generally are eligible to participate in our 2006 employee stock
purchase plan if they are employed by us, or a subsidiary of
ours that we designate, for more than 20 hours per week and more
than five months in a calendar year. Employees who are
5% stockholders, or would become 5% stockholders as a
result of their participation in our 2006 employee stock
purchase plan, are ineligible to participate in our
2006 employee stock purchase plan. We may impose additional
restrictions on eligibility as well. Under our 2006 employee
stock purchase plan, eligible employees may acquire shares of
our common stock by accumulating funds through payroll
deductions. Our eligible employees may select a rate of payroll
deduction between 1% and 15% of their cash
compensation. We also have the right to
amend or terminate our 2006 employee stock purchase plan, except
that, subject to certain exceptions, no such action may
adversely affect any outstanding rights to purchase stock under
the plan. Our 2006 employee stock purchase plan will terminate
on the tenth anniversary of the first offering date, unless it
is terminated earlier by our board of directors.
Purchase
Rights.When an offering period
commences, our employees who meet the eligibility requirements
for participation in that offering period are automatically
granted a non-transferable option to purchase shares in that
offering period. Each offering period may run for no more than
19 months and consist of no more than three purchase
periods. An employee’s participation automatically ends
upon termination of employment for any reason.
Except for the first offering period, each
offering period will be for one year (commencing each
August 15th and February 15th on and after
August 15, 2007) and will consist of two six-month purchase
periods (August 15th to February 14th and
February 15th to August 14th). The first offering
period will begin upon the effective date of this offering and
will end on February 14, 2008. The first purchase period in
this first offering period will run until August 14, 2007
and the second purchase period in this first offering period
will run from August 15, 2007 to February 14, 2008.
No participant will have the right to
purchase our shares at a rate which, when aggregated with
purchase rights under all our employee stock purchase plans that
are also outstanding in the same calendar year(s), have a fair
market value of more than $25,000, determined as of the first
day of the applicable offering period, for each calendar year in
which such right is outstanding. The purchase price for shares
of our common stock purchased under our 2006 employee stock
purchase plan will be 85% of the lesser of the fair market value
of our common stock on (i) the first trading day of the
applicable offering period and (ii) the last trading day of
each purchase period in the applicable offering period.
Change in
Control.In the event of a change in
control transaction, our 2006 employee stock purchase plan and
any offering periods that commenced prior to the closing of the
proposed transaction may terminate on the closing of the
proposed transaction and the final purchase of shares will occur
on that date, but our compensation committee may instead
terminate any such offering period at a different date.
Additional Employee Benefit
Plans
2006 Bonus Plan
In January 2006, our board of directors
adopted our 2006 bonus plan. Full-time employees are
automatically eligible to participate in our 2006 bonus plan,
while our part-time employees are eligible to participate on a
case-by-case basis. Bonuses are to be paid in the form of cash
and are based on the achievement of certain company milestones
relating to clinical testing and commercialization of the Alair
System. Under our 2006 bonus plan, our chief executive officer
is eligible to receive a bonus of up to 30% of his annualized
base salary, and other executive officers are eligible to
receive bonuses of up to 22.5% of their annualized base salaries.
401(k) Plan
We offer a 401(k) plan to all employees
who meet specified eligibility requirements. Eligible employees
may contribute up to 25% of their respective compensation
subject to limitations established by the Internal Revenue Code.
We presently do not match participant contributions.
Participants are immediately vested in their contributions plus
actual earnings thereon.
Employment Contracts and Change of
Control Arrangements
We entered into offer letter agreements
with Mr. French and Ms. Brown, each dated as of
February 10, 2004. Pursuant to these letters, each of
Mr. French and Ms. Brown is an “at will”
employee and may terminate employment with us at any time.
Similarly, we can terminate Mr. French’s or
Ms. Brown’s employment at any time, with or without
cause. In the event that we terminate employment for any reason
other than for cause, Mr. French or Ms. Brown, as
applicable, is entitled to receive severance equal to his or her
base salary for the lesser of three months or until such
individual secures another financially equivalent position. If
during the three-month period an opportunity is secured that
pays less than the base salary described in the former
employee’s respective offer letter, we will reimburse such
individual for the difference through the end of the three-month
period.
We have entered into letter agreements
with each of our executive officers providing for partial
acceleration of vesting of stock options held by an officer in
the event such officer is terminated without cause or resigns
for certain specified reasons within 12 month following an
acquisition of our company by merger, sale of substantially all
of our assets or similar transaction, or a dissolution or
liquidation of the company. This vesting acceleration is also
triggered in the event the acquiring entity elects not to assume
the stock options held by such persons or issue equivalent
options in substitution. In such an event, vesting will
accelerate so that the total percentage of vested shares subject
to the options held by each such affected person will be equal
to the sum of (i) 50% of all shares subject to options held
by such person, plus (ii) 50% of all shares subject to
options held by such person multiplied by a fraction equal to
the number of months of employment (including employment with
Broncus) divided by 48 months.
Upon the completion of this offering, we
will enter into an executive change of control agreement with
each of our executive officers. Under these agreements, in the
event of a change of control, and, in connection with, or during
the 12 months following, the change of control, we
terminate the employment of any such officer without cause, or
constructively terminate them, such terminated individual will
receive a single severance payment in cash equal to the sum of
50% of the individual’s annual base salary (100% in
the case of Mr. French), and will receive continuation of
all life, medical, dental, vision and disability insurance
benefits for six months following termination
(12 months in the case of Mr. French). In each case,
our obligation to make any severance payment is expressly
conditioned upon such terminated individual’s execution and
delivery of a general release and waiver of claims.
Indemnification of Directors and
Executive Officers and Limitation of Liability
Our bylaws to be in effect upon our
reincorporation into Delaware provide that we will indemnify our
directors and officers to the fullest extent permitted by
Delaware law against all expenses and liabilities reasonably
incurred in connection with their service for or on our behalf,
subject to limited exceptions. Our bylaws also provide that we
will advance the expenses incurred by a director or officer in
advance of the final disposition of an action or proceeding,
subject to limited exceptions, and permit us to secure insurance
on behalf of any officer, director, employee or other agent for
any liability arising out of his or her action in that capacity,
regardless of whether Delaware law would otherwise permit
indemnification. In addition, the restated certificate of
incorporation provides that our directors will not be personally
liable for monetary damages to us for breaches of their
fiduciary duty as directors, unless they violate their duty of
loyalty to us or our stockholders, act in bad faith, knowingly
or intentionally violate the law, authorize illegal dividends or
redemptions or derive an improper personal benefit from their
action as directors.
We will enter into an indemnity agreement
with each of our directors and officers prior to the completion
of this offering. These agreements will require us to indemnify
each such person against
expenses and liabilities incurred by such
person in connection with a proceeding related to such
person’s services for us, and to advance expenses incurred
in connection with such proceeding, all subject to limited
exceptions. We believe these provisions in our restated
certificate of incorporation, bylaws and indemnity agreements
are necessary to attract and retain qualified persons as
directors and officers. In addition, we maintain liability
insurance which insures our directors and officers against
certain losses under certain circumstances.
The limitation of liability and
indemnification provisions in our restated certificate of
incorporation and bylaws may discourage stockholders from
bringing a lawsuit against our directors for breach of their
fiduciary duty. They may also reduce the likelihood of
derivative litigation against our directors and officers, even
though an action, if successful, might benefit us and our
stockholders.
Furthermore, a stockholder’s
investment may be adversely affected to the extent that we pay
the costs of settlement and damage awards against directors and
officers as required by these indemnification provisions. At
present, we are not aware of any pending litigation or
proceeding involving any of our directors, officers or employees
for which indemnification is sought, and we are not aware of any
threatened litigation that may result in claims for
indemnification.
Other than the transactions described
above in Management — Director Compensation and
Management — Employment Contracts and Change of
Control Arrangements and the transactions described below, since
our inception, there has not been, nor is there currently
proposed, any transaction or series of similar transactions to
which we were or will be a party:
•
in which the amount involved exceeds
$60,000; and
•
in which any director, executive officer,
holder of more than 5% of our common stock or any member of
their immediate family had or will have a direct or indirect
material interest.
Formation-Related Agreements
Our company was formed to develop and
commercialize an asthma treatment system utilizing technology
transferred from Broncus Technologies, Inc. Broncus transferred
to us the technology that comprises the core of our asthma
treatment system, together with $2.2 million in cash, in
exchange for shares of our stock and distributed such stock to
its shareholders as a dividend. As a result of this transaction,
we began operations as an independent entity effective
December 30, 2003. The following is a summary of the
material components of this transaction, including agreements
defining the relationship between us and Broncus following our
inception as a separate entity.
Management and
Directors
Mr. French, the former Chief
Executive Officer of Broncus, became our President and Chief
Executive Officer, and certain officers and employees of
Broncus, including Ms. Brown, Mr. Kaplan and
Dr. Shargill, became our officers and employees and ceased
their employment with Broncus. In addition, certain members of
the board of directors of Broncus, including our current
directors Messrs. French and Fitzsimmons and
Dr. Laufer, also became members of our board of directors.
Each of these directors also currently serves on the board of
directors of Broncus. Dr. Merz, also one of our current
directors, is also a director of Broncus. Dr. Laufer was
the founder of Broncus, and conceived key innovations that led
to the development of our technology.
Capitalization
Capital
Stock. As a result of the
dividend described above, Broncus shareholders received one
share of our preferred stock and/or common stock of the same
class and series, and containing the same rights, preferences
and privileges, for each share of their shareholdings in
Broncus, except for adjustments required to reflect the
respective valuations of the two companies. The following table
identifies the number of shares of capital stock received by our
directors and executive officers and holders of more than 5% of
our outstanding stock in connection with our inception:
Shares of our
Series A-1,
A-2,
A-3, B, C and D
Preferred Stock were issued at our inception and were converted
into shares of our Series AA Preferred Stock in our
recapitalization in March 2004 as described below.
(2)
Represents shares held jointly by
Mr. French and Gayle W. French.
(3)
Represents shares held by Mr. Kaplan
and Susan K. Kaplan, Co-Trustees of the Kaplan Family Trust
dated April 12, 2005.
(4)
Represents 3,333 shares held jointly
by Ms. Brown and Greg M. Bell and 833 shares held by
Ms. Brown.
(5)
Represents 166,666 shares of common
stock and 684,259 shares of Series AA Preferred Stock
held by Menlo Ventures VII, L.P. and 7,500 shares of common
stock and 29,701 shares of Series AA Preferred Stock
held by Menlo Entrepreneurs Fund VII, L.P., both of which
are affiliates of Menlo Ventures.
Options.
Broncus employees who joined our company received stock options
to purchase a number of shares of our common stock equal to the
number of shares of Broncus common stock subject to their
respective Broncus stock options, with the same vesting
schedules and vesting credit for their services with Broncus.
Broncus employees who remained with Broncus received
fully-vested stock options to purchase a number of shares of our
common stock equal to the number of shares underlying the
respective Broncus stock options that were vested as of the date
of our inception as a separate company, and will be entitled to
exercise these options so long as they continue to be employed
with Broncus. The exercise price of each stock option was equal
to 40% of the exercise price per share of the Broncus stock
option in respect of which such stock option was granted. As a
result, we granted options to purchase an aggregate of
222,718 shares of our common stock at a weighted average
exercise price of $1.38 per share. The following table
identifies the options received by our directors and executive
officers in connection with our inception:
Number of Common Stock
Percent of Total
Name of Director and/or Executive Officer
Underlying Options
Options Granted
Glendon E. French
85,832
38.5
%
Gary S. Kaplan
17,135
7.7
Debera M. Brown
14,759
6.6
Dr. Michael D. Laufer
6,666
3.0
W. James Fitzsimmons
13,332
6.0
Each of the above options has an exercise
price of $1.44 per share, except for an option to purchase 6,666
shares at an exercise price of $0.18 per share and an option to
purchase 3,333 shares at an exercise price of $0.54 per share
each issued to Mr. French.
Warrants.
Broncus warrants were automatically adjusted by their terms so
that, upon exercise, holders became entitled to receive
(i) the Broncus shares issuable upon the exercise of the
warrants and (ii) shares of our common stock that would
have been distributed upon our inception in respect of the
Broncus shares issued upon the exercise of the warrants. The
entirety of the exercise price payable upon exercise of these
warrants, which exercise prices were unchanged, remained payable
to Broncus upon exercise of these warrants. Many of these
warrants have since been exercised, such that, as of
August 31, 2006, we have issued an aggregate of
44,968 shares of our common stock upon exercise of these
warrants and there is only one such warrant remaining
outstanding that, if exercised, will entitle
the holder to receive 1,000 shares of
our common stock. The following table identifies the warrants
received by holders of more than 5% of our outstanding stock in
connection with our inception:
Number of Common
Percent of Total
Stock Underlying
Warrants
Name of 5% Stockholder
Warrants(1)
Granted
Boston Scientific Corporation
34,609
64.2
%
Entities affiliated with Menlo
Ventures(2)
4,029
7.5
(1)
All of these warrants have been exercised.
(2)
Represents a warrant to purchase
3,874 shares held by Menlo Ventures VII, L.P. and a warrant
to purchase 155 shares held by Menlo Entrepreneurs
Fund VII, L.P., both of which are affiliates of Menlo
Ventures.
Inter-Company
Agreements. We entered into
the following agreements with Broncus in connection with our
inception:
•
Corporate Formation
Agreement. Pursuant to this
agreement, Broncus transferred to us intellectual property
(including U.S. and international patents and patent
applications) and approximately $2.2 million in cash, and
we assumed liabilities related to the asthma treatment
technology. We also issued stock to Broncus, granted options to
certain Broncus employees and agreed to issue shares of our
stock on exercise of Broncus warrants, as described
under — Capitalization.
•
Cross-License
Agreement. In conjunction with
the division of intellectual property assets between us and
Broncus pursuant to the Corporate Formation Agreement, and in
addition to the assignment of patent rights pursuant to that
agreement, we and Broncus provided each other with a perpetual,
royalty-free license to each other’s then-existing
intellectual property for use by each of us solely in our
respective fields of use. We and Broncus also provided each
other with a perpetual,
royalty-free license to
certain intellectual property developed after our inception
during a collaboration period between the companies that ended
in June 2005 for use by each of us in our respective fields of
use. Our field of use is devices and procedures for providing
asthma therapy, and the Broncus field of use is devices and
procedures for providing emphysema therapy. The licenses are not
transferable by either party except in connection with an
acquisition of such party. We and Broncus also agreed, in
general, not to practice our respective then-existing
intellectual property in the other party’s field of use, or
to license a third-party to use our respective existing
intellectual property, or certain of our respective intellectual
property developed during the collaboration period that ended in
June 2005, in the other party’s field of use. Accordingly,
if we were to determine that it was in our best interests to
develop products to treat emphysema, we would be subject to the
foregoing restrictions in doing so.
•
Indemnification
Agreement. We agreed to
indemnify Broncus for certain losses arising prior to and
following our inception out of the development, testing,
marketing, selling and otherwise commercially exploiting of the
Alair System, or the liabilities we assumed pursuant to the
Corporate Formation Agreement. Broncus is likewise obligated to
indemnify us for certain losses arising out of its business and
limited pre-formation losses suffered by us that are not
reimbursed by insurance.
•
Agreement Not to
Sue. We also agreed to be bound
by Broncus’ obligations under an Agreement Not to Sue
entered into by Broncus in 1997 that were related to the
intellectual property assigned to us by Broncus. Broncus entered
into the Agreement Not to Sue in connection with the assignment
to it of several inventions by Dr. Laufer, one of our
directors, and Menlo Ventures, one of our significant
stockholders, upon the organization
of Broncus. The agreement is between
Broncus and three other companies then affiliated with
Dr. Laufer and Menlo Ventures which also were assigned
certain inventions from Dr. Laufer and Menlo Ventures, and
prohibits each party from suing another party on the inventions
assigned pursuant to the agreement to the first party to the
extent that the other party is using the inventions in such
party’s specified field, consisting of (i) urinary
incontinence and the treatment of kidney stones, (ii) the
treatment of heart and pulmonary vessels, and (iii) chronic
venous insufficiency, hemorrhoids, endovascular treatments for
vasogenic impotence and esophagel varices.
•
Manufacturing Service
Agreement. We and Broncus
entered into a manufacturing service agreement, effective as of
December 30, 2003. Pursuant to this agreement, Broncus was
responsible for managing or performing contract manufacturing
tasks for us during the transition following our inception,
including purchasing and inspecting components, manufacturing
products and conducting quality assurance and engineering
support activities necessary to meet quality specifications and
delivery requirements. This agreement expired on
December 31, 2004.
These agreements were negotiated in the
context of a related party relationship. Therefore, they were
not the result of negotiations between independent parties.
While we intended for the terms of these agreements to be at
least as favorable to us as agreements that could have been
obtained with unaffiliated parties, there can be no assurance we
received such terms.
Recapitalization
In March 2004, as a condition of
completing the Series BB preferred stock financing
described under — Preferred Stock Financings, we
effected a recapitalization consisting of (i) the
conversion of all outstanding shares of Series A-1, A-2,
A-3, B, C and D preferred stock into a new Series AA
preferred stock and (ii) a
1-for-5 reverse stock
split whereby every five shares of common stock and preferred
stock were converted into one share of common stock and
preferred stock, respectively. As a result of this
recapitalization, we issued an aggregate of
2,510,737 shares of Series AA preferred stock, each
share of which will convert into one share of common stock upon
the completion of this offering. The following table identifies
the number of shares of Series AA preferred stock received
by holders of more than 5% of our outstanding stock:
Series AA
Percentage of
Investor
Preferred Stock
Total Issued
Entities affiliated with Menlo
Ventures(1)
713,960
28.4
%
Boston Scientific Corporation
671,295
26.7
(1)
Represents 684,259 shares held by
Menlo Ventures VII, L.P. and 29,701 shares held by Menlo
Entrepreneurs Fund VII, L.P.
Preferred Stock Financings
Series BB Preferred Stock
Financing
In March 2004, we sold an aggregate of
3,217,096 shares of our Series BB preferred stock at
$4.82 per share for an aggregate purchase price of
approximately $15.5 million. Each share of our
Series BB preferred stock will convert automatically into
one share of our common stock upon the completion of this
offering. The following table identifies the number of shares of
Series BB preferred stock purchased by current holders of
more than 5% of our outstanding stock. None of our executive
officers or directors purchased Series BB preferred stock,
although certain of our executive officers or directors may
currently be considered to beneficially own shares held by
entities with which they are
affiliated. Please see Principal
Stockholders. The terms of these purchases were the same as
those made available to unaffiliated purchasers.
Series BB
Percentage of
Investor
Preferred Stock
Total Issued
Entities affiliated with Polaris Venture
Partners(1)
1,245,329
38.7
%
Entities affiliated with MedVenture Associates,
L.P.(2)
830,220
25.8
Entities affiliated with Montreux Equity
Partners(3)
415,110
12.9
Entities affiliated with Menlo
Ventures(4)
415,109
12.9
Boston Scientific Corporation
207,555
6.5
(1)
Represents 1,223,733 shares held by
Polaris Venture Partners IV, L.P. and 21,596 shares held by
Polaris Venture Partners Entrepreneurs Fund IV, L.P., both
of which are affiliates of Polaris Venture Partners.
(2)
Represents 808,219 shares held by
MedVenture Associates IV, L.P. and 22,001 shares held by
MedVenture Affiliates IV, L.P., both of which are affiliates of
MedVenture Associates, L.P.
(3)
Represents 207,555 shares held by
Montreux Equity Partners II SBIC, L.P. and
207,555 shares held by Montreux Equity Partners III,
SBIC, L.P., both of which are affiliates of Montreux Equity
Partners.
(4)
Represents 399,144 shares held by
Menlo Ventures VII, L.P. and 15,965 shares held by Menlo
Entrepreneurs Fund VII, L.P., both of which are affiliates
of Menlo Ventures.
Series CC Preferred Stock
Financing
In December 2005, we sold an aggregate of
4,199,183 shares of our Series CC preferred stock at
approximately $6.43 per share for an aggregate purchase
price of approximately $26.9 million. Each share of
preferred stock will convert automatically into one share of our
common stock upon the completion of this offering. The following
table identifies the number of shares of Series CC
preferred stock purchased by current holders of more than 5% of
our outstanding stock. None of our executive officers or
directors purchased Series CC preferred stock, although
certain of our executive officers or directors may currently be
considered to beneficially own shares held by entities with
which they are affiliated. Please see Principal Stockholders.
The terms of these purchases were the same as those made
available to unaffiliated purchasers.
Series CC
Percentage of
Investor
Preferred Stock
Total Issued
Entities affiliated with Polaris Venture
Partners(1)
1,088,679
25.9
%
Entities affiliated with HBM BioCapital
Ltd.(2)
979,811
23.3
Entities affiliated with Vanguard
Ventures(3)
777,627
18.5
Entities affiliated with MedVenture Associates,
L.P.(4)
466,576
11.1
Entities affiliated with Montreux Equity
Partners(5)
455,689
10.9
Entities affiliated with Menlo
Ventures(6)
77,763
1.9
(1)
Represents 1,068,640 shares held by
Polaris Venture Partners IV, L.P. and 20,039 shares held by
Polaris Venture Partners Entrepreneurs Fund IV, L.P., both
of which are affiliates of Polaris Venture Partners. Mr. Chee,
one of our directors, is a General Partner of Polaris Venture
Partners.
(2)
Represents 732,017 shares held by HBM
BioCapital (EUR) L.P. and 247,794 shares held by HBM
BioCapital (USD) L.P., both of which are affiliates of HBM
BioCapital Ltd.
(3)
Represents 680,693 shares held by
Vanguard VII, L.P., 64,650 shares held by Vanguard VII-A,
L.P., 22,175 shares held by Vanguard VII Accredited
Affiliates Fund, L.P. and 10,109 shares held by Vanguard
VII Qualified Affiliates Fund, L.P., all of which are affiliates
of Vanguard Ventures. Mr. McConnell, one of our directors,
is a Managing Member at Vanguard Ventures.
(4)
Represents 454,212 shares held by
MedVenture Associates IV, L.P. and 12,364 shares held by
MedVenture Affiliates IV, L.P., both of which are affiliates of
MedVenture Associates, L.P. Ms.
Campbell-White, one of
our directors, is the Managing General Partner of MedVenture
Associates, L.P.
(5)
Represents 155,525 shares held by
Montreux Equity Partners II SBIC, L.P. and
300,164 shares held by Montreux Equity Partners III,
SBIC, L.P., both of which are affiliates of Montreux Equity
Partners.
(6)
Represents 74,772 shares held by
Menlo Ventures VII, L.P. and 2,991 shares held by Menlo
Entrepreneurs Fund VII, L.P., both of which are affiliates
of Menlo Ventures.
In connection with our inception and each
of the preferred stock financing rounds described above, we
entered into agreements that grant customary preferred stock
rights to all of our major preferred stock investors, including
holders of more than 5% of our outstanding stock. These rights
include registration rights, rights of first refusal,
information rights, co-sale rights with respect to stock
transfers, a voting agreement providing for the election of
investor designees to the board of directors, board observer
rights and other similar rights. The Second Amended and Restated
Investors’ Rights Agreement, which contains the
registration rights and many of the other rights described
above, is filed as an exhibit to the registration statement of
which this prospectus is a part. All of these rights, other than
the registration rights, will terminate upon the completion of
this offering. For a description of the registration rights,
please see Description of Capital Stock — Registration
Rights.
Loans
In October 2005, we loaned $200,000 to
Mr. French, our President and Chief Executive Officer and a
member of our board of directors, to apply towards the exercise
of a stock option granted to him on March 30, 2004 to
purchase 333,333 shares at an exercise price per share of
$0.60. The loan was subject to 4.19% interest, compounded
annually, and was secured by the stock purchased with the loan
amount. The loan amount was due on July 1, 2015, or earlier
following the termination of Mr. French’s employment
with us, the closing of an acquisition that would result in the
loan violating Section 402 of the Sarbanes-Oxley Act, or
the filing of a registration statement for an initial public
offering of our common stock. Mr. French repaid the loan in
full in July 2006.
Director and Officer
Indemnification
We will enter into an indemnity agreement
with each our directors and officers, in addition to the
indemnification provided for in our bylaws. These agreements
will require us to indemnify each such person against expenses
and liabilities incurred by such person in connection with a
proceeding related to such person’s services for us, and to
advance expenses incurred in connection with such proceeding,
all subject to limited exceptions. Please see Executive
Compensation — Indemnification of Directors and
Executive Officers and Limitation of Liability.
The following table presents information
as to the beneficial ownership of our common stock as of
August 31, 2006 by:
•
each of the executive officers listed in
the summary compensation table;
•
each of our directors;
•
all of our directors and executive
officers as a group; and
•
each stockholder known by us to be the
beneficial owner of more than 5% of our common stock.
Beneficial ownership is determined in
accordance with the rules of the SEC and generally includes
voting or investment power with respect to securities. Unless
otherwise indicated below, to our knowledge, the persons and
entities named in the table have sole voting and sole investment
power with respect to all shares beneficially owned, subject to
community property laws where applicable. Shares of our common
stock subject to options that are currently exercisable or
exercisable within 60 days of August 31, 2006 are
deemed to be outstanding and to be beneficially owned by the
person holding the options for the purpose of computing the
percentage ownership of that person but are not treated as
outstanding for the purpose of computing the percentage
ownership of any other person.
The number of shares beneficially owned
and percentage of our common stock outstanding before and after
the offering is based on 11,010,501 shares of our common
stock outstanding on August 31, 2006.
Percentage of
Shares Beneficially
Number of
Owned
Shares
Beneficially
Before
After
Name of Beneficial Owner
Owned
Offering
Offering
Directors and Named Executive Officers:
Brian E.
Chee(1)
2,334,008
21.2
%
14.6
%
Annette J.
Campbell-White(2)
1,296,796
11.8
8.1
Dr. Beat R.
Merz(3)
979,811
8.9
6.1
Thomas C.
McConnell(4)
777,627
7.1
4.9
Glendon E.
French(5)
764,164
6.7
4.7
Gary S.
Kaplan(6)
190,467
1.7
1.2
Dr. Narinder S.
Shargill(7)
126,666
1.1
*
Debera M.
Brown(8)
114,757
1.0
*
Dr. Michael D.
Laufer(9)
111,665
1.0
*
Karen M.
Passafaro(10)
101,666
*
*
Lowell E.
Sears(11)
41,666
*
*
W. James
Fitzsimmons(12)
38,332
*
*
All directors and executive officers as a group
(13 persons)(13)
Entities affiliated with Polaris Venture
Partners(14)
2,334,008
21.2
%
14.6
%
Entities affiliated with Menlo
Ventures(15)
1,385,027
12.6
8.7
Entities affiliated with MedVenture
Associates(16)
1,296,796
11.8
8.1
Entities affiliated with HBM BioCapital
Ltd.(17)
979,811
8.9
6.1
Boston Scientific
Corporation(18)
913,459
8.3
5.7
Entities affiliated with Montreux Equity
Partners(19)
870,799
7.9
5.4
Entities affiliated with Vanguard
Ventures(20)
777,627
7.1
4.9
*
Less than 1%
(1)
Consists of shares held by entities
affiliated with Polaris Venture Partners (see note 14).
Mr. Chee is a General Partner of Polaris Venture Partners.
As a result, Mr. Chee may be deemed to beneficially own all
of the shares held by the entities affiliated with Polaris
Venture Partners. Mr. Chee disclaims beneficial ownership
of such shares except to the extent of his pecuniary interest
therein. The address of Mr. Chee is c/o Polaris Venture
Partners, 1000 Winter Street, Suite 3350, Waltham,
Massachusetts02451.
(2)
Consists of shares held by entities
affiliated with MedVenture Associates (see note 16).
Ms. Campbell-White is the Managing General Partner of
MedVenture Associates. As a result,
Ms. Campbell-White
may be deemed to beneficially own all of the shares held by the
entities affiliated with MedVenture Associates.
Ms. Campbell-White
disclaims beneficial ownership of such shares except to the
extent of her pecuniary interest therein. The address of
Ms. Campbell-White is c/o MedVenture Associates, 5980
Horton Street, Suite 390, Emeryville, California94608.
(3)
Consists of 732,017 shares held by
HBM BioCapital (EUR) L.P. and 247,794 shares held by
HBM BioCapital (USD) L.P. (collectively with HBM BioCapital
(EUR) L.P., the “HBM BioCapital Funds”) (see
note 17). Dr. Merz is an employee of HBM Partners AG,
the sole beneficial owner of HBM BioCapital Ltd. Dr. Merz
disclaims beneficial ownership of the shares held by the HBM
BioCapital Funds, except to the extent of his pecuniary interest
therein. The address of Dr. Merz is c/o HBM Partners
AG, Lowenstrasse 29, CH-8001 Zurich, Switzerland.
(4)
Consists of shares held by entities
affiliated with Vanguard Ventures (see note 20).
Mr. McConnell is a Managing Member at Vanguard Ventures. As
a result, Mr. McConnell may be deemed to beneficially own
all of the shares held by the entities affiliated with Vanguard
Ventures. Mr. McConnell disclaims beneficial ownership of
such shares except to the extent of his pecuniary interest
therein. The address of Mr. McConnell is
525 University Avenue, Suite 1200, Palo Alto,
California94301.
(5)
Consists of 356,666 shares held
jointly by Mr. French and Gayle W. French (of which 138,889
remain subject to our lapsing right of repurchase) and
407,498 shares subject to options that are exercisable
within 60 days of August 31, 2006 (of which
274,943 shares are unvested and will remain subject to our
lapsing right of repurchase if such options are exercised prior
to such shares becoming vested).
(6)
Consists of 93,332 shares held by
Gary S. Kaplan and Susan K. Kaplan, Co-Trustees of the Kaplan
Family Trust dated April 12, 2005 (of which
41,778 shares remain subject to our lapsing right of
repurchase) and 97,135 shares subject to options that are
exercisable within 60 days of August 31, 2006 (of
which 68,250 shares are unvested and will remain subject to
our lapsing right of repurchase if such options are exercised
prior to such shares becoming vested). Mr. Kaplan disclaims
beneficial ownership of the shares held in the Kaplan Family
Trust except to the extent that he is the beneficiary of such
trust.
(7)
Consists of 33,333 shares held by
Theresa M. and Dr. Narinder S. Shargill, Trustees of the
Shargill 2001 Trust UA December 29, 2001 (of which
3,125 shares remain subject to our lapsing right of
repurchase) and 93,333 shares subject to options that are
exercisable within 60 days of August 31, 2006 (of
which 63,542 shares are unvested and will remain subject to
our lapsing right of repurchase if such options are exercised
prior to such shares becoming vested). Dr. Shargill
disclaims beneficial ownership of the shares held in the
Shargill 2001 Trust except to the extent that he is the
beneficiary of such trust.
(8)
Consists of 3,333 shares held jointly
by Ms. Brown and Greg M. Bell, 56,666 shares held
by Ms. Brown and Greg M. Bell, Trustees, U/ A/ D
May 28, 1997 Greg M. Bell and Ms. Brown (of which
23,611 shares remain subject to our lapsing right of
repurchase), 833 shares held by Ms. Brown and
53,925 shares subject to options that are exercisable
within 60 days of August 31, 2006 (of which
34,193 shares are unvested and will remain subject to our
lapsing right of repurchase if such options are exercised prior
to such shares becoming vested). Ms. Brown disclaims
beneficial ownership of the shares held in the U/ A/ D
May 28, 1997 except to the extent that she is the
beneficiary of such trust.
(9)
Consists of shares subject to options that
are exercisable within 60 days of August 31, 2006 (of
which 44,236 shares are unvested and will remain subject to
lapsing our right of repurchase if such options are exercised
prior to such shares becoming vested).
(10)
Consists of 33,333 shares held by
Karen Passafaro, Trustee, Passafaro 1998 Family Trust (of which
6,285 shares remain subject to our lapsing right of
repurchase) and 68,333 shares subject to options that are
exercisable within 60 days of August 31, 2006 (of
which 63,472 shares are unvested and will remain subject to
our lapsing right of repurchase if such
options are exercised prior to such shares
becoming vested). Ms. Passafaro disclaims beneficial
ownership of the shares held in the Passafaro 1998 Family Trust
except to the extent she is the beneficiary of such trust.
(11)
Consists of shares subject to options that
are exercisable within 60 days of August 31, 2006 (of
which 40,509 shares are unvested and will remain subject to
our lapsing right of repurchase if such options are exercised
prior to such shares becoming vested).
(12)
Consists of shares subject to options that
are exercisable within 60 days of August 31, 2006 (of
which 11,389 shares are unvested and will remain subject to
our lapsing right of repurchase if such options are exercised
prior to such shares becoming vested).
(13)
Includes shares held by entities
affiliated with directors as described in notes 1, 2, 3 and
4. Also includes 594,162 shares held by our executive
officers (of which 230,354 shares remain subject to our lapsing
right of repurchase), and 1,021,887 shares subject to
options that are exercisable within 60 days of
August 31, 2006 (of which 710,804 shares are unvested
but will remain subject to our lapsing right of repurchase if
such options are exercised prior to such shares becoming vested).
(14)
Consists of 41,635 shares held by
Polaris Venture Partners Entrepreneurs’ Fund IV, L.P.
and 2,292,373 shares held by Polaris Venture Partners IV,
L.P., both of which are affiliates of Polaris Venture Partners.
Polaris Venture Management Co. IV, L.L.C. is the general partner
of Polaris Venture Partners IV, L.P. and Polaris Venture
Partners Entrepreneurs’ Fund IV, L.P. The managing
members of Polaris Venture Management Co. IV, L.L.C. are
Jonathan A. Flint, Terrance G. McGuire and Alan G. Spoon, which
individuals may be deemed to have shared voting, investment and
dispositive power with respect to these shares. Each of
Messrs. Flint, McGuire and Spoon disclaims beneficial
ownership of these shares except to the extent of each of their
respective pecuniary interest in Polaris Venture Partners IV,
L.P. and Polaris Venture Partners Entrepreneurs’
Fund IV, L.P. The address of Polaris Venture Partners is
1000 Winter Street, Suite 3350, Waltham, Massachusetts02451.
(15)
Consists of 56,312 shares held by
Menlo Entrepreneurs Fund VII, L.P. and
1,328,715 shares held by Menlo Ventures VII, L.P., both of
which are affiliates of Menlo Ventures. MV Management VII,
L.L.C. is the general partner of Menlo Ventures VII, L.P. and
Menlo Entrepreneurs Fund VII, L.P. H.D. Montgomery, Douglas
C. Carlisle, John W. Jarve, Sonja L. Hoel and Mark A. Siegel are
the managing members of MV Management VII, LLC, which
individuals may be deemed to have shared voting and investment
control with respect to these shares. Each of
Messrs. Montgomery, Carlisle, Jarve and Siegel and
Ms. Hoel disclaims beneficial ownership of these shares
except to the extent of each of their respective pecuniary
interest in Menlo Ventures VII, L.P. and Menlo Entrepreneurs
Fund VII, L.P. The address for Menlo Ventures is
3000 Sand Hill Road, Building 4, Suite 100, MenloPark, California94025.
(16)
Consists of 1,262,431 shares held by
MedVenture Associates IV, L.P. and 34,365 shares held by
MedVenture Affiliates IV, L.P., both of which are affiliates of
MedVenture Associates. MedVenture Associates Management IV
Co., L.L.C. is the general partner of MedVenture Affiliates IV,
L.P. and MedVenture Associates IV, L.P. The sole managing member
of MedVenture Associates Management IV Co., L.L.C. is
Ms. Campbell-White, who may be deemed to have sole voting
and investment control with respect to these shares.
Ms. Campbell-White disclaims beneficial ownership of these
shares except to the extent of her pecuniary interest in
MedVenture Affiliates IV, L.P. and MedVenture Associates IV,
L.P. The address of MedVenture Associates is 5980 Horton
Street, Suite 390, Emeryville, California94608.
(17)
Consists of 732,017 shares held by
HBM BioCapital (EUR) L.P. and 247,794 shares held by
HBM BioCapital (USD) L.P. (see note 3). The board of
directors of HBM BioCapital Ltd., the general partner of the HBM
BioCapital Funds, has sole voting and dispositive power with
respect to such shares. The board of directors of HBM BioCapital
Ltd. consists of John Arnold, Colin Shaw, Richard Coles,
Dr. Andreas Wicki and John Urquhart, none of whom has
individual voting or investment power with respect to the
shares. The address of the HBM BioCapital Funds is c/o HBM
BioCapital Ltd., Centennial Towers, 3rd Floor,
2454 West Bay Road, Grand Cayman, Cayman Islands.
(18)
Consists of shares held by Boston
Scientific Corporation. The address of Boston Scientific
Corporation is 1 Boston Scientific Place, Natick,
Massachusetts01760.
(19)
Consists of 363,080 shares held by
Montreux Equity Partners II SBIC, L.P. and
507,719 shares held by Montreux Equity Partners III
SBIC, L.P., both of which are affiliates of Montreux Equity
Partners. The managing members of Montreux Equity
Partners II SBIC, L.P. and Montreux Equity
Partners III SBIC, L.P. are Daniel K. Turner III,
Howard D. Palefsky and Manish Chapekar, which individuals may be
deemed to have shared voting and investment control with respect
to these shares. Each of Messrs. Turner, Palefsky and
Chapekar disclaims beneficial ownership of these shares except
to the extent of each of their respective pecuniary interest in
Montreux Equity Partners II SBIC, L.P. and Montreux Equity
Partners III SBIC, L.P. The address of Montreux Equity
Partners is 3000 Sand Hill Road, Building 1,
Suite 260, Menlo Park, California94025.
(20)
Consists of 680,693 shares held by
Vanguard VII, L.P., 64,650 shares held by Vanguard VII-A,
L.P., 22,175 shares held by Vanguard VII Accredited
Affiliates Fund, L.P. and 10,109 shares held by Vanguard
VII Qualified Affiliates Fund, L.P., each of which is affiliated
with Vanguard Ventures. Vanguard VII Venture Partners L.L.C., is
the general partner of Vanguard VII, L.P., Vanguard
VII-A, L.P., Vanguard
VII Accredited Affiliates Fund, L.P. and Vanguard VII Qualified
Affiliates Fund L.P. The managing members of Vanguard VII
Venture Partners, L.L.C. are Daniel L. Eilers, Jack M. Gill,
Thomas C. McConnell, Robert D. Ulrich, and Donald F. Wood, which
individuals may be deemed to have shared voting and investment
control with respect to these shares. Each of
Messrs. Eilers, Gill, McConnell, Ulrich and Wood disclaims
beneficial ownership of these shares except to the extent of
each of their respective pecuniary interest in Vanguard VII,
L.P., Vanguard VII-A,
L.P., Vanguard VII Accredited Affiliates Fund, L.P. and Vanguard
VII Qualified Affiliates Fund L.P. The address of Vanguard
Ventures is 525 University Avenue, Suite 1200, PaloAlto, California94301.
Immediately following the completion of
this offering, our authorized capital stock will consist of:
•
40,000,000 shares of common stock,
$0.00001 par value per share; and
•
3,333,333 shares of preferred stock,
$0.00001 par value per share.
As of August 31, 2006, and after
giving effect to the conversion of all of our outstanding
preferred stock into common stock upon completion of this
offering, there were outstanding:
•
11,010,501 shares of our common stock
held by 89 stockholders;
•
1,507,503 shares issuable upon
exercise of outstanding stock options; and
•
1,000 shares issuable upon exercise
of an outstanding warrant.
Common Stock
Dividend
Rights. Subject to
preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of
our common stock are entitled to receive dividends out of funds
legally available if our board of directors, in its discretion,
determines to issue dividends and only then at the times and in
the amounts that our board of directors may determine.
Voting
Rights. Each holder of
common stock is entitled to one vote for each share of common
stock held on all matters submitted to a vote of stockholders.
Our restated certificate of incorporation eliminates the right
of stockholders to cumulate votes for the election of directors.
No Preemptive or Similar
Rights. Our common stock is
not entitled to preemptive rights and is not subject to
conversion or redemption.
Right to Receive Liquidation
Distributions. Upon our
dissolution, liquidation or winding-up, the assets legally
available for distribution to our stockholders are distributable
ratably among the holders of our common stock, subject to prior
satisfaction of all outstanding debt and liabilities and the
preferential rights and payment of liquidation preferences, if
any, on any outstanding shares of preferred stock.
Preferred Stock
Upon the closing of this offering, each
outstanding share of preferred stock will be converted into
common stock.
Following the closing of this offering, we
will be authorized, subject to limitations prescribed by
Delaware law, to issue up to 3,333,333 shares of preferred
stock in one or more series, to establish from time to time the
number of shares to be included in each series and to fix the
designation, powers, preferences and rights of the shares of
each series and any of its qualifications, limitations or
restrictions. Our board of directors can also increase or
decrease the number of shares of any series, but not below the
number of shares of that series then outstanding, without any
further vote or action by our stockholders. Our board of
directors may authorize the issuance of preferred stock with
voting or conversion rights that could adversely affect the
voting power or other rights of the holders of the common stock.
The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate
purposes, could, among other things, have the effect of
delaying, deferring or preventing a change in control of our
company and may adversely affect the market price
of our common stock and the voting and
other rights of the holders of common stock. We have no current
plan to issue any shares of preferred stock.
Warrant
As of August 31, 2006, we had one
warrant outstanding to purchase an aggregate of
1,000 shares of our common stock with an aggregate exercise
price of $1,350. Pursuant to the terms of the Corporate
Formation Agreement that we entered into with Broncus, Broncus
will receive the exercise price of the warrant upon exercise.
This warrant expires upon the earlier of (i) March 19,2008, (ii) the closing of a merger, consolidation or other
reorganization in which the shareholders of Broncus own less
than a majority of the voting power of the surviving entity or
(iii) the closing of Broncus’ initial public offering.
Registration Rights
Following the closing of this offering,
the holders of the 9,927,016 shares of our common stock
issued upon conversion of our preferred stock will be entitled
to rights with respect to the registration of these shares under
the Securities Act of 1933, as amended, or Securities Act, as
described below.
Demand Registration
Rights. At any time
beginning six months after the completion of this offering, the
holders of at least a majority of the shares having registration
rights can request that we register all or a portion of their
shares, as long as the aggregate offering price of the shares to
the public is $15.0 million or more, net of any
underwriters’ discounts or commissions. We will only be
required to file three registration statements upon exercise of
these demand registration rights. We may postpone the filing of
a registration statement for up to 120 days once in a
12-month period if we
determine that the filing would be seriously detrimental to us
and our stockholders.
Piggyback Registration
Rights. If we register any
of our securities for public sale, the stockholders with
registration rights will have the right to include their shares
in the registration statement. However, this right does not
apply to a registration relating to any of our employee benefit
plans or a corporate reorganization. The managing underwriter of
any underwritten offering will have the right to limit, due to
marketing reasons, the number of shares registered by these
holders to 20% of the total shares covered by the registration
statement.
Form S-3
Registration Rights. The
holders of at least 20% of the shares having registration rights
can request that we register all or a portion of their shares on
Form S-3 if we are
eligible to file a registration statement on
Form S-3 and the
aggregate price to the public of the shares offered is at least
$1.0 million. The stockholders may only require us to file
one registration statement on
Form S-3 per
12-month period. We may
postpone the filing of a registration statement on
Form S-3 for up to
120 days once in a
nine-month period if we
determine that the filing would be seriously detrimental to us
and our stockholders.
Registration
Expenses. We will pay all
expenses incurred in connection with each of the registrations
described above, except for underwriters’ and brokers’
discounts and commissions. However, we will not pay for any
expenses of any demand registration if the request is
subsequently withdrawn by a majority of the holders requesting
that we file such a registration statement, subject to limited
exceptions.
Expiration of Registration
Rights. The registration
rights described above will expire seven years after this
offering is completed. The registration rights will terminate
earlier with respect to a particular stockholder to the extent
the shares held by and issuable to such holder may be sold under
Rule 144 of the Securities Act in any
90-day period.
Holders of substantially all of our shares
with these registration rights have signed agreements with the
underwriters prohibiting the exercise of their registration
rights for 180 days, subject to a possible extension under
certain circumstances, following the date of this prospectus.
These agreements are described below in Underwriting.
Anti-Takeover Provisions
Some of the provisions of Delaware law,
our restated certificate of incorporation and our bylaws may
have the effect of delaying, deferring or discouraging another
person from acquiring control of our company.
Delaware Law
After we reincorporate in Delaware, we
will be subject to the provisions of Section 203 of the
Delaware General Corporation Law regulating corporate takeovers.
This section prevents some Delaware corporations from engaging,
under some circumstances, in a business combination, which
includes a merger or sale of at least 10% of the
corporation’s assets with any interested stockholder,
meaning a stockholder who, together with affiliates and
associates, owns or, within three years prior to the
determination of interested stockholder status, did own 15% or
more of the corporation’s outstanding voting stock, unless:
•
the transaction is approved by the board
of directors prior to the time that the interested stockholder
became an interested stockholder;
•
upon consummation of the transaction which
resulted in the stockholder’s becoming an interested
stockholder, the interested stockholder owned at least 85% of
the voting stock of the corporation outstanding at the time the
transaction commenced; or
•
at or subsequent to such time that the
stockholder became an interested stockholder the business
combination is approved by the board of directors and authorized
at an annual or special meeting of stockholders by at least
two-thirds of the outstanding voting stock which is not owned by
the interested stockholder.
A Delaware corporation may “opt
out” of these provisions with an express provision in its
original certificate of incorporation or an express provision in
its certificate or incorporation or bylaws resulting from a
stockholders’ amendment approved by at least a majority of
the outstanding voting shares. We do not plan to “opt
out” of these provisions. The statute could prohibit or
delay mergers or other takeover or change in control attempts
and, accordingly, may discourage attempts to acquire us.
following the completion of this offering,
no action shall be taken by our stockholders except at an annual
or special meeting of our stockholders called in accordance with
our bylaws and that our stockholders may not act by written
consent;
•
our stockholders may not call special
meetings of our stockholders or fill vacancies on our board of
directors; and
•
we will indemnify directors and officers
against losses that they may incur in investigations and legal
proceedings resulting from their services to us, which may
include services in connection with takeover defense measures.
These provisions of our restated
certificate of incorporation or bylaws, as well as the ability
of our board of directors to authorize the issuance of preferred
stock without any further action by our stockholders, as
described in Description of Capital Stock, and the
classification of our board of directors, as described in
Management — Board Composition, may have the effect of
delaying, deferring or discouraging another person or entity
from acquiring control of us.
NASDAQ Global Market Listing
We have applied to list our common stock
on the NASDAQ Global Market under the trading symbol
“AZMA.”
Transfer Agent and Registrar
The transfer agent and registrar for our
common stock is Computershare Investor Services LLC.
Prior to this offering, there has been no
public market for our common stock, and we cannot predict the
effect, if any, that market sales of shares of our common stock
or the availability of shares of our common stock for sale will
have on the market price of our common stock prevailing from
time to time. Nevertheless, sales of substantial amounts of our
common stock, including shares issued upon exercise of
outstanding options, in the public market after this offering
could adversely affect market prices prevailing from time to
time and could impair our ability to raise capital through the
sale of our equity securities.
Upon the completion of this offering,
based on the number of shares outstanding as of August 31,2006, and after giving effect to the automatic conversion of all
outstanding shares of our preferred stock into common stock
immediately prior to completion of this offering, we will have
16,010,501 shares of common stock outstanding, assuming no
exercise of the underwriters’ over-allotment option and no
exercise of outstanding options or the outstanding warrant. All
of the shares sold in this offering will be freely tradable,
except that any shares held by our affiliates (as that term is
defined in Rule 144 promulgated under the Securities Act)
may only be sold in compliance with the limitations described
below.
Sales of Restricted
Securities
The remaining 11,010,501 shares of
common stock will be deemed restricted securities as defined
under Rule 144. Restricted securities may be sold in the
public market only if registered or if they qualify for an
exemption from registration under Rule 144, 144(k) or 701
promulgated under the Securities Act, which rules are summarized
below. As a result of the
lock-up agreements
described below, the provisions of Rule 144 and
Rule 701 and, in some cases, rights of repurchase by us,
these shares of our common stock (excluding the shares sold in
this offering) will be available for sale in the public market
as follows (subject in some cases to volume limitations under
Rule 144):
•
no shares will be eligible for sale on the
date of this prospectus;
•
10,782,935 shares will be eligible
for sale upon the expiration of
lock-up agreements, as
described below in Underwriting, beginning 180 days
(subject to a possible extension under certain circumstances)
after the date of this prospectus; and
•
227,566 shares will be eligible for
sale at various dates thereafter upon the lapse of our right of
repurchase with respect to unvested shares.
Lock-Up Agreements
All of our directors and officers and the
holders of substantially all of our outstanding shares and stock
options have signed
lock-up agreements
under which they have agreed not to sell, transfer or dispose
of, directly or indirectly, any shares of our common stock or
any securities convertible into or exercisable or exchangeable
for shares of our common stock without the prior written consent
of Piper Jaffray & Co. and Bear, Stearns & Co.
Inc. for a period of 180 days, subject to specified
exceptions and possible extension under certain circumstances.
Please see below in Underwriting.
Rule 144
In general, under Rule 144 as
currently in effect, a person, or group of persons whose shares
are required to be aggregated, who has beneficially owned shares
that are restricted securities as defined in
Rule 144 for at least one year is
entitled to sell, within any three-month period commencing
90 days after the date of this prospectus, a number of
shares that does not exceed the greater of:
•
1% of the then outstanding shares of our
common stock, which will be approximately 160,105 shares
immediately after this offering; or
•
the average weekly trading volume in our
common stock on the NASDAQ Global Market during the four
calendar weeks preceding the filing of a notice on Form 144
with respect to such sale.
In addition, a person who is not deemed to
have been an affiliate at any time during the three months
preceding a sale and who has beneficially owned the shares
proposed to be sold for at least two years would be entitled to
sell these shares under Rule 144(k) without regard to the
requirements described above. To the extent that shares were
acquired from one of our affiliates, a person’s holding
period for the purpose of effecting a sale under Rule 144
would commence on the date of transfer from the affiliate.
Rule 701
In general, under Rule 701 of the
Securities Act, any of our employees, directors, officers,
consultants or advisors who purchased shares from us in
connection with a compensatory stock or option plan or other
written agreement is eligible to resell those shares in reliance
on Rule 144, but without compliance with specified
restrictions, including the holding period contained in
Rule 144. However, all shares issued under Rule 701
are subject to the
lock-up agreements
described below and will only become eligible for sale at the
expiration of such agreements.
Registration Rights
The holders of 9,927,016 shares of
our common stock, or their transferees, will be entitled to
specified rights with respect to the registration of those
shares under the Securities Act. For a description of these
registration rights, please see Description of Capital
Stock — Registration Rights. After these shares are
registered, they will be freely tradable without restriction
under the Securities Act.
Stock Options
As of August 31, 2006, options to
purchase a total of 1,507,503 shares of our common stock
were outstanding. We intend to file a registration statement on
Form S-8 under the
Securities Act to register all shares of our common stock
subject to outstanding options and all shares of our common
stock issuable under our equity incentive and employee stock
purchase plans. Accordingly, shares of our common stock issued
under these plans will be eligible for sale in the public
markets, subject to vesting restrictions and the
lock-up agreements
described above.
The underwriters named below have agreed
to buy, subject to the terms of the purchase agreement, the
number of shares listed opposite their names below. Piper
Jaffray & Co. and Bear, Stearns & Co. Inc. are
acting as joint book-running managers for this offering and,
together with First Albany Capital Inc. and
Jefferies & Company, Inc., are acting as
representatives of the underwriters. The underwriters are
committed to purchase and pay for all of the shares if any are
purchased, other than those shares covered by the over-allotment
option described below.
Number of
Underwriters
Shares
Piper Jaffray & Co.
Bear, Stearns & Co. Inc.
First Albany Capital Inc.
Jefferies & Company, Inc.
Total
5,000,000
The underwriters have advised us that they
propose to offer the shares to the public at
$ per
share. The underwriters propose to offer the shares to certain
dealers at the same price less a concession of not more than
$ per
share. The underwriters may allow and the dealers may reallow a
concession of not more than
$ per
share on sales to certain other brokers and dealers. After the
offering, these figures may be changed by the underwriters.
We have granted to the underwriters an
option to purchase up to an additional 750,000 shares of
common stock from us at the same price to the public, and with
the same underwriting discount, as set forth above. The
underwriters may exercise this option any time during the
30-day period after the
date of this prospectus, but only to cover over-allotments, if
any. To the extent the underwriters exercise the option, each
underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of the
additional shares as it was obligated to purchase under the
purchase agreement.
We estimate that the total fees and
expenses payable by us, excluding underwriting discounts, will
be approximately $1.5 million. The following table shows
the underwriting fees to be paid to the underwriters by us in
connection with this offering. These amounts are shown assuming
both no exercise and full exercise of the over-allotment option.
No Exercise
Full Exercise
Per Share
$
$
Total
$
$
We have agreed to indemnify the
underwriters against certain liabilities, including civil
liabilities under the Securities Act, or to contribute to
payments that the underwriters may be required to make in
respect of those liabilities.
The underwriters have informed us that
neither they, nor any other underwriter participating in the
distribution of the offering, will make sales of the common
stock offered by this prospectus to accounts over which they
exercise discretionary authority without the prior specific
written approval of the customer.
All of our directors and executive
officers and the holders of substantially all of our outstanding
shares and stock options are subject to
lock-up agreements that
prohibit them from offering for sale, selling, contracting to
sell, granting any option for the sale of, transferring or
otherwise disposing of any shares of our common stock, options
or warrants to acquire shares of our common stock or any
security or instrument related to such common stock, option or
warrant for a period of at least
180 days following the date of this
prospectus without the prior written consent of Piper
Jaffray & Co. and Bear, Stearns & Co. Inc. The
lock-up provisions do
not prevent securityholders from transferring their shares or
other securities as gifts, or by will or intestate succession to
members of their immediate family or to a trust for the benefit
of members of their immediate family, provided in each case,
that the transferee of such securities agrees to be
locked-up to the same
extent as the securityholder from whom they received the
shares.
In addition, we are subject to a
lock-up agreement that
prohibits us from offering for sale, selling, contracting to
sell, granting any option for the sale of, pledging,
transferring, establishing an open put equivalent position or
otherwise disposing of any shares of our common stock, options
or warrants to acquire shares of our common stock or any
security or instrument related to such common stock, option or
warrant for a period of at least 180 days following the
date of this prospectus without the prior written consent of
Piper Jaffray & Co. and Bear, Stearns & Co.
Inc., subject to certain specified exceptions.
The
180-day
lock-up period in all
of the lock-up
agreements is subject to extension if (i) during the last
17 days of the
lock-up period, we
issue an earnings release or material news or a material event
relating to us occurs or (ii) prior to the expiration of
the lock-up period, we
announce that we will release earnings results during the
16-day period beginning
on the last day of the
lock-up period, in
which case the restrictions imposed in these
lock-up agreements
shall continue to apply until the expiration of the
18-day period beginning
on the issuance of the earnings release or the occurrence of the
material news or material event, unless Piper Jaffray &
Co. and Bear, Stearns & Co. Inc. waive the extension in
writing.
We have applied to list our common stock
on the NASDAQ Global Market under the trading symbol
“AZMA.”
Prior to the offering, there has been no
established trading market for our common stock. The initial
public offering price for the shares of common stock offered by
this prospectus will be negotiated by us and the underwriters.
The factors to be considered in determining the initial public
offering price include:
•
the history of and the prospects for the
industry in which we compete;
•
our past and present operations;
•
our historical results of operations;
•
our prospects for future earnings;
•
the recent market prices of securities of
generally comparable companies; and
•
the general condition of the securities
markets at the time of the offering and other relevant factors.
To facilitate the offering, the
underwriters may engage in transactions that stabilize, maintain
or otherwise affect the price of the common stock during and
after the offering. Specifically, the underwriters may
over-allot or otherwise create a short position in the common
stock for their own account by selling more shares of common
stock than we have sold to them. Short sales involve the sale by
the underwriters of a greater number of shares than they are
required to purchase in the offering. “Covered” short
sales are sales made in an amount not greater than the
underwriters’ option to purchase additional shares in the
offering. The underwriters may close out any covered short
position by either exercising their option
to purchase additional shares or purchasing shares in the open
market. In determining the source of shares to close out the
covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase
shares through the over-allotment option. “Naked”
short sales are sales in excess of this option. The underwriters
must close out any naked short position by purchasing shares in
the open market. A naked short position is more likely to be
created if the underwriters are concerned that there may be
downward pressure on the price of the common stock in the open
market after pricing that could adversely affect investors who
purchase in the offering.
In addition, the underwriters may
stabilize or maintain the price of the common stock by bidding
for or purchasing shares of common stock in the open market and
may impose penalty bids. If penalty bids are imposed, selling
concessions allowed to syndicate members or other broker-dealers
participating in the offering are reclaimed if shares of common
stock previously distributed in the offering are repurchased,
whether in connection with stabilization transactions or
otherwise. The effect of these transactions may be to stabilize
or maintain the market price of the common stock at a level
above that which might otherwise prevail in the open market. The
imposition of a penalty bid may also affect the price of the
common stock to the extent that it discourages resales of the
common stock. The magnitude or effect of any stabilization or
other transactions is uncertain. These transactions may be
effected on the NASDAQ Global Market or otherwise and, if
commenced, may be discontinued at any time.
Some underwriters and selling group
members may also engage in passive market making transactions in
our common stock. Passive market making consists of displaying
bids on the NASDAQ Global Market limited by the prices of
independent market makers and effecting purchases limited by
those prices in response to order flow. Rule 103 of
Regulation M promulgated by the SEC limits the amount of
net purchases that each passive market maker may make and the
displayed size of each bid. Passive market making may stabilize
the market price of the common stock at a level above that which
might otherwise prevail in the open market and, if commenced,
may be discontinued at any time.
A prospectus in electronic format may be
made available on the web sites maintained by one or more of the
underwriters or selling group members, if any, participating in
this offering and one or more of the underwriters participating
in this offering may distribute prospectuses electronically.
From time to time in the ordinary course
of their respective businesses, certain of the underwriters and
their affiliates may in the future engage in commercial banking
or investment banking transactions with us and our affiliates.
In addition, SightLine Healthcare Fund III, L.P.,
previously known as Piper Jaffray Healthcare Fund III,
L.P., holds 224,976 shares of our Series AA preferred
stock and is a party to the Registration Rights Agreement
described in Description of Capital Stock —
Registration Rights. These shares represent approximately 2.0%
of our outstanding capital stock, before giving effect to this
offering. In connection with our inception in December 2003,
Piper Jaffray Healthcare Fund III, L.P. received shares of
our capital stock which were converted into shares of
Series AA preferred stock pursuant to our recapitalization
in March 2004. At the time of our inception and
recapitalization, Piper Jaffray Healthcare Fund III, L.P.
was an affiliate of Piper Jaffray & Co., an underwriter
of this offering. On December 31, 2004, SightLine Partners
LLC, an independent entity not affiliated with Piper
Jaffray & Co., replaced a subsidiary of Piper
Jaffray & Co. as the manager of the general partner of
Piper Jaffray Healthcare Fund III, L.P., thereby assuming
responsibility for managing Piper Jaffray Healthcare
Fund III, L.P. Also on December 31, 2004, Piper
Jaffray Healthcare Fund III, L.P. changed its name to
SightLine Healthcare Fund IV, L.P. Piper Jaffray &
Co. retains a minority investment in the general partner of
SightLine Healthcare Fund III, L.P.
In relation to each member state of the
European Economic Area which has implemented the Prospectus
Directive (each, a relevant member state), each underwriter has
represented and agreed that with effect from and including the
date on which the Prospectus Directive is implemented in that
relevant member state, or the relevant implementation date, it
has not made and will not make an offer of shares of our common
stock to the public in this offering in that relevant member
state prior to the publication of a prospectus in relation to
such shares which has been approved by the competent authority
in that relevant member state or, where appropriate, approved in
another relevant member state and notified to the competent
authority in that relevant member state, all in accordance with
the Prospectus Directive. However, with effect from and
including the relevant implementation date, it may make an offer
of shares of our common stock to the public in that relevant
member state at any time:
•
to legal entities which are authorized or
regulated to operate in the financial markets or, if not so
authorized or regulated, whose corporate purpose is solely to
invest in securities;
•
to any legal entity which has two or more
of (i) an average of at least 250 employees during the last
financial year, (ii) a total balance sheet of more than
€43,000,000 and
(iii) an annual net turnover of more than
€50,000,000, as
shown in its last annual or consolidated accounts;
•
to fewer than 100 natural or legal persons
(other than qualified investors as defined in the Prospectus
Directive) subject to obtaining the prior consent of the
underwriters; or
•
in any other circumstances which do not
require the publication by the issuer of a prospectus pursuant
to Article 3 of the Prospectus Directive,
provided that no such offer of shares
shall result in a requirement for the publication of a
prospectus pursuant to Article 3 of the Prospectus
Directive or any measure implementing the Prospectus Directive
in a relevant member state and each person who initially
acquires any share or to whom any offer is made under this
offering will be deemed to have represented, acknowledged and
agreed that it is a “qualified investor” within the
meaning of Article 2 (1)(e) of the Prospectus Directive.
For the purposes of this provision, the
expression an “offer of shares of our common stock to the
public” in any relevant member state means the
communication in any form and by any means of sufficient
information on the terms of the offer and the shares to be
offered so as to enable an investor to decide to purchase or
subscribe such shares, as may be varied in that relevant member
state by any measure implementing the Prospectus Directive in
that member state, and the expression “Prospectus
Directive” means Directive 2003/71/ EC and includes any
relevant implementing measure in each relevant member state.
The shares have not been and will not be
offered to the public within the meaning of the German Sales
Prospectus Act (Verkaufsprospektgesetz) or the German Investment
Act (Investmentgesetz). The shares have not been and will not be
listed on a German exchange. No sales prospectus pursuant to the
German Sales Prospectus Act has been or will be published or
circulated in Germany or filed with the German Federal Financial
Supervisory Authority (Bundesanstalt für
Finanzdienstleistungsaufsicht) or any other governmental or
regulatory authority in Germany. This prospectus does not
constitute an offer to the public in Germany and it does not
serve for public distribution of the shares in Germany. Neither
this prospectus, nor any other document issued in connection
with this offering, may be issued or distributed to any person
in Germany except under circumstances which do not constitute an
offer to the public within the meaning of the German Sales
Prospectus Act or the German Investment Act.
Each underwriter has represented,
warranted and agreed that: (i) it has only communicated or
caused to be communicated and will only communicate or cause to
be communicated any invitation or inducement to engage in
investment activity (within the meaning of section 21 of
the Financial Services and Markets Act 2000, or FSMA) received
by it in connection with the issue or sale of any shares in
circumstances in which section 21(1) of the FSMA does not
apply to our company and (ii) it has complied and will
comply with all applicable provisions of the FSMA with respect
to anything done by it in relation to the shares in, from or
otherwise involving the United Kingdom.
The shares offered pursuant to this
prospectus will not be offered, directly or indirectly, to the
public in Switzerland and this prospectus does not constitute a
public offering prospectus as that term is understood pursuant
to Article 652a or Article 1156 of the Swiss Federal
Code of Obligations. We have not applied for a listing of the
shares being offered pursuant to this prospectus on the SWX
Swiss Exchange or on any other regulated securities market, and
consequently, the information presented in this prospectus does
not necessarily comply with the information standards set out in
the relevant listing rules. The shares being offered pursuant to
this prospectus have not been registered with the Swiss Federal
Banking Commission as foreign investment funds, and the investor
protection afforded to acquirers of investment fund certificates
does not extend to acquirers of securities.
If you purchase shares of common stock
offered in this prospectus, you may be required to pay stamp
taxes and other charges under the laws and practices of the
country of purchase, in addition to the offering price listed on
the cover page of this prospectus.
Fenwick & West LLP, Mountain
View, California, will pass upon the validity of the issuance of
the shares of common stock offered by this prospectus for
Asthmatx. Fenwick & West LLP and partners of the firm
beneficially own an aggregate of 24,477 shares of our
common stock. Certain legal matters in connection with this
offering will be passed upon for the underwriters by
Latham & Watkins LLP, Menlo Park, California.
EXPERTS
Our financial statements as of
December 31, 2004 and 2005 and for each of the three
periods in the period ended December 31, 2005 included in
this prospectus have been so included in reliance on the report
(which contains an explanatory paragraph relating to the
restatement of our financial statements as described in
Note 1 to the financial statements) of
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, given on the authority of said firm as experts
in auditing and accounting.
WHERE YOU CAN FIND MORE
INFORMATION
We have filed with the Securities and
Exchange Commission a registration statement on
Form S-1 under the
Securities Act with respect to the common stock. This
prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in
the registration statement, some items of which are contained in
exhibits to the registration statement as permitted by the rules
and regulations of the Commission. For further information with
respect to us and our common stock, we refer you to the
registration statement, including the exhibits and the
consolidated financial statements and notes filed as a part of
the registration statement. Statements contained in this
prospectus concerning the contents of any contract or any other
document are not necessarily complete. If a contract or document
has been filed as an exhibit to the registration statement,
please see the copy of the contract or document that has been
filed. Each statement in this prospectus relating to a contract
or document filed as an exhibit is qualified in all respects by
the filed exhibit. The exhibits to the registration statement
should be referenced for the complete contents of these
contracts and documents. A copy of the registration statement,
including the exhibits and the consolidated financial statements
and notes filed as a part of the registration statement, may be
inspected without charge at the public reference facilities
maintained by the Commission in Room 1580, 100 F Street,
N.E., Washington, D.C. 20549, and copies of all or any part
of the registration statement may be obtained from the
Commission upon the payment of fees prescribed by it. You may
call the Commission at
1-800-SEC-0330 for more
information on the operation of the public reference facilities.
The Commission maintains a website at http://www.sec.gov that
contains reports, proxy and information statements and other
information regarding companies that file electronically with
it.
As a result of this offering, we will
become subject to the information and reporting requirements of
the Securities Exchange Act and, in accordance with this law,
will file periodic reports, proxy statements and other
information with the Commission. These periodic reports, proxy
statements and other information will be available for
inspection and copying at the Commission’s public reference
facilities and the website of the SEC referred to above.
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Shareholders
of Asthmatx, Inc.
(a development stage enterprise)
The reverse stock split described in the
last paragraph in Note 13 to the financial statements has
not been consummated at October 2, 2006. When it has been
consummated, we will be in a position to furnish the following
report:
“In our opinion, the accompanying
balance sheets and the related statements of operations, of
shareholders’ deficit and of cash flows present fairly, in
all material respects, the financial position of Asthmatx, Inc.
(a development stage enterprise) at December 31, 2004 and
2005 and the results of its operations and its cash flows for
each of the three periods in the period ended December 31,2005 in conformity with accounting principles generally accepted
in the United States of America. These financial statements are
the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
As described in Note 1, the Company
restated its financial statements as of and for the year ended
December 31, 2005.”
San Jose, California
July 21, 2006, except for the last
three paragraphs in Note 13 and the matter described under
the caption “Restatement of Financial Statements” in
Note 1 which are as of October 2, 2006
Common stock: no par value; 8,000,000 shares authorized at
December 31, 2004, 15,000,000 shares authorized at
December 31, 2005 and June 30, 2006
(unaudited) respectively; 261,492, 531,091, and
681,509 shares issued and outstanding at December 31,2004 and 2005, and at June 30, 2006
(unaudited) respectively; 10,608,525 shares issued and
outstanding at June 30, 2006 pro forma (unaudited)
188,106
5,243,756
6,388,620
106
Additional paid-in capital
—
—
—
50,708,337
Deferred stock-based compensation
—
(2,079,117
)
(1,722,896
)
(1,722,896
)
Notes receivable from shareholders
(100,933
)
(132,333
)
(132,333
)
Deficit accumulated during the development stage
(5,963,648
)
(16,913,995
)
(26,265,436
)
(26,265,430
)
Accumulated other comprehensive (loss) income
—
(696
)
104,001
104,001
Total shareholders’ equity (deficit)
(5,775,542
)
(13,850,985
)
(21,628,044
)
22,691,785
Total liabilities, convertible preferred stock and
shareholders’ equity (deficit)
$
12,854,115
$
31,732,595
$
26,869,520
The accompanying notes are an integral part of these
financial statements.
Asthmatx, Inc., a California corporation
(the “Company”), is a medical device company focused
on developing and commercializing a novel therapeutic treatment
for asthma. Since its inception on December 30, 2003, the
Company has devoted substantially all of its efforts to
developing an asthma treatment system using assets and
technology transferred to it by Broncus Technologies, Inc. The
Company is currently enrolling patients in a clinical trial
under an Investigational Device Exemption granted by the U.S.
Food and Drug Administration to evaluate the safety and efficacy
of this system on severe asthma patients.
The financial statements of the Company
have been prepared in conformity with Statement of Financial
Accounting Standards (“SFAS”) No. 7,
Accounting and Reporting by a Development Stage
Enterprise. As a development stage company, with no
commercial operating history, the Company is subject to all of
the risks and expenses associated with a
start-up company. The
Company must, among other things, respond to competitive
developments, attract, retain and motivate qualified personnel
and support the expense of developing and marketing new products
based on innovative technology. To date, the Company has not
recognized operating revenue from its primary product. Revenue
recognized to date is from a Research Grant (Note 9). There
can be no assurance that the Company will be able to achieve
revenue in excess of expenses or maintain adequate financing to
fulfill its development activities.
Restatement of Financial
Statements
The Company re-evaluated its accounting
for the beneficial conversion feature on Series CC
convertible preferred stock issued in December 2005
(Note 6) and concluded that it incorrectly recorded the
beneficial conversion feature as an increase to preferred stock
instead of to common stock (as the Company has no additional
paid-in capital). In addition, the Company incorrectly amortized
the beneficial conversion feature to deficit accumulated during
the development stage instead of to common stock. The Company
has restated its balance sheets as of December 31, 2005 and
as of June 30, 2006 to appropriately allocate and amortize
the beneficial conversion feature. There was no impact on the
statement of operations or statement of cash flows as a result
of the noted error. The effects of this adjustment on the
accompanying financial statements are as follows:
The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
as of the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Interim Financial
Information
The accompanying balance sheet as of
June 30, 2006, the statements of operations and of cash
flows for the six months ended June 30, 2005 and 2006 and
for the period from December 30, 2003 (date of inception)
to June 30, 2006 and the statements of shareholders’
deficit for the six months ended June 30, 2006 are
unaudited. The unaudited interim financial statements have been
prepared on the same basis as the annual financial statements
and, in the opinion of management, reflect all adjustments,
which include only normal recurring adjustments, necessary to
present fairly the Company’s financial position and results
of operations and cash flows for the six months ended
June 30, 2005 and 2006 and the period from inception to
June 30, 2006. The financial data and other information
disclosed in these notes to the financial statements related to
the six-month periods are unaudited. The results of the six
months ended June 30, 2006 are not necessarily indicative
of the results to be expected for the year ending
December 31, 2006 or for any other interim period or for
any other future year.
Unaudited Pro Forma Shareholders’
Equity
If the offering contemplated by this
prospectus is consummated, all of the convertible preferred
stock outstanding will automatically convert into
9,927,016 shares of common stock, based on the shares of
convertible preferred stock outstanding at June 30, 2006.
See Note 13 Subsequent Events. Unaudited pro forma
shareholders’ equity, as adjusted for the assumed
conversion of the convertible preferred stock and the
reincorporation in Delaware, is set forth on the balance sheet.
Risks and Uncertainties
The Company is subject to all of the risks
inherent in an early stage company developing a new medical
device. These risks include, but are not limited to, the need to
obtain FDA and other regulatory approvals, the possibility of
unanticipated side effects, dependence on obtaining coverage or
reimbursement from third-party payors, uncertainty as to whether
the Company’s device will achieve market acceptance, and
potential competition or technological breakthroughs which may
render the Company’s device obsolete. The Company’s
operating results may be materially affected by the foregoing
factors.
In particular, the Company must receive
approval of the Alair System for the treatment of asthma from
the U.S. Food and Drug Administration prior to commercialized
sales. There can be no assurance that the Alair System will
receive any of these required approvals. If the Company was
denied these approvals or these approvals were delayed, it would
have a materially adverse impact on the Company.
Financial instruments that potentially
subject the Company to a concentration of credit risk consist of
cash and cash equivalents and available-for-sale securities. All
the Company’s cash and cash equivalents are held by three
financial institutions that management believes are of high
credit quality. These deposits may, at times, exceed federally
insured limits. The
available-for-sale
securities are held primarily in government agencies.
Cash and Cash Equivalents
The Company considers all highly liquid
investments purchased with an original maturity of three months
or less to be cash equivalents. Cash and cash equivalents
consist of cash in bank, checking and money market accounts.
Available-for-Sale Securities
The Company has classified its short-term
investments as “available-for-sale” and carries them
at fair value, with unrealized gains and losses, if any,
reported as a separate component of shareholders’ equity
(deficit) and included in comprehensive income (loss). Realized
gains and losses are calculated on the specific identification
method and recorded as interest income. The investments have
original maturities greater than 90 days.
Fair Value of Financial
Investments
Financial instruments, including cash and
cash equivalents, available-for-sale securities, prepaid
expenses, accounts payable and accrued liabilities, are carried
at cost, which management believes approximates fair value given
their short-term nature.
Property and Equipment
Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, generally between three
and five years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful
life of the asset or the term of the lease. Maintenance and
repairs are charged to expense as incurred, and improvements and
betterments are capitalized. When assets are retired or
otherwise disposed of, the cost and accumulated depreciation are
removed from the balance sheet and any resulting gain or loss is
reflected in operations in the period realized.
Impairment of Long-lived
Assets
The Company reviews property and equipment
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability is measured by comparison of the
carrying amount to the future net cash flows that the assets are
expected to generate. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the
projected discounted future net cash flows arising from the
asset. There had been no such impairments of long-lived assets
as of December 31, 2005.
In March 2004, the Board of Directors
approved a 1-for-5
share reverse split of common stock, and consequently reduced
the number of issued and outstanding shares from 3,883,541 to
776,708, with shares rounded down to the nearest whole number.
All share and per share amounts in these financial statements
were retroactively adjusted to give effect to the reverse stock
split. See also Note 13 Subsequent Events.
Revenue Recognition
Grant revenue is received and recognized
as earned based on actual costs incurred or as milestones are
achieved. Revenues are based on reimbursement of direct costs,
and additional funds for indirect expenses and profit. All grant
revenue to date was earned from one university (Note 9).
Research and Development
Costs
Research and development costs, including
costs incurred under grant and collaborative arrangements, are
expensed as incurred and consist primarily of compensation,
clinical trials and other direct expenses.
Income Taxes
The Company uses the liability method to
account for income taxes as required by SFAS No. 109,
Accounting for Income Taxes. Under this method, deferred
tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and
liabilities, and are measured using enacted tax rules and laws
that will be in effect when differences are expected to reverse.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
Stock-Based Compensation
Prior to January 1, 2006, the Company
accounted for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees
(“APB No. 25”), and related
interpretations, and followed the disclosure provisions of
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation
(“SFAS No. 123”) using the minimum value
method. Under APB No. 25, compensation expense is based on
the difference, if any, on the date of the grant, between the
fair value of the Company’s stock and the exercise price.
Employee stock-based compensation determined under APB
No. 25 is recognized using the
straight-line method
for fixed awards, and the multiple option method for variable
awards as prescribed by the Financial Accounting Standards Board
Interpretation No. 28, Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans
(“FIN 28”), over the option vesting
period.
The Company accounts for equity
instruments issued to non-employees in accordance with the
provisions of SFAS No. 123, Emerging Issues Task Force
Abstract
No. 96-18,
Accounting for Equity Instruments that are Issued to Other than
Employees for Acquiring, or in Conjunction with Selling, Goods
or Services
(“EITF 96-18”),
and FIN 28.
Effective January 1, 2006, the
Company adopted the fair value provisions of SFAS No. 123R,
Share-Based Payment (“SFAS No. 123R”), which
supersedes its previous accounting under APB No. 25.
SFAS No. 123R requires the recognition of compensation
expense, using a fair-value based method, for costs related to
all share-based payments including stock options.
SFAS No. 123R requires companies to estimate the fair
value of share-based payment awards on the date of grant using
an option-pricing model. The Company adopted
SFAS No. 123R using the prospective transition method,
which requires that for nonpublic entities that used the minimum
value method for either pro forma or financial statement
recognition purposes, SFAS No. 123R shall be applied
to option grants after the required effective date. For options
granted prior to the SFAS No. 123R effective date,
which the requisite service period has not been performed as of
January 1, 2006, the Company continues to recognize
compensation expense on the remaining unvested awards under the
intrinsic-value method of APB 25. All option grants valued
after January 1, 2006 are expensed on a straight-line basis.
Comprehensive Income (Loss)
The Company has adopted the provisions of
SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components for general
purpose financial statements. For all periods presented, the
difference between net loss and comprehensive loss is due to
unrealized gains (losses) on available-for-sale securities.
Net Loss Per Common Share
Basic net loss per common share is
computed by dividing net loss available to common shareholders
by the weighted average number of vested common shares
outstanding for the period. Diluted net loss per share is
computed giving effect to all dilutive potential common shares,
including options, warrants
and convertible preferred stock. A
reconciliation of the numerator and denominator used in the
calculation of historical basic and diluted net loss per share
follows:
Securities listed below have not been
included in the computations of diluted net loss per share for
the periods ended December 31, 2003, 2004 and 2005 and
June 30, 2005 and 2006 because the inclusion of these
securities would be
anti-dilutive:
Shares issuable upon exercise of warrants for common stock
53,926
53,926
1,333
1,333
1,333
Shares issuable upon exercise of options for common stock
222,718
1,101,156
777,688
1,167,881
1,462,246
Common stock subject to repurchase
—
—
262,568
—
315,606
Convertible preferred stock
2,510,737
5,727,833
9,927,016
5,727,833
9,927,016
Recent Accounting
Pronouncements
In November 2005, the FASB issued FASB
Staff Position (“FSP”) Nos. FAS 115-1 and
FAS 124-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments, which
provides guidance on determining when investments in certain
debt and equity securities are considered impaired, whether that
impairment is other-than-temporary, and the measurement of an
impairment loss. This FSP also includes accounting
considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures
about unrealized losses that have not been recognized as
other-than-temporary impairments. The FSP is required to be
applied to reporting periods beginning after December 15,2005. The adoption of this FSP in 2006 had no impact on the
financial statements.
In June 2005, the FASB issued
SFAS No. 154, Accounting Changes and Error
Corrections: a Replacement of Accounting Principles Board
Opinion No. 20 and FASB Statement No. 3
(“SFAS No. 154”). SFAS No. 154
requires retrospective application for voluntary changes in an
accounting principle unless it is impracticable to do so.
Retrospective application refers to the application of a
different accounting principle to previously issued financial
statements as if that principle had always been used.
SFAS No. 154’s retrospective application
requirement replaces the requirement in APB No 20
(“Accounting Changes”) to recognize most voluntary
changes in an accounting principle by including in net income
(loss) of the period of the change the cumulative effect of
changing to the new accounting principle. SFAS No. 154
defines retrospective application as the application of a
different accounting principle to prior accounting periods as if
that principle had always been used or as the adjustment of
previously issued financial statements to reflect a change in
the reporting entity. SFAS No. 154 also redefines
“restatement” as the revising of previously issued
financial statements to reflect the correction of an error. The
requirements of SFAS No. 154 are effective for
accounting changes made in fiscal years beginning after
December 15, 2005 and will only impact the financial
statements in periods in which a change in an accounting
principle is made.
In March 2005, the FASB issued
Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations (“FIN 47”).
FIN 47 clarifies that an entity must record a liability for
a “conditional” asset retirement obligation if the
fair value of the obligation can be reasonably estimated.
FIN 47 also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset
retirement obligation. FIN 47 is effective no later than
the end of the first reporting period ending after
December 15, 2005. The adoption of FIN 47 did not have
an impact on the Company’s financial statements.
In December 2004, the FASB issued
SFAS No. 153 (“SFAS No. 153”),
Exchanges of Nonmonetary Assets — an amendment of
Accounting Principles Board Opinion No. 29 (“APB
No. 29” or the “Opinion”). The guidance in
APB No. 29, “Accounting for Nonmonetary
Transactions,” is based on the principle that gains or
losses on exchanges of nonmonetary assets may be recognized
based on the differences in the fair values of the assets
exchanged. The guidance in that Opinion, however, included
certain exceptions to that principle which allowed the asset
received to be recognized at the book value of the asset
surrendered. SFAS No. 153 amends APB No. 29 to
eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for
“exchanges of nonmonetary assets that do not have
commercial substance.” A nonmonetary exchange has
commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange.
The provisions of SFAS No. 153 should be applied
prospectively, and are effective for the Company for nonmonetary
asset exchanges occurring from the third quarter of 2005. The
adoption of this statement did not have an impact on the
Company’s financial statements.
In July 2006, the FASB issued FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes — an interpretation of FASB Statement
No. 109 (“FIN 48”), which clarifies the
accounting for uncertainty in tax positions. FIN 48
requires that the Company recognize in its financial statements
the impact of a tax position, if that position is more likely
than not of being sustained on audit, based on the technical
merits of the position. The provisions of FIN 48 are
effective as of the beginning of the Company’s 2007 fiscal
year, with the cumulative effect, if any, of the change in
accounting principle recorded as an adjustment to opening
retained earnings. The Company is currently evaluating the
impact of adopting FIN 48 on its financial statements.
3.
Balance Sheet Components
Available-for-sale securities
The following is a summary of
available-for-sale securities as of December 31, 2005:
Gross
Gross
Unrealized
Unrealized
Estimated Fair
Amortized Cost
Gain
Loss
Value
Money market funds
$
22,451,961
$
—
$
—
$
22,451,961
Government agencies
4,482,746
—
(696
)
4,482,050
26,934,707
—
(696
)
26,934,011
Less: amounts classified as cash equivalents
(22,451,961
)
—
—
(22,451,961
)
Available-for-sale securities, all maturing within one year
The Company leases office space and
equipment under non-cancelable operating leases with various
expiration dates through 2007. Future minimum lease payments
under non-cancelable operating leases as of December 31,2005 are as follows:
Rent expense for the office space under
the operating lease totaled $0, $88,029, $86,224 and $174,253
for the period ended December 31, 2003, the year ended
December 31, 2004, the year ended December 31, 2005,
and the cumulative period from December 30, 2003 (date of
inception) to December 31, 2005, respectively. Rent expense
for the periods ended June 30, 2005 and 2006 was $41,117
and $64,243, respectively.
Indemnifications
In the normal course of business, the
Company enters into contracts and agreements that contain a
variety of representation and warranties and provide for general
indemnifications. The Company’s exposure under these
agreements is unknown because it involves claims that may be
made against the Company in the future, but have not yet been
made. To date, the Company has not paid any claims or been
required to defend any action related to its indemnification
obligations. However, the Company may record charges in the
future as a result of these indemnification obligations.
In accordance with its bylaws and pursuant
to contractual agreements, the Company has indemnification
obligations to its officers and directors for certain events or
occurrences, subject to limits, while they are serving at the
Company’s request in such a capacity. There have been no
claims to date and the Company has a director and officer
insurance policy that enables it to recover a portion of any
amounts paid for future claims.
Contingencies
From time to time, the Company may have
certain contingent liabilities that arise in the ordinary course
of its business activities. The Company accrues contingent
liabilities when it is probable that future expenditures will be
made and these expenditures can be reasonably estimated.
5.
Income Taxes
The company has provided a full valuation
allowance for its deferred tax assets at December 31, 2005
due to the uncertainty surrounding the future realization of
these assets.
The Company had net operating loss
carryforwards of approximately $11,518,000 and $11,517,000 for
federal and state income tax purposes, respectively, at
December 31, 2005. If not utilized, these federal and state
carryforwards will begin to expire in the years 2024 and 2014,
respectively. As of December 31, 2005, the Company also had
research and development tax credits of approximately
$345,000 and $363,000 for federal and
state income tax purposes, respectively. If not utilized, the
federal carryforwards will expire in various amounts beginning
in 2024, and the state credits can be carried forward
indefinitely.
The components of net deferred tax assets
were as follows:
The Tax Reform Act of 1986 limits the use
of net operating loss and tax credit carryforwards in certain
situations where changes occur in the stock ownership of a
company. In the event the Company has had a change in ownership,
utilization of the carryforwards could be limited.
Convertible preferred stock at
December 31, 2004 consisted of the following:
Shares
Liquidation
Series
Authorized
Outstanding
Amount
AA
2,510,833
2,510,737
$
15,711,857
BB
3,279,369
3,217,096
15,500,000
5,790,202
5,727,833
$
31,211,857
In December 2005, the Company issued
4,199,183 shares of Series CC Convertible Preferred
Stock at a price of $6.43 per share in exchange for net
cash proceeds of $26,881,715. Pursuant to EITF Issue
No. 00-27,
Application of Issue
No. 98-5,
Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios, to
Certain Convertible Instruments, the Company recorded a
deemed dividend of $21,104,339 representing the $5.03 per
share
intrinsic value of the embedded beneficial
conversion feature computed based on the reassessed fair value
of common stock of $11.46 at the Series CC Preferred Stock
issuance date.
Dividends
The holders of the outstanding shares of
Series AA, BB and CC Convertible Preferred Stock are
entitled to receive, when and if declared by the Board of
Directors, a non-cumulative dividend at the annual rate of
$0.50, $0.39 and $0.51 per share, respectively. These
dividends are payable in preference to any dividends for common
stock declared by the Board of Directors. No dividends have been
declared to date.
Liquidation Rights
Upon liquidation, dissolution or winding
up of the Company, the holders of the Series AA, BB and CC
Convertible Preferred Stock will be entitled to receive, prior
and in preference to any distribution of any of the assets or
surplus funds of the Company to the holders of shares of common
stock, an amount equal to $6.26, $4.82 and $6.43 per share,
respectively, plus any declared but unpaid dividends on each
share. After the payment of the liquidation preference, all
remaining assets available for distribution, if any, shall be
distributed ratably among the holders of the Series AA, BB
and CC Convertible Preferred Stock, and common stock. If
available assets are insufficient to pay the full liquidation
preference, the available assets will be distributed pro rata to
the holders of Series AA and BB Convertible Preferred Stock.
Merger or Sale of Assets
The convertible preferred stock is
redeemable upon the liquidation or winding up of the Company, a
greater than 50% change in control or sale of substantially all
of the assets of the Company. Since a redemption event is
outside the control of the Company, all shares of convertible
preferred stock have been presented outside of permanent equity
in accordance with EITF Topic D-98, Classification and
Measurement of Redeemable Securities.
Conversion Rights
Each share of preferred stock is
convertible, at the option of the holder, at any time after the
date of issuance of such share, into the number of shares of
common stock determined by dividing the conversion amount by the
conversion price. The conversion price per share for
Series AA, Series BB and Series CC Convertible
Preferred Stock as of December 31, 2005 and June 30,2006 (unaudited) was $4.82, $4.82 and $6.43, respectively. The
conversion price is subject to adjustment.
Each share of Series AA, BB and CC
Convertible Preferred Stock will automatically convert into
shares of common stock at the then effective conversion price
for each such share immediately upon the earlier of (i) the
Company’s sale of its common stock in a firm commitment
underwritten public offering pursuant to a registration
statement under the Securities Act of 1933, as amended, where
the public offering price equals or exceeds $25,000,000 and
$14.45 per share (before deduction of underwriting
discounts and commissions) or (ii) approval of the
conversion by a majority of the holders of the then outstanding
shares of preferred stock.
The holder of each share of convertible
preferred stock is entitled to the number of votes equal to the
number of shares of common stock into which each share could be
converted on the record date for the vote or consent of
shareholders, except as otherwise required by law, and has
voting rights and powers equal to the voting rights and powers
of holders of common stock.
Antidilution Provision
The Company’s amended and restated
Articles of Incorporation contain an antidilution provision.
This clause did not cause a beneficial conversion feature.
7. Common Stock
The Company’s Articles of
Incorporation, as amended, authorize the Company to issue
15,000,000 shares of common stock. Each share of common
stock is entitled to one vote. The holders of common stock are
entitled to receive dividends whenever funds are legally
available and when declared by the Board of Directors, subject
to the prior right of holders of preferred stock outstanding at
the time. The Company had not declared or paid cash dividends as
of June 30, 2006.
Warrants
In December 2003, as part of the
intellectual property transfer from Broncus Technologies, Inc.
(“Broncus”), the Company granted Broncus warrant
holders the right to receive 53,926 shares of the
Company’s common stock upon exercise. These warrants expire
at various dates through March 2008. The fair value of the
Company’s stock on the date of intellectual property
transfer was $1.44. The Company recorded the fair value of
$77,659 as an issuance cost associated with the Series D
Convertible Preferred Stock during the period ended
December 31, 2003. During the year ended December 31,2005, the Company issued 44,635 shares of common stock upon
the exercise of some of the warrants. Warrants to purchase an
additional 7,958 shares of common stock expired in February
2005. As of December 31, 2005 and June 30, 2006
(unaudited) there were outstanding warrants to receive
1,333 shares of common stock.
8.
Stock Option Plan
In 2003, the Company established its 2003
Stock Option Plan (the “2003 Plan”), which provides
for the granting of stock options to employees and consultants
of the Company. Options granted under the 2003 Plan may be
either incentive stock options (“ISOs”) or
non-qualified stock options (“NSOs”). ISOs may be
granted only to Company employees (including officers and
directors who are also employees). NSOs may be granted to
Company employees and consultants. The Company has reserved
2,521,419 shares of common stock for issuance under the
2003 Plan.
Options under the Plan may be granted for
periods of up to ten years. The exercise price of an ISO or NSO
may not be less than 100% and 85% of the estimated fair value of
the shares on the date of grant, respectively, as determined by
the Board of Directors. The exercise price of an ISO or NSO
granted to a 10% shareholder may not be less than 110% of the
estimated fair value of the shares on the date of grant,
respectively, as determined by the Board of Directors. Options
are exercisable immediately, subject to repurchase rights held
by the Company that lapse over a maximum period of ten years. To
date, options granted generally vest over four years.
As of December 31, 2004 there were no
shares which were early exercised and unvested. As of
December 31, 2005 there were 262,568 shares which were
early exercised and unvested. The exercise of these options is
not reflected in the table above until the underlying shares
vest. As of June 30, 2006 (unaudited) there were
315,606 shares which were early exercised and unvested. The
exercise of these options is not reflected in the table above,
and as such, are accounted for as outstanding options until the
underlying shares vest.
During the six months ended June 30,2006 (unaudited), the Company granted stock options to purchase
an aggregate of 888,008 shares of common stock with an
estimated weighted average grant-date fair value of $12.90. The
total fair value of options that vested during the six months
ended June 30, 2006 was $950,219 (unaudited). The total
intrinsic value of options exercised during the six months ended
June 30, 2006 was $664,382 (unaudited).
The following table summarizes information
about stock options outstanding, vested and exercisable at
December 31, 2005:
Options Outstanding
Options Exercisable
and Exercisable
and Vested
Weighted
Weighted
Average
Average
Exercise
Number
Contractual
Number of
Exercise
Price
Outstanding
Life (In Years)
Options
Price
$
0.18
6,666
8.0
6,666
$
0.18
$
0.54
4,999
8.0
4,999
$
0.54
$
0.60
836,981
8.6
148,048
$
0.60
$
1.44
191,610
8.0
180,383
$
1.44
1,040,256
8.5
340,096
$
1.04
The following table summarizes information
about stock options outstanding, vested and exercisable at
June 30, 2006 (unaudited):
Options Outstanding
and Exercisable
Options Exercisable
and Vested
Weighted
Average
Weighted
Remaining
Average
Exercise
Number
Contractual
Number of
Exercise
Price
Outstanding
Life (In Years)
Options
Price
$
0.18
6,666
7.5
6,666
$
0.18
$
0.54
3,999
7.5
3,999
$
0.54
$
0.60
1,452,549
8.9
227,901
$
0.60
$
1.20
146,665
9.9
—
$
1.20
$
1.44
167,973
7.5
163,713
$
1.44
1,777,852
8.8
402,279
$
0.93
As of June 30, 2006
(unaudited) there were 315,606 shares which were early
exercised and unvested. These shares continue to be reflected as
outstanding options in the above table until they vest.
As of December 31, 2004, options to
purchase 314,070 shares were vested and exercisable
with a weighted average exercise price of $1.03.
Early Exercise of Employee
Options
Stock options granted under the 2003 Plan
provide employee option holders the right to elect to exercise
unvested options in exchange for restricted common stock.
Unvested shares, which amounted to zero and 262,568 at
December 31, 2004 and 2005, respectively, and 315,606
(unaudited) at June 30, 2006, were subject to a
repurchase right held by the Company at the original issuance
price in the event the optionees’ employment is terminated
either voluntarily or involuntarily. For exercises of employee
options, this right lapses 25% on the first anniversary of the
vesting start date and in 36 equal monthly amounts thereafter.
These repurchase terms are considered to be a forfeiture
provision and do not result in variable accounting. In
accordance with EITF
No. 00-23,
Issues Related to the Accounting for Stock Compensation under
APB No. 25, the shares purchased by the employees
pursuant to the early exercise of stock
options are not deemed to be outstanding until those shares
vest. In addition, cash received from employees for exercise of
unvested options is treated as a refundable deposit shown as a
liability. Amounts so recorded are transferred into common stock
and additional paid-in capital as the shares vest.
Non-Employee Stock
Options
During 2003 and 2004, the Company granted
options to purchase 74,241 and 134,497 shares of
common stock under the 2003 Plan to non-employees at exercise
prices ranging between $0.54 and $1.44. During 2005, the Company
did not grant any options to purchase common stock under the
2003 plan to non-employees. The fair values of options granted
during the period ended December 31, 2003 and the year
ended December 31, 2004 were $0.06 and ranged between $0.06
and $0.15, respectively, estimated on the date of grant using
the Black-Scholes option pricing model and the following
assumptions: dividend yield of 0%, expected volatility of 60%,
risk-free interest rate of 2.52% in 2004 and 2.81% in 2003 and
contractual lives of four years. Compensation expense related to
these options for the period ended December 31, 2003, the
years ended December 31, 2004, 2005, and for the cumulative
period from December 30, 2003 (date of inception) to
June 30, 2006 was $44,832, $22,897, $13,087 and $87,119
(unaudited), respectively.
Stock-based Compensation Associated
with Awards to Employees
All options granted were intended to be
exercisable at a price per share not less than fair market value
of the shares of the Company’s stock underlying those
options on their respective dates of grant. The Board determined
these fair market values in good faith based on the best
information available to the Board and Company’s management
at the time of the grant. Although the Company believes these
determinations accurately reflect the historical value of the
Company’s common stock, management has retroactively
revised the valuation of its common stock for the purpose of
calculating stock-based compensation expense. Accordingly, in
the period ended December 31, 2003 and the years ended
December 31, 2004 and 2005 for such stock options issued to
employees, the Company recorded deferred stock-based
compensation of $0, $0, and $1,285,100, respectively, net of
cancellations, of which the Company amortized $0, $0, $96,435
and $160,704 (unaudited) of stock-based compensation in the
period ended December 31, 2003, the years ended
December 31, 2004 and 2005, and the six months ended
June 30, 2006, respectively.
Information on employee stock options
granted in 2005 and the six months ended June 30, 2006 is
summarized as follows:
The valuation used to determine the fair
value of the common stock was retrospective.
Compensation expense associated with
employee options granted in the six months ended June 30,2006 was recorded in the financial statements under the fair
value recognition and measurement principles established under
SFAS No. 123R.
Stock Option Award
Modifications
In 2005, the Company issued full recourse
notes receivable to officers totaling $251,200 upon the early
exercise of stock options. These notes bear interest at a rate
of 4.19% which the Company considers to be below the market rate
on the issuance dates. In accordance with FASB Interpretation
No. 44 (“FIN 44”), Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of
APB Opinion No. 25,the Company accounted for the
issuance of the note as a modification which resulted in a new
measurement date and variable accounting on the date of
exercise. The Company recorded deferred
stock-based
compensation of $3,619,485 based on the intrinsic value of the
stock options on the exercise date and amortized $2,729,033
during the year ended December 31, 2005. This note was
repaid in July 2006 (see Note 13).
Adoption of SFAS No. 123R
(Unaudited)
The Company adopted
SFAS No. 123R on January 1, 2006. Under
SFAS No. 123R, the Company estimated the fair value of
each option award on the date of grant using the Black-Scholes
option-pricing model using the assumptions noted in the
following table. Expected volatility is based on the historical
volatility of a peer group of publicly traded healthcare
companies. The expected term of options is based upon the
vesting term of the Company’s options (i.e., 25% on the
first anniversary of the vesting start date and 36 equal monthly
installments thereafter) and on the Company’s partial life
history. The risk-free rate for the expected term of the option
is based on the U.S. Treasury Constant Maturity rate as of
June 30, 2006. The assumptions used to value options
granted during the six months ended June 30, 2006 were as
follows:
Employee stock-based compensation expense
recognized in the six months ended June 30, 2006 was
calculated based on awards ultimately expected to vest and has
been reduced for estimated forfeitures. SFAS No. 123R
requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.
As a result of adopting
SFAS No. 123R on January 1, 2006, the
Company’s net loss for the six months ended June 30,2006, was higher by $41,056 (unaudited), net of tax effect, than
if the Company had continued to account for stock-based
compensation under APB No. 25. At June 30, 2006, the
Company had $10,211,553 (unaudited) of total unrecognized
compensation expense under SFAS No. 123R, net of estimated
forfeitures, related to stock option grants that will be
recognized over a weighted average period of 3.60 years
(unaudited).
The National Institutes of Health
(“NIH”) awarded a grant to Johns Hopkins University
(“JHU”) to research the Company’s products and
the Company entered into an agreement with JHU in June 2004 to
serve as a subcontractor on the grant. The grant involves
analysis, modeling, bench experiments, in vitro experiments
and animal experiments. Under the terms of the subcontract, the
Company will own any inventions pertaining to the Company’s
product arising from the grant research and the Company has the
first right to an exclusive, perpetual, worldwide license to any
other invention JHU may have rights in or to primarily as a
result of work performed as part of the grant research. NIH
awarded the grant for the period from January 1, 2004 to
August 31, 2006. The total funding budgeted for the
Company’s research contributions is $1,116,992 in direct
costs plus indirect costs. The Company submits its direct costs
to JHU and is reimbursed for these costs by JHU. The
Company’s subcontract is contingent upon renewal of grant
funding by NIH. The Company received $0, $522,558, $355,181 and
$877,739 in funding from JHU during the period ended
December 31, 2003, the years ended December 31, 2004
and 2005, and the cumulative period from December 30, 2003
(date of inception) to December 31, 2005. For the six
months ended June 30, 2005 and 2006, (unaudited) the
Company received $147,456 and $212,186 respectively.
10.
401(k) Savings Plan
In 2003, the Company established a 401(k)
plan under the provisions of which eligible employees may
contribute an amount up to 25% of their compensation on a
pre-tax basis. The Company matches employees’ contributions
at the discretion of the Board. To date, no matching
contributions have been made by the Company.
11.
Related Party Transactions
Intellectual Property Transfer from
Broncus Technologies, Inc.
In December 2003, as part of the
Company’s inception, Broncus transferred to the Company
intellectual property (including several U.S. and international
patents and patent applications) and $2.2 million in cash,
Asthmatx assumed liabilities related to the asthma treatment
technology in exchange for shares of Asthmatx stock and issued a
dividend of its common stock and Series A-1, A-2, A-3, B, C
and D Convertible Preferred Stock, having a total liquidation
value of $15.7 million, to Broncus shareholders, and
Broncus and the Company agreed to issue and modify stock options.
Cross-License of Intellectual
Property
The Company and Broncus entered into a
cross-licensing arrangement, effective December 30, 2003,
under which the Company granted Broncus a perpetual,
irrevocable, royalty-free license for the use of the
Company’s intellectual property and technology (including
certain intellectual property developed after its inception
through June 2005) within a field of use related to emphysema
therapy applications. Likewise, Broncus granted the Company a
perpetual, irrevocable, royalty-free license to use the
intellectual property of Broncus (including certain intellectual
property developed after its inception through June 2005) within
a field of use related to asthma therapy applications. The
licenses are not transferable or assignable by either party
except in connection with an acquisition of that party.
Manufacturing Service
Agreement
The Company and Broncus entered into a
manufacturing service agreement effective as of
December 30, 2003. The term of the agreement began on the
effective date and expired on
December 31, 2004. Broncus was
responsible for managing or performing all tasks normally
associated with being a contract manufacturer of a medical
device, such as purchasing and inspecting components,
manufacturing product, and conducting quality assurance and
engineering support activities necessary to meet quality
specifications and delivery requirements as related to the
Company’s product.
Officer Notes Receivable
In 2005, the Company issued notes
receivable to two officers of the Company totaling $251,200 upon
the early exercise of stock options. These notes bear interest
at a rate of 4.19% and are secured by the shares issued in
conjunction with the exercise. The notes are due at various
dates through 2015 but become due immediately upon the
occurrence of a liquidating event or employee termination. The
vested portion of the early exercises of $100,933 and $132,333
(unaudited) at December 31, 2005 and June 30, 2006,
respectively was recorded as notes receivable from shareholders
in the accompanying balance sheet as a reduction in the
Company’s common stock, and the remainder of $150,267 and
$118,867 (unaudited) at December 31, 2005 and June 30,2006, respectively, was recorded as other current assets. These
notes were repaid in July 2006 (see Note 13).
12.
Unaudited Pro Forma Net Loss Per
Share
Pro forma basic and diluted net loss per
share have been computed to give effect to convertible preferred
stock that will convert to common stock upon the closing of the
Company’s initial public offering for the year ended
December 31, 2005 and the six months ended June 30,2006 as if the closing occurred at the beginning of 2005. The
following table sets forth the computation of pro forma basic
and diluted net loss per share and assumes that the price at
which the convertible preferred stock automatically converts to
common stock is in accordance with the conversion terms:
In January 2006, the Company approved the
2006 Bonus Plan.
In July 2006, the Company received
payments in satisfaction of the outstanding officer loans.
In July 2006, the board of directors of
the Company approved the filing of a registration statement with
the Securities and Exchange Commission for an initial public
offering of the Company’s common stock.
In July 2006, the board of directors of
the Company adopted the 2006 Equity Incentive Plan and the 2006
Employee Stock Purchase Plan, and reserved 500,000 and
166,666 shares of common stock, respectively, for issuance
under these plans.
On September 25, 2006, the Company
reincorporated into Delaware by merging with its wholly-owned
subsidiary Asthmatx, Inc., a Delaware corporation. As a result,
the Company is now incorporated in Delaware under the name
Asthmatx, Inc. In connection with the reincorporation, the
Company authorized the issuance of 3,333,333 shares of a
new class of preferred stock.
On September 27, 2006, preferred
stockholders elected to convert all outstanding shares of
convertible preferred stock of the Company into common stock
immediately prior to the closing of a firm commitment
underwritten public offering so long as such closing occurs on
or before December 31, 2006.
On September 29, 2006, the
Company’s Board of Directors and shareholders approved an
amendment to the Company’s Amended and Restated Certificate
of Incorporation to effect a 1-for-3 reverse split of the
Company’s common stock and preferred stock and to adjust
the authorized shares of common stock to 40,000,000 shares.
The Amended and Restated Certificate of Incorporation will be
filed prior to the effective date of the registration statement
relating to the initial public offering. All information related
to common stock, preferred stock, options, warrants and net loss
per share included in the accompanying financial statements has
been retroactively adjusted to give effect to the reverse stock
split.
Until ,
2006, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the
dealers’ obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
The following table sets forth the costs
and expenses to be paid by the Registrant in connection with the
sale of the shares of common stock being registered hereby. All
amounts are estimates except for the SEC registration fee, the
NASD filing fee and the NASDAQ Global Market initial filing fee.
SEC registration fee
$
7,999
NASD filing fee
7,975
NASDAQ Global Market initial filing fee
100,000
Printing and engraving expenses
250,000
Legal fees and expenses
900,000
Accounting fees and expenses
750,000
Blue sky fees and expenses
10,000
Transfer agent and registrar fees and expenses
10,000
Directors’ and officers’ insurance
450,000
Miscellaneous
14,026
Total
$
2,500,000
*
To be provided by amendment.
Item 14.
Indemnification of Directors and
Officers.
Section 145 of the Delaware General
Corporation Law authorizes a court to award, or a
corporation’s board of directors to grant, indemnity to
directors and officers under certain circumstances and subject
to certain limitations. The terms of Section 145 of the
Delaware General Corporation Law are sufficiently broad to
permit indemnification under certain circumstances for
liabilities, including reimbursement of expenses incurred,
arising under the Securities Act of 1933.
As permitted by the Delaware General
Corporation Law, the Registrant’s certificate of
incorporation includes a provision that eliminates, to the
fullest extent permitted by law, the personal liability of a
director for monetary damages resulting from breach of his
fiduciary duty as a director.
As permitted by the Delaware General
Corporation Law, the Registrant’s bylaws provide that:
•
the Registrant is required to indemnify
its directors and officers to the fullest extent permitted by
the Delaware General Corporation Law, subject to certain limited
exceptions;
•
the Registrant may also indemnify its
other employees and agents in its discretion;
•
the Registrant is required to advance
expenses, as incurred, to its directors and officers in
connection with a legal proceeding subject to certain limited
exceptions, and to the extent the Delaware General Corporation
Law so requires, such advances may be conditioned on the
director’s or officer’s agreement to repay any such
advanced expenses if it is determined that the director or
officer is not entitled to be indemnified under the
Registrant’s bylaws; and
•
the rights conferred in the bylaws are not
exclusive.
In addition, the Registrant will enter
into indemnity agreements with each of its current directors and
executive officers. These agreements provide for the
indemnification of directors and officers for all reasonable
expenses and liabilities incurred in connection with any action
or proceeding brought
against them by reason of the fact that
they are or were agents of the Registrant, subject to limited
exceptions. Some of the directors of the Registrant have entered
into agreements with investment entities with which they are
affiliated that provide for the indemnification of such
directors (entered into in connection with such entities’
investments in the Registrant).
The Registrant currently carries liability
insurance for its directors and officers.
The Underwriting Agreement filed as
Exhibit 1.1 to this Registration Statement provides for
indemnification by the underwriters of the Registrant and of the
Registrant’s directors and officers for certain liabilities
under the Securities Act of 1933, as amended, or otherwise.
Reference is made to the following
documents filed as exhibits to this Registration Statement
regarding relevant indemnification provisions described above
and elsewhere herein:
Registrant’s First Amended and Restated Certificate of
Incorporation
3.2
Form of Second Amended and Restated Certificate of Incorporation
of the Registrant, to be filed prior to the completion of this
offering with the Delaware Secretary of State
3.3
Form of Third Amended and Restated Certificate of
Incorporation of the Registrant, to be filed upon the completion
of this offering with the Delaware Secretary of State
Form of Indemnity Agreement to be entered into between the
Registrant and each of its directors and executive officers
prior to the completion of this offering
10.1
Item 15.
Recent Sales of Unregistered
Securities.
Since December 30, 2003, the
Registrant has issued and sold the following securities (all
share numbers reflect a 1-for-3 reverse split of the
Registrant’s capital stock to occur before the closing of
the offering):
1. Through August 31, 2006, the
Registrant granted stock options to purchase an aggregate of
2,354,854 shares of its common stock at a weighted average
exercise price of $1.03 per share to employees,
consultants, directors and other service providers under its
2003 Stock Option Plan.
2. Through August 31, 2006, the
Registrant issued and sold an aggregate of 779,844 shares
of its common stock to employees, consultants, directors and
other service providers at prices ranging from $0.54 to
$1.44 per share under direct issuances or exercises of
options granted under its 2003 Stock Option Plan.
3. On December 30, 2003, the
Registrant agreed to issue an aggregate of 53,926 shares of
its common stock upon the exercise of Broncus warrants
outstanding as of the time of the Registrant’s separation
from Broncus Technologies, Inc. These warrants were
automatically adjusted as a result of this transaction such that
the holders became entitled to receive shares of Asthmatx stock
as if they had exercised their warrants prior to the
Registrant’s inception. Through August 31, 2006, the
Registrant had issued 44,968 shares of its common stock
pursuant to exercises of these warrants. The Registrant issued
these shares in reliance on Section 4(2) and/or
Rule 506 of Regulation D under the Securities Act of
1933. Pursuant to the terms of the Corporate Formation Agreement
that the Registrant entered into in connection with this
transaction, Broncus received the exercise price of the
exercised warrants.
(In addition, as of August 31, 2006,
warrants to purchase 7,958 shares of the Registrant’s
common stock had expired.)
4. On December 30, 2003, the
Registrant issued 9,639,395 shares of its
Series A-1,
A-2,
A-3, B, C and D
Preferred Stock and 258,894 shares of common stock to
shareholders of Broncus in connection with our separation from
Broncus. The Registrant issued these shares in reliance on Staff
Legal Bulletin No. 4.
5. On March 5, 2004, the
Registrant issued 2,510,737 shares of Series AA
Preferred Stock to existing holders of preferred stock in
exchange for all outstanding shares of its
Series A-1,
A-2,
A-3, B, C and D
Preferred Stock in a recapitalization in reliance on
Section 3(a)(9) under the Securities Act. Each share of
Series AA Preferred Stock will convert automatically into
one share of common stock upon the completion of this
offering.
6. On March 5, 2004, the
Registrant issued 3,217,096 shares of Series BB
Preferred Stock to private investors at a price of
$4.82 per share for an aggregate purchase price of
approximately $15.5 million in reliance on
Section 4(2) of the Securities Act and/or Regulation D
promulgated under the Securities Act. Each share of
Series BB Preferred Stock will convert automatically into
one share of common stock upon the completion of this
offering.
7. On December 9, 2005, the
Registrant issued 4,199,183 shares of Series CC
Preferred Stock to private investors at a price of
$6.43 per share for an aggregate purchase price of
approximately $26.9 million in reliance on
Section 4(2) of the Securities Act and/or Regulation D
promulgated under the Securities Act. Each share of
Series CC Preferred Stock will convert automatically into
one share of common stock upon the completion of this
offering.
All sales of common stock made pursuant to
the Registrant’s 2003 Stock Option Plan, including pursuant
to the exercise of stock options, were made in reliance on
Rule 701 under the Securities Act or Section 4(2) of
the Securities Act.
All sales indicated as having been made in
reliance on Section 4(2) of the Securities Act and/or
Regulation D promulgated under the Securities Act were made
without general solicitation or advertising. Each purchaser was
a sophisticated investor with access to all relevant information
necessary to evaluate the investment and represented to the
Registrant that the shares were being acquired for investment.
Registrant’s First Amended and Restated Certificate of
Incorporation.
3
.3
Form of Second Amended and Restated Certificate of Incorporation
of Registrant, to be filed prior to the completion of this
offering with the Delaware Secretary of State.
3
.4
Form of Third Amended and Restated Certificate of Incorporation
of Registrant, to be filed upon completion of this offering with
the Delaware Secretary of State.
Second Amended and Restated Investors’ Rights Agreement,
dated as of December 9, 2005, among Registrant and certain
of its stockholders.
5
.1**
Form of Opinion of Fenwick & West LLP.
10
.1**
Form of Indemnity Agreement to be entered into between
Registrant and each of its directors and executive officers
prior to the completion of this offering.
10
.2**
2003 Stock Option Plan and forms of stock option agreement and
stock option exercise agreement.
10
.3**
2006 Equity Incentive Plan and forms of stock option agreement
and stock option exercise agreement.
10
.4**
2006 Employee Stock Purchase Plan.
10
.5**
2006 Bonus Plan.
10
.6**
Letter Agreement, dated as of February 10, 2004, between
Registrant and Glendon French.
10
.7**
Letter Agreement, dated as of February 10, 2004, between
Registrant and Debera Brown.
10
.8**
Form of letter agreement between Registrant and each executive
officer.
10
.9*
Form of Executive Change of Control Agreement to be entered into
between the Registrant and each executive officer.
10
.10**
Loan and Pledge Agreement, dated as of October 17, 2005,
between Registrant and Glendon French.
Corporate Formation Agreement, dated as of December 26,2003, between Registrant and Broncus Technologies, Inc.
10
.13**†
Cross License Agreement, dated as of December 30, 2003,
between Registrant and Broncus Technologies, Inc.
10
.14**†
Indemnification Agreement, dated as of February 17, 2004,
between Registrant and Broncus Technologies, Inc.
10
.15**
Agreement Not to Sue, dated as of April 30, 1997, among
VNUS Medical Technologies, Inc., SURx, Inc., Cordial Medical,
Inc., and Broncus Technologies, Inc.
10
.16**
Contract Manufacturing Agreement, dated as of October 18,2005, between Registrant and Life Science Outsourcing.
† Confidential treatment has been
requested for certain portions of this document pursuant to an
application for confidential treatment filed with the Securities
and Exchange Commission. Such portions are omitted from this
filing and are filed separately with the Securities and Exchange
Commission.
All schedules have been omitted because
they are either inapplicable or the required information has
been given in the financial statements or the notes thereto.
Item 17.
Undertakings.
That, for the purpose of determining
liability under the Securities Act of 1933 to any purchaser, if
the Registrant is subject to Rule 430C, each prospectus
filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses
filed in reliance on Rule 430A, shall be deemed to be part
of and included in the Registration Statement as of the date it
is first used after effectiveness. Provided, however,
that no statement made in a registration statement or
prospectus that is part of the Registration Statement or made in
a document incorporated or deemed incorporated by referenced
into the Registration Statement or prospectus that is part of
the Registration Statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or modify
any statement that was made in the Registration Statement or
prospectus that was part of the Registration Statement or made
in any such document immediately prior to such date of first use.
That, for the purpose of determining
liability of the Registrant under the Securities Act of 1933 to
any purchaser in the initial distribution of the securities, the
undersigned Registrant undertakes that in a primary offering of
securities of the undersigned Registrant pursuant to this
Registration Statement, regardless of the underwriting method
used to sell the securities to the purchaser, if the securities
are offered or sold to such purchaser by means of any of the
following communications, the undersigned Registrant will be a
seller to the purchaser and will be considered to offer or sell
such securities to such purchaser:
(i)
Any preliminary prospectus or prospectus
of the undersigned Registrant relating to the offering required
to be filed pursuant to Rule 424;
(ii)
Any free writing prospectus relating to
the offering prepared by or on behalf of the undersigned
Registrant or used or referred to by the undersigned Registrant;
(iii)
The portion of any other free writing
prospectus relating to the offering containing material
information about the undersigned Registrant or its securities
provided by or on behalf of the undersigned Registrant; and
(iv)
Any other communication that is an offer
in the offering made by the undersigned Registrant to the
purchaser.
The undersigned Registrant hereby
undertakes to provide to the underwriters at the closing
specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Registrant pursuant to
the provisions described under Item 14 above, or otherwise,
the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby
undertakes that:
(1)
For purposes of determining any liability
under the Securities Act, the information omitted from the form
of prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or Rule 497(h) under the
Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2)
For the purpose of determining any
liability under the Securities Act, each post-effective
amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities
offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof.
Pursuant to the requirements of the
Securities Act, the Registrant has duly caused this Amendment
No. 3 to the Registration Statement on
Form S-1 to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Mountain View, State of California,
on October 3, 2006.
Pursuant to the requirements of the
Securities Act, this Amendment No. 3 to the Registration
Statement on
Form S-1 has been
signed by the following persons in the capacities and on the
dates indicated:
Name
Title
Date
*
Glendon
E. French
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Registrant’s First Amended and Restated Certificate of
Incorporation.
3
.3
Form of Second Amended and Restated Certificate of Incorporation
of Registrant, to be filed prior to this offering with the
Delaware Secretary of State.
3
.4
Form of Third Amended and Restated Certificate of Incorporation
of Registrant, to be filed upon completion of this offering with
the Delaware Secretary of State.
Form of Specimen Certificate for Registrant’s Common Stock.
4
.2**
Second Amended and Restated Investors’ Rights Agreement,
dated as of December 9, 2005, among Registrant and certain
of its stockholders.
5
.1**
Form of Opinion of Fenwick & West LLP.
10
.1**
Form of Indemnity Agreement to be entered into between
Registrant and each of its directors and executive officers
prior to the completion of this offering.
10
.2**
2003 Stock Option Plan and forms of stock option agreement and
stock option exercise agreement.
10
.3**
2006 Equity Incentive Plan and forms of stock option agreement
and stock option exercise agreement.
10
.4**
2006 Employee Stock Purchase Plan.
10
.5**
2006 Bonus Plan.
10
.6**
Letter Agreement, dated as of February 10, 2004, between
Registrant and Glendon French.
10
.7**
Letter Agreement, dated as of February 10, 2004, between
Registrant and Debera Brown.
10
.8**
Form of letter agreement between Registrant and each executive
officer.
10
.9*
Form of Executive Change of Control Agreement between the
Registrant and each executive officer.
10
.10**
Loan and Pledge Agreement, dated as of October 17, 2005,
between Registrant and Glendon French.
Corporate Formation Agreement, dated as of December 26,2003, between Registrant and Broncus Technologies, Inc.
10
.13**†
Cross License Agreement, dated as of December 30, 2003,
between Registrant and Broncus Technologies, Inc.
10
.14**†
Indemnification Agreement, dated as of February 17, 2004,
between Registrant and Broncus Technologies, Inc.
10
.15**
Agreement Not to Sue, dated as of April 30, 1997, among
VNUS Medical Technologies, Inc., SURx, Inc., Cordial Medical,
Inc., and Broncus Technologies, Inc.
10
.16**
Contract Manufacturing Agreement, dated as of October 18,2005, between Registrant and Life Science Outsourcing.
† Confidential treatment has been
requested for certain portions of this document pursuant to an
application for confidential treatment filed with the Securities
and Exchange Commission. Such portions are omitted from this
filing and are filed separately with the Securities and Exchange
Commission.
Dates Referenced Herein and Documents Incorporated by Reference
