Filed pursuant to Rule 424(b)(1)

File No.: 333-142646

PROSPECTUS

 

 

3,000,000 Shares

 

Common Stock

 

$5.00 per share

 

 

This is the initial public offering of our common stock. We are selling 3,000,000 shares of our common stock at $5.00 per share. Prior to this offering, there has been no public market for our common stock. Our common stock has been approved for listing on the NASDAQ Capital Market under the symbol “IMRX.”

 

Investing in our common stock involves a high degree of risk. Please read the “Risk Factors” beginning on page 9.

 

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.

 

 

 

We expect total costs and expenses of this offering to be approximately $1.6 million, which will include a non-accountable expense allowance of 2.0% of the gross proceeds of this offering, or $300,000, payable to the representative of the underwriters. We have granted the underwriters a 45-day option to purchase up to 450,000 shares of common stock on the same terms and conditions as set forth above, solely to cover over-allotments, if any. Upon completion of this offering we will issue warrants to purchase up to 175,000 shares of our common stock at an exercise price of $5.75 per share to the representative of the underwriters, or representative’s warrants, as additional compensation for its services in connection with this offering.

 

The underwriters are offering the common stock on a firm commitment basis and expect to deliver the shares to purchasers on or about July 31, 2007.

 

                    Sole Bookrunner

 

The date of this prospectus is July 25, 2007

 

Table of Contents

 

 

 

You should rely only on the information contained in this prospectus or any filed issuer free writing prospectus. We have not, and the underwriters have not, authorized anyone to provide you with information different from that contained in this prospectus or any filed issuer free writing prospectus. We are offering to sell, and are seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus or any filed issuer free writing prospectus is accurate only as of its date, regardless of its time of delivery or of any sale of the common stock.

 

Summary

Product or Candidate		Product Elements		Indication		Development Status
SonoLysistm+tPA therapy		• MRX-801 microbubbles • Ultrasound • tPA		Ischemic stroke		Phase I/II clinical trial in progress
SonoLysis therapy		• MRX-801 microbubbles		Ischemic stroke		Preclinical
		• Ultrasound
Abbokinase®		• Urokinase		Acute massive pulmonary embolism		Approved for marketing

	•	SonoLysis+tPA therapy involves the administration of our proprietary MRX-801 microbubbles and ultrasound in conjunction with tPA. We believe that this therapeutic approach incorporates two complementary mechanisms of action, mechanical and enzymatic, that together can reduce the time required to dissolve a blood clot and help ensure more rapid and complete restoration of blood flow to at risk brain tissues in patients with ischemic stroke. We are conducting a Phase I/II dose-escalation clinical trial evaluating SonoLysis+tPA therapy in patients with ischemic stroke. We initiated this trial in January 2007, and intend to enroll a total of 72 patients in various medical centers in the United States and Europe. We anticipate enrollment for this trial will be completed in the first half of 2008 and intend to initiate a Phase II study following completion of the ongoing Phase I/II study. We estimate that if approved by the FDA, over 90,000 ischemic stroke patients in the U.S. could be eligible for SonoLysis+tPA therapy annually.
	•	SonoLysis therapy involves administration of our MRX-801 microbubbles with ultrasound, but without the administration of a thrombolytic drug. Because SonoLysis therapy does not involve use of a thrombolytic drug and its associated risk of bleeding, we believe SonoLysis therapy may offer advantages over existing treatments for ischemic stroke, including extending the treatment window beyond three hours from onset of symptoms and broadening treatment availability to patients for whom thrombolytic drugs are contraindicated due to risk of bleeding. We have not yet conducted any clinical trials using our proprietary MRX-801 microbubbles with ultrasound to treat blood clot indications without a thrombolytic drug. We are conducting and intend to conduct additional preclinical studies of SonoLysis therapy through the first half of 2008. We expect to initiate a Phase II study to treat patients with ischemic stroke following completion of our SonoLysis+tPA therapy Phase I/II clinical trial. Because of the preclinical data package as well as our ongoing Phase I/II clinical trial evaluating SonoLysis+tPA therapy in patients with ischemic stroke, we believe no Phase I study will be required prior to initiating the Phase II study for SonoLysis therapy. We estimate that if approved by the FDA, over 200,000 ischemic stroke patients in the U.S. could be eligible for SonoLysis therapy annually.

						Research
Product Candidate		Product Elements		Indication(s)		Status
SonoLysis therapy		• MRX-801 microbubbles • Ultrasound		Ischemic stroke in pre-  hospital setting		Preclinical
SonoLysis+tPA therapy		• MRX-801 microbubbles • Ultrasound • tPA		Myocardial infarction Peripheral arterial  occlusive disease Deep vein thrombosis		Preclinical Preclinical Preclinical
NanO2tm		• MRX-804 emulsion/microbubbles		Hemorrhagic shock Neuroprotection for  ischemic stroke		Preclinical Research
Targeted SonoLysis therapy		• MRX-802 targeted microbubbles		Myocardial infarction and  other vascular clots		Research
Targeted drug delivery		• MRX-803 targeted drug delivery microbubbles		Angiogenic tumors		Research

	•	Oxygen Delivery.  We are investigating the potential use of our proprietary MRX-804 emulsion/microbubbles, which we call NanO2, to carry oxygen to parts of the body as a potential treatment for a

		broad variety of disorders in which reduced blood flow results in oxygen-deprived tissues, such as ischemic stroke, heart attack, and injuries that involve significant blood loss, or hemorrhagic shock. We are working with an academic collaborator who has recently received an approximately $700,000 grant from the U.S. Department of Defense to conduct preclinical animal studies of MRX-804 microbubbles to treat hemorrhagic shock. We believe our NanO2 product candidate may have the ability to be stored at room temperature, which could make it suitable for emergency battlefield or ambulance-based treatments.

	•	Targeted SonoLysis Therapy.  Our research team has developed MRX-802, our next generation SonoLysis microbubbles with targeting technology that causes the microbubbles to bind to blood clots. We believe that our MRX-802 targeted microbubbles will have a greater ability to break-up blood clots than non-targeted microbubbles when combined with ultrasound. To further the research on our next generation SonoLysis technology, we have received and are near the mid-point of our work on an approximately $1.2 million grant from the National Institutes of Health, or NIH, to study MRX-802 targeted microbubbles to treat vascular clots.
	•	Targeted Drug Delivery.  We have also developed targeted drug delivery microbubbles, known as MRX-803, which have the potential for selective drug delivery when used in conjunction with ultrasound. We have received an approximately $1.0 million subcontract and have reached the mid-point of our research on an NIH grant to study the use of our proprietary MRX-803 targeted drug delivery microbubbles to treat a variety of tumors. We believe this technology has the potential for broad applications, including delivering drugs to dissolve blood clots or arterial plaque as well as to treat a variety of types of cancer.

	•	develop and commercialize our SonoLysis product candidates to expand the number of ischemic stroke patients who are eligible for treatment;
	•	sell our Abbokinase inventory and benefit from our commercial relationships;
	•	leverage our SonoLysis product candidates to accelerate initiation of treatment for ischemic stroke in an ambulance setting and address additional clot disorders in cardiology and peripheral vascular disease; and
	•	create a deep pipeline of products based on our microbubble technologies to address additional indications.

	•	we have a history of operating losses, including an accumulated deficit of approximately $65.5 million and an overall stockholders’ deficit of approximately $32.7 million at March 31, 2007, and expect to continue to incur substantial losses for the foreseeable future;
	•	we will need substantial additional capital to fund our operations;
	•	we may never complete clinical development of our product candidates or have more than one product approved for marketing, and even if approved, our product candidates may never achieve market acceptance;

	•	failure to comply with various government regulations in connection with the development, manufacture and commercialization of our product candidates, and post-approval manufacturing and marketing of our products, could result in significant interruptions or delays in our development and commercialization activities;
	•	we may not be able to sell our inventory of Abbokinase at such times, in such quantities, and at such prices as we anticipate, or at all;
	•	if we are unable to meet testing specifications for extension of the expiration dates currently applicable to about 64% of our vials of Abbokinase that we expect hospitals to purchase, we will not be allowed to continue selling these vials after October 2007;
	•	if we fail to satisfy our December 2007 debt obligation to Abbott Laboratories, Abbott Laboratories could reclaim our remaining inventory of Abbokinase, along with the portion of the cash we have received from our sales of Abbokinase that is in an escrow account; and
	•	we compete against companies that have longer operating histories, more established products and greater resources than we do.

Common stock offered		3,000,000 shares
Common stock to be outstanding after this offering		10,007,868 shares
Initial public offering price		$5.00 per share
Use of proceeds		To continue the development of our product candidates, including clinical trials, to fund our commercialization efforts, to fund our research and preclinical development activities, and for working capital and other general corporate purposes including a possible partial repayment of debt. See “Use of Proceeds.”
NASDAQ Capital Market symbol		Our common stock has been approved for listing on the NASDAQ Capital Market under the symbol “IMRX”.

	•	550,959 shares of common stock issuable upon the exercise of options outstanding having a weighted average exercise price of $18.43 per share, under our 2000 Stock Plan,;
	•	233,321 shares of common stock issuable upon the exercise of options to be granted under our 2000 Stock Plan upon completion of this offering, having an exercise price of $5.00 per share;
	•	38,500 shares of common stock to be issued pursuant to restricted stock grants under our 2000 Stock Plan upon completion of this offering;
	•	352,324 shares of common stock issuable upon the exercise of warrants outstanding, having a weighted average exercise price of $15.79 per share;
	•	175,000 shares of common stock issuable upon the exercise of the representative’s warrant and 496,589 shares of common stock issuable upon the exercise of other warrants to be granted upon completion of this offering, having an exercise price of $5.75; and
	•	850,000 shares of common stock reserved for future issuance under our 2007 Performance Incentive Plan, which became effective immediately upon the signing of the underwriting agreement for this offering, subject to increases resulting from the rollover of terminated and expired options originally granted under our 2000 Stock Plan.

	•	the conversion of all our outstanding shares of preferred stock into 4,401,129 shares of common stock upon the closing of this offering, based on a 1-to-1.176 conversion ratio of our Series F preferred stock. See “Conversion of Series F Preferred Stock”;
	•	a one-for-three reverse stock split of our common stock that was effected on May 4, 2007;
	•	the filing of our amended and restated certificate of incorporation upon completion of this offering; and
	•	no exercise of the underwriters’ over-allotment option.

		Years Ended December 31,												Three Months Ended March 31,
		2004				2005				2006				2006				2007
														(Unaudited)
Consolidated Statements of Operations Data:
Product sales, grant and other revenue		$	575			$	619			$	1,327			$	177			$	1,208
Costs and expenses:
Cost of product sales			—				—				204				—				461
Research and development			2,490				3,579				8,396				1,723				1,500
General and administrative			3,183				4,142				7,371				1,618				1,098
Depreciation and amortization			186				194				1,049				60				363
Acquired in-process research and development			—				24,000				—				—				—
Total cost and expenses			5,859				31,915				17,020				3,401				3,422
Interest and other income, net			29				122				381				104				41
Interest expense			(469	)			(587	)			(1,515	)			(225	)			(225	)
Gain on extinguishment of debt			—				3,835				16,128				—				—
Net loss			(5,724	)			(27,926	)			(699	)			(3,345	)			(2,398	)
Accretion of dividends on preferred stock			(301	)			(601	)			(1,167	)			(150	)			(433	)
Net loss attributable to common stockholders		$	(6,025	)		$	(28,527	)		$	(1,866	)		$	(3,495	)		$	(2,831	)
Net loss attributable to common stockholders per share — Basic and diluted		$	(5.37	)		$	(15.11	)		$	(0.72	)		$	(1.35	)		$	(1.09	)
Weighted average shares outstanding — Basic and diluted			1,122,881				1,888,291				2,599,425				2,585,315				2,605,915

	•	on an actual basis;
	•	on a pro forma basis to reflect the conversion of all outstanding shares of preferred stock, valued on our balance sheet at approximately $40.3 million, into 4,401,129 shares of common stock upon the closing of this offering; and
	•	on a pro forma as adjusted basis to reflect our receipt of the estimated net cash proceeds from our sale of 3,000,000 shares of common stock in this offering at an initial public offering price of $5.00, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

		At March 31, 2007
										Pro Forma
		Actual				Pro Forma				as Adjusted
						(In thousands)
						(Unaudited)
Consolidated Balance Sheet Data:
Cash and cash equivalents		$	2,748			$	2,748			$	15,053
Working capital(1)			583				583				12,888
Total assets			23,384				23,384				35,689
Redeemable convertible preferred stock			36,297				—				—
Total stockholders’ equity (deficit)		$	(32,676	)		$	3,621			$	15,926

(1)		Includes $147,000 of deferred financing costs.

 

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common stock. If any of the following events were to occur, our business, financial condition or results of operations could be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose some or all of your investment.

 

Risks Relating to Our Business

 

 

Unless we are able to generate sufficient product or other revenue, we will continue to incur losses from operations and may never achieve or maintain profitability.

 

We have a history of net losses and negative cash flow from operations since inception. In the quarter ended March 31, 2007, we generated product revenue of approximately $1.1 million and have funded our operations primarily from private sales of our securities. Net losses attributable to common stockholders for the fiscal years ended December 31, 2004, 2005, and 2006 were approximately $6.0 million, $28.5 million, and $1.9 million, respectively, and for the quarters ended March 31, 2006 and 2007 we had net losses attributable to common stockholders of approximately $3.5 million and $2.8 million, respectively. At March 31, 2007, we had an accumulated deficit of approximately $65.5 million. Except for Abbokinase, which is approved and marketed for the treatment of acute massive pulmonary embolism and which we acquired from Abbott Laboratories in April 2006, we do not have regulatory approval for any of our product candidates. Even if we receive regulatory approval for any product candidates, sales of such products may not generate sufficient revenue for us to achieve or maintain profitability.

 

Our ability to generate revenue depends on a number of factors, including our ability to:

 

 

We anticipate that our expenses will increase substantially following this offering as a result of:

 

 

Because of the numerous risks and uncertainties associated with developing and commercializing our potential products, we may experience larger than expected future losses and may never become profitable.

 

Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.

 

We have received an audit report from our independent registered accounting firm containing an explanatory paragraph stating that our historical recurring losses from operations and net capital deficiency raise substantial doubt about our ability to continue as a going concern. We believe that the completion of this offering will eliminate this doubt and allow us to continue as a going concern at least in the near term. We

estimate that the net proceeds from this offering and our existing cash and cash equivalents will be sufficient to meet our anticipated cash requirements until September 2008, assuming continuing sales of Abbokinase (including the extension of product expiration date) to wholesalers will be adequate to repay the $15.0 million note due to Abbott Laboratories on December 31, 2007. We believe that, based on conversations with our wholesale distributors about the current market demand for Abbokinase, we will sell a sufficient amount of Abbokinase prior to December 31, 2007 to repay the note to Abbott Laboratories. It is possible that the sales of Abbokinase that we expect to occur prior to December 31, 2007 may instead occur in the first quarter of 2008 or later. In such event we would use a portion of the net proceeds of this offering to repay the note on December 31, 2007 and we would replenish our cash resources from subsequent sales of Abbokinase. Alternatively, we may refinance the note using our Abbokinase inventory as collateral. If we are unable to complete this offering, we will need to obtain alternative financing and modify our operational plans to continue as a going concern.

 

We incurred significant indebtedness in connection with our acquisition of Abbokinase assets from Abbott Laboratories. If we are unable to satisfy this obligation in December 2007, Abbott Laboratories will have a right to reclaim our remaining inventory of Abbokinase, along with a portion of the cash we have received from our sales of Abbokinase.

 

In connection with our April 2006 acquisition of the remaining inventory of and certain rights related to Abbokinase, we issued to Abbott Laboratories a $15.0 million non-recourse note that is secured by the inventory and rights acquired and matures in December 2007. Although we have commenced selling Abbokinase to obtain near-term revenue that will help fund our cash needs, the asset purchase agreement provides that after we have received initial net revenue of $5.0 million from the sale of Abbokinase, we are then required to deposit 50% of the cash receipts we receive from further sales of Abbokinase into an escrow account to secure the repayment of the note. As of June 30, 2007, our net cash received from sales of Abbokinase to wholesalers and customers totaled approximately $13.8 million and we had deposited approximately $4.2 million in escrow as security for the note. If the escrow amount is not adequate to repay the note and we are otherwise unable to repay the note by its maturity date, Abbott Laboratories has the right to reclaim our remaining inventory of Abbokinase, along with the portion of the cash we have received from our sales of Abbokinase that is in the escrow account.

 

We will need substantial additional capital to fund our operations. If we are unable to raise capital when needed, we may be forced to delay, reduce or eliminate our research and development programs or commercialization efforts, and we may be unable to timely pay our debts or may be forced to sell or license assets or otherwise terminate further development of one or more of our programs.

 

Since our inception, we have financed our operations principally through the private placement of shares of our common and preferred stock and convertible notes and the receipt of government grants. Upon completion of this offering we believe that we will have working capital sufficient to meet our anticipated cash needs through September 2008, assuming our projected sales of Abbokinase to wholesalers occur within a timeframe adequate to repay the $15.0 million note due to Abbott Laboratories on December 31, 2007. We expect our expenses to increase substantially following this offering, and we will require substantial additional financing at various times in the future as we expand our operations and as our debt obligations mature.

 

Our funding requirements will, however, depend on numerous factors, including:

 

 

 

We intend to seek additional funding from a variety of sources, which may include collaborations involving our technology, technology licensing, grants and public or private equity and debt financings. We cannot be certain that any additional funding will be available on terms acceptable to us, or at all. Accordingly, we may not be able to secure the substantial funding that is required to maintain and continue our commercialization and development programs at levels that may be required in the future. We may be forced to accept funds on terms or pricing that are highly dilutive or otherwise disadvantageous to our existing stockholders. We are restricted from granting any additional security interest in our Abbokinase assets that we acquired in 2006. Raising additional funds through debt financing, if available, may involve covenants that restrict our business activities. To the extent that we raise additional funds through collaborations and licensing arrangements, we may have to relinquish valuable rights and control over our technologies, research programs or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to secure adequate financing, we could be required to sell or license assets, delay, scale back or eliminate one or more of our development programs or enter into licenses or other arrangements with third parties to commercialize products or technologies that we would otherwise seek to develop and commercialize ourselves.

 

 

We have expanded our business strategy to include the sale of Abbokinase and this exposes us to additional risks which we may not be able to overcome.

 

Until September 2005, our business strategy focused on the development of microbubbles for the treatment of blood clots and various vascular disorders. In October 2006 we began selling Abbokinase, a thrombolytic drug that we acquired in April 2006. Abbokinase is approved by the FDA for marketing in the U.S. for acute massive pulmonary embolism. We have limited experience in marketing or selling Abbokinase, and we may not be successful in these undertakings. Use of Abbokinase in general involves significant risks, such as bleeding. In addition, adding Abbokinase to our business places additional burdens on our management and technical staff to undertake commercialization activities and may distract them from development activities. Furthermore, our customers may return outdated, short dated or damaged product that is in its original, unopened cartons and received by us prior to 12 months past the expiration date. Finally, the FDA must formally approve the release of each lot of Abbokinase we wish to sell. We must submit a request for each lot we intend to ship to our product wholesalers prior to shipment. If the FDA does not release these lots for shipment in a timely manner or at all, our sales of Abbokinase may be adversely affected.

 

We may be unable to sell our existing inventory of Abbokinase before product expiration, and even if we are able to sell the existing inventory, the product may be returned prior to use by hospitals and clinics. Additionally, even if we are successful in extending the product expiration dates, we will need to re-brand the product.

 

In our acquisition of Abbokinase, we received approximately 153,000 vials of Abbokinase manufactured between 2003 and 2005. At the time of our acquisition of Abbokinase, we estimated that hospitals would purchase, and we would thereby recognize revenue for, approximately 111,000 vials, or approximately 72% of the total vials we acquired, which we believe represented approximately a four-year supply of inventory. We also estimated that, due to expiration of the vials or for other reasons, hospitals would not purchase approximately 42,000 vials, or approximately 28% of the vials we acquired. Approximately $16.7 million of the $20.0 million purchase price for Abbokinase was allocated to the vials we expect hospitals to purchase. Of our vials of Abbokinase held in inventory either by us or by our wholesalers as of March 31, 2007, approximately 64% of the vials we expect hospitals to purchase, or approximately $10.7 million in inventory value, are unlabeled and will expire by October 2007 based on current stability data. The remaining approximately 36% of the vials we expect to sell to hospitals, or approximately $6.1 million in inventory

value, are labeled and will expire at various times between December 2008 and August 2009. We commenced sales of Abbokinase in October 2006. We may or may not be able to sell the entire inventory we acquired before the product expires, and we are not permitted to sell this inventory after its expiration dates. We will continue our ongoing stability program to potentially extend the expiration dates for this inventory. Our license to use the Abbokinase trademark does not cover any inventory with extended expiration dates. Accordingly, if we are successful in demonstrating extended stability and shelf life, we would need to re-brand the inventory to commercialize it. We cannot be certain that we will be successful in establishing an alternate brand name for Abbokinase and obtaining market acceptance. Even if we are able to sell the Abbokinase inventory to wholesalers prior to expiration, the product may be returned to us if outdated or short dated, and our sales could be significantly reduced.

 

The thrombolytic drug market is highly competitive and dominated by products from Genentech. We have limited sales and marketing capabilities and depend on drug wholesalers to distribute our Abbokinase product.

 

The market for thrombolytic drugs is currently dominated by thrombolytic drugs offered by Genentech, Inc., in particular alteplase, or tPA, which is approved for treatment of ischemic stroke and pulmonary emboli, among other indications. We cannot be certain that we have sufficient resources to effectively market or sell Abbokinase. We have a limited sales and marketing staff and depend on the efforts of third parties for the sale and distribution of Abbokinase to hospitals and clinics. If we are unable to maintain effective third party distribution on commercially reasonable terms, we may be unable to market and sell Abbokinase in commercial quantities. Drug wholesale companies may be unwilling to continue selling Abbokinase, or we may be forced to accept lower prices or other unfavorable terms or to expend significant additional resources to sell our Abbokinase inventory. Additionally, even if we are able to market and sell Abbokinase in commercial quantities, we do not expect sales of Abbokinase to generate enough revenue for us to achieve profitability.

 

Our competitors generally are larger than we are, have greater financial resources available to them than we do and may have a superior ability to develop and commercialize competitive products. In addition, if our competitors have products that are approved in advance of ours, marketed more effectively or demonstrated to be safer or more effective than ours, our commercial opportunity will be reduced or eliminated and our business will be harmed.

 

Our industry sector is intensely competitive, and we expect competition to continue to increase. Many of our actual or potential competitors have substantially longer operating histories and greater financial, research and development and marketing capabilities than we do. Many of them also have substantially greater experience than we have in undertaking preclinical studies and clinical trials, obtaining regulatory approvals and manufacturing and distributing products. Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical companies. In addition, academic institutions, government agencies and other public and private research organizations also conduct research, seek patent protection and establish collaborative arrangements for product development and marketing. We may not be able to develop products that are more effective or achieve greater market acceptance than our competitors’ products. Any company that brings competitive products to market before us may achieve a significant competitive advantage.

 

We believe that the primary competitive factors in the market for treatments of vascular disorders include safety and efficacy, access to and acceptance by leading physicians, cost-effectiveness, physician relationships and sales and marketing capabilities. We may be unable to compete successfully on the basis of any one or more of these factors, which could have a material adverse effect on our business, financial condition and results of operations.

 

If we are unable to develop, manufacture and commercialize our product candidates, we may not generate sufficient revenue to continue our business.

 

We currently have only one product, urokinase, currently marketed as Abbokinase, that has received regulatory approval, and we have limited experience commercializing Abbokinase. The process to develop, obtain regulatory approval for and commercialize potential drug candidates is long, complex and costly. Our proprietary SonoLysis microbubble technology has not been used in clinical trials other than our ongoing Phase I/II clinical trial of our SonoLysis+tPA therapy. We do not expect to have the results of any clinical trials using our proprietary MRX-801 microbubbles until at least 2008. As a result, our business in the near term is substantially dependent upon our ability to sell Abbokinase and to complete development, obtain regulatory approval for and commercialize our SonoLysis product candidates in a timely manner. If we are unable to further develop, commercialize or license our SonoLysis product candidates, we may not be able to earn sufficient revenue to continue our business.

 

If we want to sell urokinase beyond our existing inventory of Abbokinase, we would need to undertake manufacturing and secure regulatory approval for a new manufacturing process and facility.

 

As part of our acquisition of Abbokinase, we acquired cell lines that could be used to manufacture urokinase. If we want to sell urokinase beyond our existing inventory of acquired Abbokinase, we would need to undertake manufacturing and to demonstrate that our manufactured material is comparable to the urokinase we purchased from Abbott Laboratories. To demonstrate this, we would need to have our manufacturing process validated by the FDA and may be required to conduct additional preclinical studies, and possibly additional clinical trials, to demonstrate its safety and efficacy. In addition, the manufacturing process for Abbokinase involves a roller bottle production method that is used infrequently today and is available only from a limited number of manufacturers worldwide. We do not currently intend to undertake any efforts required for manufacturing and regulatory approval of additional urokinase in the near term, and even if we were to undertake these efforts in the future, we cannot be certain that we would be able to manufacture and receive regulatory approval for additional sales of urokinase beyond our existing inventory.

 

We do not plan to manufacture any of our product candidates and will depend on commercial contract manufacturers to manufacture our products.

 

We do not have our own manufacturing facilities, have no experience in large-scale product manufacturing, and do not intend to develop such facilities or capabilities. Our ability to conduct clinical trials and commercialize our product candidates will depend, in part, on our ability to manufacture our products through contract manufacturers. For all of our product candidates, we or our contract manufacturers will need to have sufficient production and processing capacity to support human clinical trials, and if those clinical trials are successful and regulatory approvals are obtained, to produce products in commercial quantities. Delays in providing or increasing production or processing capacity could result in additional expense or delays in our clinical trials, regulatory submissions and commercialization of our products. In addition, we will be dependent on such contract manufacturers to adhere to the FDA’s current Good Manufacturing Practices, or cGMP, and other regulatory requirements.

 

Establishing contract manufacturing is costly and time-consuming and we cannot be certain that we will be able to engage contract manufacturers who can meet our quantity and quality requirements in a timely manner and at competitive costs. The manufacturing processes for our product candidates have not yet been tested at commercial levels, and it may not be possible to manufacture such materials in a cost-effective manner. Further, there is no guarantee that the components of our proposed drug product candidates will be available to our manufacturers when needed on terms acceptable to us. If we are unable to obtain contract manufacturing on commercially reasonable terms, we may not be able to conduct or complete planned or necessary clinical trials or commercialize our product candidates.

 

If our clinical trials are not successful, or if we are unable to obtain regulatory approvals, we will not be able to commercialize our products and we will continue to incur significant operating losses.

 

Abbokinase is our only product approved for commercial sale. The sale of all of our product candidates in the U.S. requires approval from the FDA and from foreign regulatory agencies for sales outside the U.S. To gain regulatory approval for the commercial sale of our product candidates, we must demonstrate the safety and efficacy of each product candidate in human clinical trials. This process is expensive and can take many years, and failure can occur at any stage of the testing process. There are many risks associated with our clinical trials. For example:

 

 

Any of these or other unexpected events could cause us to delay or terminate our ongoing clinical trials, increase the costs associated with our clinical trials or affect the statistical analysis of the safety and efficacy of our product candidates. If we fail to adequately demonstrate the safety and efficacy of our product candidates, we will not obtain regulatory approval to commercialize our products. Significant delays in clinical development could materially increase our product development costs or impair our competitive position. In addition, any approvals we may obtain may not cover all of the clinical indications for which we seek approval, or an approval may contain significant limitations in the form of narrow labeling and warnings, precautions or contraindications with respect to limitations on use. Accordingly, we may not be able to obtain our desired product registration or marketing approval for any of our product candidates.

 

We rely on third parties to conduct our clinical trials who may not carry out their contractual duties, with resulting negative impacts on our clinical trials.

 

We depend on contract research organizations, or CROs, for managing some of our preclinical testing and clinical trials. If we are not able to retain CROs in a timely manner and on commercially reasonable terms, we may not be able to conduct or complete clinical trials or commercialize our product candidates and we do not know whether we will be able to develop or attract partners with such capabilities. We have established relationships with multiple CROs for our existing clinical trials, although there is no guarantee that the CROs

will be available for future clinical trials on terms acceptable to us. We may not be able to control the amount and timing of resources that CROs devote to our clinical trials. In the event that we are unable to maintain our relationship with any of our CROs or elect to terminate the participation of any of these CROs, we may lose the ability to obtain follow-up information for patients enrolled in ongoing clinical trials unless we are able to transfer the care of those patients to another qualified CRO.

 

Our product candidates may never achieve market acceptance.

 

We cannot be certain that our products will achieve any degree of market acceptance among physicians and other health care providers and payors, even if necessary regulatory approvals are obtained. We believe that recommendations by physicians and other health care providers and payors will be essential for market acceptance of our products, and we cannot be certain we will ever receive any positive recommendations or reimbursement. Physicians will not recommend our products unless they conclude, based upon clinical data and other factors, that our products are safe and effective. We are unable to predict whether any of our product candidates will ever achieve market acceptance, either in the U.S. or internationally. A number of factors may limit the market acceptance of our products, including:

 

 

If our products are not commercialized, our business will be materially harmed.

 

Technological change and innovation in our market sector may cause our products to become obsolete shortly after or even before such products reach the market.

 

New products and technological development in the pharmaceutical and medical device industries may adversely affect our ability to complete required regulatory requirements and introduce our product candidates into the market or may render our products obsolete. The markets into which we plan to introduce our products are characterized by constant and sometimes rapid technological change, new and improved product introductions, changes in regulatory requirements, and evolving industry standards. Our ability to execute our business plan will depend to a substantial extent on our ability to identify new market trends and develop, introduce and support our candidate products on a timely basis. If we fail to develop and commercialize our product candidates on a timely basis, we may be unable to compete effectively. For example, we are aware of other thrombolytic drugs in development such as ancrod and desmoteplase, which are currently in Phase III clinical trials as treatments for acute ischemic stroke. Since none of our product candidates for treatment of ischemic stroke will be able to achieve regulatory approval for commercial sale in the U.S. any earlier than 2011, if ever, we could by that time find that competitive developments have diminished our product opportunities, which would have an adverse impact on our business prospects and financial condition.

 

If we are unable to obtain acceptable prices or adequate reimbursement from third-party payors for any product candidates that we seek to commercialize, our revenue and prospects for profitability will suffer.

 

The commercialization of our product candidates is substantially dependent on whether third-party coverage and reimbursement is available from governmental payors such as Medicare and Medicaid, private health insurers, including managed care organizations and other third-party payors. The U.S. Centers for Medicare and Medicaid Services, health maintenance organizations and other third-party payors in the U.S. and in other jurisdictions are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for new drugs and medical devices and, as a result, they may not cover or provide adequate payment for our products. Our products may not be considered cost-effective and reimbursement may not be available to consumers or may not be sufficient to allow our products to be marketed on a competitive basis. Large private payors, managed care organizations, group purchasing organizations and similar organizations are exerting increasing influence on decisions regarding the use of, and reimbursement levels for, particular treatments. Such third-party payors, including Medicare, are challenging the prices charged for medical products and services, and many third-party payors limit or delay reimbursement for newly approved medical products and indications. Cost-control initiatives could lower the price we may establish for our products which could result in product revenue lower than anticipated. If the prices for our product candidates decrease or if governmental and other third-party payors do not provide adequate coverage and reimbursement levels, our prospects for profitability could suffer.

 

We intend to rely heavily on third parties to implement critical aspects of our business strategy, and our failure to enter into and maintain these relationships on acceptable business terms, or at all, would materially adversely affect our business.

 

We intend to rely on third parties for certain critical aspects of our business, including:

 

 

We do not currently have many of these relationships in place. Although we use a third party manufacturer to produce MRX-801 microbubbles for our clinical trials on a purchase order basis, that third party does not have the capacity to produce the volume of MRX-801 microbubbles necessary for large-scale clinical trials or commercial sales. We currently have agreements with contract research organizations to manage our clinical trials; audit our clinical trials; help us write protocols and study reports for our clinical trials; store, label, package and distribute our commercial product; and conduct stability and product release testing for our commercialized product. We also have agreements with wholesalers to market and distribute our product, as well as agreements in place with many Group Purchasing Organizations that negotiate prices on behalf of hospitals and clinics. To the extent that we are unable to maintain these relationships or to enter into any one or more of the additional relationships necessary to our business on commercially reasonable terms, or at all, or to eliminate the need for any such relationship by establishing our own capabilities in a particular functional area in a timely manner, we could experience significant delays or cost increases that could have a material adverse effect on our ability to develop and commercialize our product candidates.

 

We rely on third party products, technology and intellectual property, which could negatively affect our ability to sell our MRX-801 microbubbles or other products commercially or could adversely affect our ability to derive revenue from such products.

 

Our SonoLysis program may require the use of multiple proprietary technologies, including commercially available ultrasound devices and patented technologies. Manufacturing our products or customizing related ultrasound devices may also require licensing technologies and intellectual property from third parties. Obtaining and maintaining licenses for these technologies may require us to make royalty payments or other payments to several third parties, potentially reducing our revenue or making the cost of our products commercially prohibitive. We cannot be certain that we will be able to establish any or all of the partnering relationships and technology licenses that may be necessary for the pursuit of our business strategy, or, even if such relationships can be established, that they will be on terms favorable to us or that they can be managed in a way that will assist us in executing our business plan.

 

As a highly specialized scientific business enterprise, our ability to execute our business plan is substantially dependent on certain key members of our scientific and management staff, the loss of any of whom could have a material adverse effect on our business.

 

A small number of key officers and members of our professional staff are responsible for certain critical areas of our business, such as product research and development, clinical trials, regulatory affairs, manufacturing, intellectual property protection and licensing. The services provided by our key personnel, including: Bradford A. Zakes, our President and Chief Executive Officer; Lynne Weissberger, our Vice President, Regulatory Affairs, Quality Assurance and Regulatory Compliance; Walter Singleton, our Chief Medical Officer; Terry Matsunaga, our Vice President, Research; Rajan Ramaswami, our Vice President, Product Development; Reena Zutshi, our Vice President, Operations; John McCambridge, our Vice President, Sales and Marketing; and Greg Cobb, our Chief Financial Officer, would be difficult to replace. Dr. Singleton recently advised us of his decision to leave the employ of the Company to pursue personal interests. He has entered into a one-year consulting agreement with us. We believe that we will be able to continue our drug development activities as planned. All of our employees are employed at will. Our business and future operating results also depend significantly on our ability to attract and retain qualified management, manufacturing, technical, marketing, regulatory, sales and support personnel for our operations, and competition for such personnel is intense. We cannot be certain that our key executive officers and scientific staff members will remain with us or that we will be able to attract or retain such personnel. If we are unable to retain and continue to attract qualified management and technical staff, this could significantly delay and may prevent the achievement of our research, development and business objectives. We do not maintain key-person life insurance on the lives of any of our executive officers or scientific staff and we do not intend to secure any key-person life insurance after the completion of this offering.

 

We will need to increase the size of our organization, and we may experience difficulties in managing our growth.

 

As of May 31, 2007, we had 32 full-time employees. In the future, we will need to expand our managerial, operational, financial, clinical, regulatory and other personnel to manage and expand our operations, undertake clinical trials, manufacture our product candidates, continue our research and development and collaborative activities and commercialize our product candidates. In the next 12 months we anticipate hiring between five and eight new employees at an approximate aggregate cost of between $450,000 and $700,000 annually. Our management and scientific personnel, systems and facilities currently in place will not be adequate to support our planned future growth. Our need to effectively manage our operations, growth and various projects requires that we:

 

 

 

We may be unable to implement and manage many of these tasks on a larger scale or in a timely manner and, accordingly, may not achieve our research, development and commercialization goals.

 

We depend on patents and other proprietary rights, some of which are uncertain and unproven. Further, our patent portfolio and other intellectual property rights are expensive to maintain, protect against infringement claims by third parties, and enforce against third party infringements, and are subject to potential adverse claims.

 

Because we are developing product candidates that rely on advanced and innovative technologies, our ability to execute our business plan will depend in large part on our ability to obtain and effectively use patents and licensed patent rights, preserve trade secrets and operate without infringing upon the proprietary rights of others. Our Abbokinase product has no patent protection and we have a one-half interest in a patent related to the manufacturing process for Abbokinase. Some of our intellectual property rights are based on licenses that we have entered into with owners of patents.

 

Although we have rights to 143 issued U.S. patents, plus some foreign equivalents and numerous pending patent applications, the patent position of pharmaceutical, medical device and biotechnology companies in general is highly uncertain and involves complex legal and factual questions. Effective intellectual property protection may also be unavailable or limited in some foreign countries. We have not pursued foreign patent protection in all jurisdictions or for all of our patentable intellectual property. As a result, our patent protection for our intellectual property will likely be less comprehensive if and when we commence international sales.

 

There are also companies that are currently commercializing FDA approved microbubbles-based products for diagnostic uses. These companies may promote these products for off-label uses which may directly compete with our products when and if approved. Additionally, physicians may prescribe the use of such products for off-label indications which could have the impact of reducing our revenues for our product candidates when and if approved.

 

In the U.S. and internationally, enforcing intellectual property rights against infringing parties is often costly. Pending patent applications may not issue as patents and may not issue in all countries in which we develop, manufacture or sell our products or in countries where others develop, manufacture and sell products using our technologies. Patents issued to us may be challenged and subsequently narrowed, invalidated or circumvented. We have been notified that, in February 2005, a third party filed an opposition claim to one of our patents in Europe that relates to targeted bubbles for therapeutic and diagnostic use. The third party has agreed to voluntarily dismiss and terminate this claim, but other such conflicts could occur and could limit the scope of the patents that we may be able to obtain or may result in the denial of our patent applications. If a third party were to obtain intellectual property protection for any of the technologies upon which our business strategy is based, we could be required to challenge such protections, terminate or modify our programs that rely on such technologies or obtain licenses for use of these technologies. For example, in July 2003 we received a notice from a third party who owns a patent relating to the administration of ultrasound to break up blood clots indicating that we may need a license to its patent if we intend to administer our therapies according to its patented method. Although we do not intend to administer our therapies according to the third party’s patented method, other similar third party patents, if valid, could require us to seek a license that may not be available on terms acceptable to us or at all, could impose limitations on how we administer our therapies, and may require us to adopt restrictions or requirements as to the manner of administration of our products that we might not otherwise adopt to avoid infringing patents of others. Moreover, we may not have the financial resources to protect our patent and other intellectual property rights and, in that event, our patents may not afford meaningful protection for our technologies or product candidates, which would materially

adversely affect our ability to develop and market our product candidates and to generate licensing revenue from our patent portfolio.

 

Additional risks related to our patent rights and other proprietary rights include:

 

 

If any of these events occurs, our business may be harmed.

 

We have limited patent protection for Abbokinase, and third parties likely could develop urokinase without a license from us, which could decrease the market opportunity for Abbokinase.

 

We own a one-half interest in a patent related to the manufacturing process for Abbokinase. We also have a license to use the “Abbokinase” trademark that expires when our inventory is sold, expires or its expiration date is extended, and trade secrets relating to the manufacturing process for Abbokinase. A third party could acquire or develop a cell line capable of producing urokinase and could devise a manufacturing process that could yield a product consistent with or superior to our Abbokinase product in quality, safety and activity, in each case without a license from us, which could decrease the market opportunity for Abbokinase.

 

Other companies may claim that we infringe their patents or trade secrets, which could subject us to substantial damages.

 

A number of third parties, including certain of our competitors, have developed technologies, filed patent applications or obtained patents on technologies and compositions that are related to aspects of our business, including thrombolytic drug therapy, microbubbles and ultrasound. Such third parties may sue us for infringing their patents. If we face an infringement action, defending against such an action could require substantial resources that may not be available to us. In the event of a successful claim of infringement against us, we may be required to:

 

 

Any claims of infringement could cause us to incur substantial costs and could divert management’s attention away from our business in defending against the claim, even if the claim is invalid. A party making a claim could secure a judgment that requires us to pay substantial damages. A claim of infringement could also be used by our competitors to delay market introduction or acceptance of our products. If we are sued for infringement, we could encounter substantial delays in development, manufacture and commercialization of our product candidates. Any litigation, whether to enforce our patent rights or to defend against allegations that we infringe third party rights, will be costly and time consuming and will likely distract management from other important tasks.

 

Our rights to develop and commercialize certain of our product candidates are subject to the terms and conditions of licenses or sublicenses granted to us by third parties, including other pharmaceutical companies, that contain restrictions that may limit our ability to capitalize on these products.

 

Our SonoLysis therapy and SonoLysis+tPA therapy product candidates are based in part on patents and other intellectual property that we license or sublicense from third parties. Our rights to develop and commercialize these product candidates using intellectual property licensed from UNEMED Corporation may terminate, in whole or in part, if we fail to pay royalties to third party licensors, or if we fail to comply with certain restrictions regarding our development activities. In the event of an early termination of any such license or sublicense agreement, rights licensed and developed by us under such agreements may be extinguished, and our rights to the licensed technology may revert back to the licensor. Any termination or reversion of our rights to develop or commercialize any such product candidate may have a material adverse effect on our business.

 

We are party to an agreement with Bristol-Myers Squibb that restricts us from using our bubble technology for non-targeted diagnostic imaging applications. Bristol-Myers Squibb also has a right of first negotiation should we wish to license to a third party any of our future products or technology related to the use of bubbles for targeted imaging of blood clots, or breaking up blood clots with ultrasound and bubbles. Bristol-Myers Squibb has waived its rights under this agreement with respect to our current generation of MRX-801 microbubbles that we are developing for breaking up blood clots, as well as a new generation of MRX-802 microbubbles that we are developing for breaking up blood clots that include targeting mechanisms to cause the bubbles to attach to blood clots. This right of first negotiation for future technology we may develop in these applications could adversely impact our ability to attract a partner or acquirer for SonoLysis therapy.

 

In addition, we have been awarded various government funding grants and contracts from The National Institutes of Health and other government agencies. These grants include provisions that provide the U.S. government with the right to use the technologies developed under such grants for certain uses, under certain circumstances. If the government were to exercise its rights, our ability to commercialize such technology would likely be impaired.

 

We could be exposed to significant product liability claims, which could be time consuming and costly to defend, divert management attention and adversely impact our ability to obtain and maintain insurance coverage. The expense and potential unavailability of insurance coverage for our company or our customers could adversely affect our ability to sell our products, which would negatively impact our business.

 

We face a risk of product liability exposure related to the testing of our product candidates in clinical trials and will face even greater risks upon any commercialization by us of our product candidates. Thrombolytic drugs are known to involve certain medical hazards, such as risks of bleeding or immune reactions. Our product candidates may also involve presently unknown medical risks of equal or even greater severity. Product liability claims or other claims related to our products, or their off-label use, regardless of their merits or outcomes, could harm our reputation in the industry, and reduce our product sales. Additionally, any lawsuits or product liability claims against us may divert our management from pursuing our business strategy and may be costly to defend. Further, if we are held liable in any of these lawsuits, we may incur substantial liabilities and may be forced to limit or forego further commercialization of one or more of our

products. A product liability related claim or recall could be materially detrimental to our business. Our current product liability insurance, which provides us with $10 million of coverage in the aggregate, may be insufficient. We may not be able to obtain or maintain such insurance in adequate amounts, or on acceptable terms, to provide coverage against potential liabilities. The product liability coverage we currently have for our clinical trials may be insufficient to cover fully the costs of any claim or any ultimate damages we may be required to pay. Our inability to obtain or maintain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or limit the commercialization of any products we develop, and could leave us exposed to significant financial losses relating to any products that we do develop and commercialize.

 

Moreover, Abbokinase is made from human neonatal kidney cells. Products made from human source material may contain infectious agents, such as viruses, that can cause disease. We believe the risk that Abbokinase will transmit an infectious agent has been reduced by changes made by Abbott Laboratories to its tissue acquisition and related manufacturing process that included screening donors for prior exposure to certain viruses, testing donors for the presence of certain current virus infections, testing for certain viruses during manufacturing and inactivating and/or removing certain viruses. All of our inventory was produced after these changes were made. Despite these measures, Abbokinase may still present a risk of transmitting infectious agents, which could expose us to product liability lawsuits.

 

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

 

Our research and development activities involve the controlled use of potentially hazardous substances, including toxic chemical and biological materials. Our recent expansion of our business strategy to include the sale of Abbokinase has increased our involvement in the handling and distribution of biological materials. In addition, our operations produce hazardous waste products. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these hazardous and biological materials. While we believe that we are currently in compliance with these laws and regulations, continued compliance may be expensive, and current and future environmental regulations may impair our research, development and manufacturing efforts. In addition, if we fail to comply with these laws and regulations at any point in the future, we may be subject to criminal sanctions and substantial civil liabilities and could be required to suspend or modify our operations. Even if we continue to comply with all applicable laws and regulations regarding hazardous materials, we cannot eliminate the risk of accidental contamination or discharge and our resultant liability for any injuries or other damages caused by these accidents. Although we maintain general liability insurance, this insurance may not fully cover potential liabilities for these damages, and the amount of uninsured liabilities may exceed our financial resources and materially harm our business.

 

The FDA approval process for drugs involves substantial time, effort and financial resources, and we may not receive any new approvals for our product candidates on a timely basis, or at all.

 

The process required by the FDA before product candidates may be marketed in the U.S. generally involves the following:

 

 

The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any new approvals for our product candidates will be granted on a timely basis, if at all. We have failed in the past, and may in the future fail, to make timely submissions of required reports or modifications to clinical trial documents, and such delays as well as possible errors or omissions in such submissions could endanger regulatory acceptance of clinical trial results or even our ability to continue with our clinical trials.

 

The results of product development, preclinical tests and clinical trials are submitted to the FDA as part of an NDA, or as part of an NDA supplement. The FDA may deny approval of an NDA or NDA supplement if the applicable regulatory criteria are not satisfied, or it may require additional clinical data or an additional pivotal Phase III clinical trial. Even if such data are submitted, the FDA may ultimately decide that the NDA or NDA supplement does not satisfy the criteria for approval. The FDA may move to withdraw product approval, once issued, if ongoing regulatory standards are not met or if safety problems occur after the product reaches the market. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products which have been commercialized, and the FDA may move to prevent or limit further marketing of a product based on the results of these post-marketing programs.

 

Satisfaction of FDA requirements or similar requirements of state, local and foreign regulatory agencies typically takes several years and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease. Government regulation may delay or prevent marketing of product candidates for new indications for a considerable period of time and impose costly procedures upon our activities. The FDA or any other regulatory agency may not grant approvals for new indications for our product candidates on a timely basis, if at all. Success in early stage clinical trials does not ensure success in later stage clinical trials. Data obtained from clinical trials is not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. Even if a product candidate receives regulatory approval, the approval may be significantly limited to specific disease states, patient populations and dosages. Further, even after regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. Delays in obtaining, or failures to obtain, additional regulatory approvals for our products would harm our business. In addition, we cannot predict what adverse governmental regulations may arise from future U.S. or foreign governmental action.

 

The FDA’s policies may change and additional government regulations may be enacted, which could prevent or delay regulatory approval of our product candidates or approval of new indications for our product candidates. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the U.S. or internationally.

 

If we or our contract manufacturers fail to comply with applicable regulations, sales of our products could be delayed and our revenue could be harmed.

 

Every medical product manufacturer is required to demonstrate and maintain compliance with cGMP. We and any third party manufacturers or suppliers with whom we enter into agreements will be required to meet these requirements. Our contract manufacturers will be subject to unannounced inspections by the FDA and corresponding foreign and state agencies to ensure strict compliance with cGMP and other applicable government quality control and record-keeping regulations. In addition, transfer of ownership of products triggers a mandatory manufacturing inspection requirement from the FDA. We cannot be certain that we or our contract manufacturers will pass any of these inspections. If we or our contract manufacturers fail one of these inspections in the future, our operations could be disrupted and our manufacturing and sales delayed significantly until we can demonstrate adequate compliance. If we or our contract manufacturers fail to take adequate corrective action in a timely fashion in response to a quality system regulations inspection, the FDA could shut down our or our contract manufacturers’ manufacturing operations and require us, among other things, to recall our products, either of which would harm our business.

 

Failure to comply with cGMP or other applicable legal requirements can lead to federal seizure of violative products, injunctive actions brought by the federal government, and potential criminal and civil liability on the

part of a company and its officers and employees. Because of these and other factors, we may not be able to replace our manufacturing capacity quickly or efficiently in the event that our contract manufacturers are unable to manufacture our products at one or more of their facilities. As a result, the sale and marketing of our products could be delayed or we could be forced to develop our own manufacturing capacity, which would require substantial additional funds and personnel and compliance with extensive regulations.

 

Our products will remain subject to ongoing regulatory review even if they receive marketing approval. If we fail to comply with applicable regulations, we could lose these approvals, and the sale of our products could be suspended.

 

Even if we receive regulatory approval to market a particular product candidate, the FDA or foreign regulatory authority could condition approval on conducting additional and costly post-approval clinical trials or could limit the scope of approved labeling. For example, to sell Abbokinase, we are required to continue an ongoing immunogenicity clinical trial that Abbott Laboratories commenced in 2003. Moreover, the product may later cause adverse effects that limit or prevent its widespread use, force us to withdraw it from the market or impede or delay our ability to obtain regulatory approvals in additional countries. In addition, the manufacturer of the product and its facilities will continue to be subject to FDA review and periodic inspections to ensure adherence to applicable regulations. After receiving marketing approval, the FDA imposes extensive regulatory requirements on the manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion and record keeping related to the product. We may not promote or advertise any future FDA-cleared or approved products for use outside the scope of our product’s label or make unsupported promotional claims about the benefits of our products. If the FDA determines that our claims are outside the scope of our label or are unsupported, it could require us to revise our promotional claims, correct any prior statements or bring an enforcement action against us. Moreover, the FDA or other regulatory authorities may bring charges against us or convict us of violating these laws, and we could become subject to third party litigation relating to our promotional practices and there could be a material adverse effect on our business.

 

If we fail to comply with the regulatory requirements of the FDA and other applicable U.S. and foreign regulatory authorities or discover previously unknown problems with our products, manufacturers or manufacturing processes, we could be subject to administrative or judicially imposed sanctions, including:

 

 

If we were subject to any of the foregoing actions by the FDA, our sales could be delayed, our revenue could decline and our reputation among clinicians, doctors, inventors and research and academic institutions could be harmed.

 

Marketing and reimbursement practices and claims processing in the pharmaceutical and medical device industries are subject to significant regulation in the U.S.

 

In addition to FDA restrictions on marketing of pharmaceutical products, several other state and federal laws have been applied to regulate certain marketing practices in the pharmaceutical and medical device industries in recent years, in particular anti-kickback statutes and false claims statutes.

 

The federal health care program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any health care item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers and formulary managers on the other. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from potential liability, the exemptions and safe harbors are drawn narrowly. Practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Our future practices may not in all cases meet the criteria for safe harbor protection from anti-kickback liability.

 

Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to have a false claim paid. For example, several pharmaceutical and other health care companies have been prosecuted under these laws for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the company’s marketing of the product for unapproved, and thus non-reimbursable, uses. The majority of states also have statutes or regulations similar to the federal anti-kickback and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturer’s products from reimbursement under government programs, criminal fines and imprisonment.

 

Because of the breadth of these laws and the limited safe harbors, it is possible that some of our commercial activities in the future could be subject to challenge under one or more of such laws. Such a challenge could have a material adverse effect on our business.

 

If we seek regulatory approvals for our products in foreign jurisdictions, we may not obtain any such approvals.

 

We may market our products outside the U.S., either with a commercial partner or alone. To market our products in foreign jurisdictions, we will be required to obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and jurisdictions and can involve additional testing, and the time required to obtain foreign approvals may differ from that required to obtain FDA approval. We have no experience with obtaining any such foreign approvals. Additionally, the foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. For all of these reasons, we may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or jurisdictions or by the FDA. We may not be able to submit applications for regulatory approvals and may not receive necessary approvals to commercialize our products in any market. The failure to obtain these approvals could materially adversely affect our business, financial condition and results of operations.

 

Risks Related to this Offering

 

 

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

 

Our management will have broad discretion in the application of the net proceeds of this offering, including for any of the purposes described in “Use of Proceeds.” The failure of our management to apply

these funds effectively could result in financial losses and materially harm our business, cause the price of our common stock to decline and delay product development.

 

Our principal stockholders and management own a significant percentage of our stock and will be able to exercise significant influence over our affairs.

 

Our executive officers, current directors and holders of five percent or more of our common stock, as of the date of this prospectus, beneficially owned approximately 57.0% of our common stock. We expect that upon the closing of this offering, that same group will continue to hold approximately 40.1% of our outstanding common stock. Consequently, even after this offering, these stockholders will likely continue to have significant influence over our operations. The interests of these stockholders may be different than the interests of other stockholders. This concentration of ownership could also have the effect of delaying or preventing a change in control of our company or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could reduce the price of our common stock.

 

We will incur increased costs as a public company which may make it more difficult to achieve profitability.

 

We are subject to the reporting obligations set forth in the Securities Exchange Act of 1934, as amended. As a public company, we will incur significant legal, accounting, insurance, investor relations and other expenses that we did not incur as a private company. The disclosures that we will be required to make will generally involve a substantial expenditure of financial resources. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the Securities and Exchange Commission, or SEC, and the NASDAQ Capital Market have required changes in corporate governance practices of public companies. We expect that full compliance with these new rules and regulations will significantly increase our legal and financial compliance costs and make some activities more time-consuming and costly. For example, in connection with becoming a reporting company, we have created additional board committees and will be required to adopt and maintain policies regarding internal controls and disclosure controls and procedures. We plan to retain a consultant to assist us in developing our internal controls to comply with regulatory requirements and may have to retain additional consultants and employees to assist us with other aspects of complying with regulatory requirements applicable to public companies. Such additional reporting and compliance costs may negatively impact our financial results and may make it more difficult to achieve profitability. The rules and regulations imposed by the SEC and as implemented under the Sarbanes-Oxley Act may also make it more difficult and expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. To the extent our earnings suffer as a result of the financial impact of our SEC reporting or compliance costs, our business could be harmed.

 

If you purchase shares of common stock in this offering, you will suffer immediate and substantial dilution of your investment.

 

Purchasers of common stock in this offering will pay a price per share that substantially exceeds the per share book value of our tangible assets after subtracting our liabilities. Based on the initial public offering price of $5.00 per share, our pro forma as adjusted net tangible book value per share as of March 31, 2007 would have been $1.37. This represents immediate dilution of $3.63 per share to new investors purchasing shares of common stock in this offering at $5.00 per share. See “Dilution.”

 

There has been no prior public market for our common stock, and an active trading market for our common stock may not develop, potentially lessening the value of your shares and impairing your ability to sell.

 

Prior to this offering, there has been no public market for our common stock. Although our common stock has been approved for listing on the NASDAQ Capital Market, 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. We have negotiated and determined the initial public offering price with the representative of the underwriters and this price may not be indicative of prices that will prevail in the trading market after the offering. Investors may not be able to sell their

common stock at or above the initial public offering price. In addition, there are continuing eligibility requirements for companies listed on the NASDAQ Capital Market. If we are not able to continue to satisfy the eligibility requirements of the NASDAQ Capital Market, then our stock may be delisted. This could result in a lower price of our common stock and may limit the ability of our stockholders to sell our stock, any of which could result in your losing some or all of your investment.

 

We expect the price of our common stock to be volatile, and if you purchase shares of our common stock you could incur substantial losses if you are unable to sell your shares at or above the offering price.

 

The price for the shares of our common stock sold in this offering has been determined by negotiation between the representative of the underwriters and us, but this price may not reflect the market price for our common stock following the offering. In addition, our stock price is likely to be volatile. The stock markets in general and the market for small health care companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the initial public offering price. The price for our common stock may be influenced by many factors, including:

 

 

A decline in the market price of our common stock could cause investors to lose some or all of their investment and may adversely impact our ability to attract and retain employees and raise capital.

 

A significant portion of our outstanding common stock may be sold into the market in the near future. Substantial sales of common stock, or the perception that such sales are likely to occur, could cause the price of our common stock to decline.

 

If our existing stockholders sell a large number of shares of common stock or the public market perceives that existing stockholders might sell shares of common stock, the market price of our common stock could decline significantly. 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,” as that term is defined in Rule 144 under the Securities Act of 1933. An aggregate of 7,007,868 shares of our common stock outstanding prior to this offering may also be sold pursuant to Rules 144, 144(k) and 701 upon completion of

this offering, or within 90 days thereafter, subject to the expiration of lock-up agreements covering an aggregate of 6,969,608 of these shares. Lock-up agreements covering 6,006,226 shares expire 180 days after the date of this prospectus, and lock-up agreements covering the remaining 963,382 shares expire 12 months after the date of this prospectus.

 

In addition, as of May 31, 2007, holders of an aggregate of 6,124,239 shares of common stock and warrants to purchase an aggregate of 984,530 shares of common stock (including certain warrants to be issued contingent upon the closing of this offering) have rights with respect to the registration of their shares of common stock with the SEC. See “Description of Capital Stock — Registration Rights.” If we register their shares of common stock following the expiration of the lock-up agreements, they can immediately sell those shares in the public market.

 

Promptly following this offering, we intend to file a registration statement covering up to a maximum of 1,634,280 shares of common stock that are authorized for issuance under our equity incentive plans. As of May 31, 2007, 550,959 shares were subject to outstanding options, of which 273,452 shares were vested. Once we register these shares, they can be freely sold in the public market upon issuance, subject to lock-up agreements and restrictions on our affiliates. For more information, see the discussion under the caption “Shares Eligible for Future Sale.”

 

If we fail to develop and maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud; as a result, current and potential stockholders could lose confidence in our financial reporting, which could harm our business and the trading price of our common stock, should a market for such securities ever develop.

 

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We have not undertaken any efforts to develop a sophisticated financial reporting system. Section 404 of the Sarbanes-Oxley Act of 2002 will require us, beginning with our fiscal year 2008, to evaluate and report on our internal controls over financial reporting and will require our independent registered public accounting firm annually to attest to such evaluation, as well as issue their own opinion on our internal control over financial reporting. Because we have historically operated as a private company, we have limited experience attempting to comply with public company obligations, including Section 404 of the Sarbanes-Oxley Act. The process of strengthening our internal controls and complying with Section 404 is expensive and time consuming, and requires significant management attention, especially given that we have not previously undertaken any efforts to comply with the requirements of Section 404. We plan to retain a consultant to assist us in developing our internal controls to comply with regulatory requirements and may be required to retain additional consultants or employees to assist us with other aspects of complying with regulatory requirements applicable to public companies in the future. The implementation of compliance efforts with Section 404 will be challenging in the face of our planned rapid growth to support our operations as well as the establishment of infrastructure to support our commercial operations. We cannot be certain that the measures we will undertake will ensure that we will maintain adequate controls over our financial processes and reporting in the future. Furthermore, if we are able to rapidly grow our business, the internal controls that we will need will become more complex, and significantly more resources will be required to ensure our internal controls remain effective. Failure to implement required controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we or our auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could diminish investors’ confidence in our financial statements and harm our stock price. In addition, non-compliance with Section 404 could subject us to a variety of administrative sanctions, including ineligibility for listing on the NASDAQ Capital Market and the inability of registered broker-dealers to make a market in our common stock.

 

Anti-takeover defenses that we have in place could prevent or frustrate attempts to change our direction or management.

 

Provisions of our amended and restated certificate of incorporation and bylaws that will become effective upon the closing of this offering and applicable provisions of Delaware law may make it more difficult or

impossible for a third party to acquire control of us without the approval of our board of directors. These provisions:

 

 

In addition, Section 203 of the Delaware General Corporation Law generally prohibits us from engaging 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.

 

We may become involved in securities class action litigation that could divert management’s attention and harm our business.

 

The stock market in general, and the NASDAQ Capital Market and the market for biopharmaceutical companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and health care industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. We may become involved in this type of litigation in the future, regardless of the merits. Litigation often is expensive and diverts management’s attention and resources, which could materially harm our financial condition and results of operations.

 

We do not intend to pay cash dividends on our common stock in the foreseeable future.

 

We have never declared or paid any cash dividends on our common stock or other securities, and we currently do not anticipate paying any cash dividends in the foreseeable future. Instruments governing any future indebtedness may also contain various covenants that would limit our ability to pay dividends. Accordingly, our stockholders will not realize a return on their investment unless the trading price of our common stock appreciates. Our common stock may not appreciate in value after the offering and may not even maintain the price at which investors purchased shares.

 

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 “Our Business.” Forward-looking statements include, but are not limited to, statements about:

 

 

 

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “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.

 

You should read this prospectus, any filed issuer free writing 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 approximately $12.3 million in net proceeds from this offering, or approximately $14.4 million if the underwriters’ over-allotment option is exercised in full, based upon the initial public offering price of $5.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses of approximately $1.6 million payable by us, including the non-accountable expense allowance of 2.0% of the gross proceeds of this offering.

 

We plan to utilize the net proceeds from this offering, which we estimate at $12.3 million, or $14.4 million if the underwriters’ over-allotment option is exercised in full, in the following manner:

 

 

The amounts we actually expend in these areas may vary significantly from our expectations and will depend on a number of factors, including developments relating to scientific, regulatory, competitive and partnering matters. Accordingly, management will retain broad discretion in the allocation of the net proceeds of this offering. A portion of the net proceeds may be used to partially repay our $15.0 million secured non-recourse promissory note maturing in December 2007, which would be reduced to approximately $11.9 million as of June 30, 2007, including accrued interest at the rate of 6% per annum, after applying the escrowed funds associated with our Abbokinase sales through June 30, 2007, if we are unable to secure additional significant sales of Abbokinase to our third party distributors or to refinance the promissory note with Abbott Laboratories. We will use a portion of the net proceeds from this offering to repay the promissory note only if, at the time of such repayment, we anticipate sales of Abbokinase sufficient to replenish our cash resources so as not to affect our planned expenditures under our then-current operating plan. Additionally, a portion of the net proceeds may be used to acquire or invest in complementary businesses, technologies, services or products. We have no current plans, agreements or commitments with respect to any such material acquisition or investment, and we are not currently engaged in any negotiations with respect to any such transaction. Pending such uses, the net proceeds of this offering will be invested in short-term, interest-bearing, investment-grade securities.

 

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings to finance the growth and development of our business. We do not anticipate paying any cash dividends in the foreseeable future.

 

The following table sets forth our capitalization as of March 31, 2007:

 

 

 

The pro forma number of shares to be outstanding immediately after this offering as shown above is based on 7,007,868 shares outstanding as of March 31, 2007 and excludes:

 

 

 

If you invest in our common stock in this offering, the amount you pay per share will be substantially more than the net tangible book value per share of the common stock you purchase.

 

Our actual net tangible book value as of March 31, 2007 was a deficit of approximately $34.9 million, or approximately $(13.38) per share of common stock. Net tangible book value per share represents total tangible assets less total liabilities, divided by the number of shares of common stock outstanding as of March 31, 2007. Our pro forma net tangible book value as of March 31, 2007 was approximately $1.4 million, or approximately $0.20 per share of common stock. Our pro forma net tangible book value gives effect to the conversion of all outstanding shares of preferred stock, valued on our balance sheet at approximately $40.3 million, into 4,401,129 shares of common stock upon the closing of this offering.

 

After giving effect, based on the initial public offering price of $5.00 per share, to (i) the automatic conversion of our outstanding preferred stock into 4,401,129 shares of common stock in connection with the closing of this offering, and (ii) receipt of the net cash proceeds from the sale of 3,000,000 shares of common stock in this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2007 would have been approximately $13.7 million, or $1.37 per share. See “Conversion of Series F Preferred Stock.” This represents an immediate increase in pro forma as adjusted net tangible book value per share of $1.17 to existing stockholders and an immediate dilution of $3.63 per share to new investors purchasing shares of common stock in this offering at the initial offering price.

 

The following table illustrates this dilution on a per share basis:

 

 

If the underwriters exercise their over-allotment option to purchase 450,000 additional shares from us in this offering, our pro forma as adjusted net tangible book value per share will increase to $1.51 per share, representing an immediate increase to existing stockholders of $1.31 per share and an immediate dilution of $3.49 per share to new investors assuming conversion of all shares of our preferred stock. If any shares are issued in connection with outstanding options, you will experience further dilution.

 

The following table summarizes, on the pro forma as adjusted basis described above, as of March 31, 2007, the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid to us by existing stockholders, and to be paid by new investors purchasing shares of common stock for cash in this offering at an initial public offering price of $5.00 per share, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

The number of shares to be outstanding immediately after this offering as shown above is based on 7,007,868 shares outstanding as of March 31, 2007 and excludes:

 

 

If the underwriters’ over-allotment option is exercised in full, the following will occur:

 

 

In connection with the closing of this offering, all of our outstanding preferred stock will convert into common stock. The per share conversion rate of our Series F preferred stock is variable and will be determined by dividing $5.00 by the lesser of (a) $25.00 (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) or (b) 85% of the price per share paid in this offering.

 

The initial public offering price in this offering is $5.00 per share, meaning that our Series F preferred stock will convert into our common stock at a ratio of 1-to-1.176 (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares). Therefore, the holders of the Series F preferred stock will receive a greater number of shares of common stock for each share of Series F preferred stock converted in connection with this offering than they would otherwise have been entitled to receive.

 

Upon completion of this offering, our existing stockholders will continue to have significant influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. Because only some of our stockholders own Series F preferred stock, the initial public offering price in this offering of $5.00 will result in a shift of the relative ownership of our common stock upon completion of this offering among our existing stockholders.

 

You should read the following selected consolidated financial data in conjunction with our consolidated financial statements and the related notes appearing elsewhere in this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have derived the consolidated statements of operations data for the years ended December 31, 2004, 2005 and 2006 and the consolidated balance sheet data at December 31, 2005 and 2006 from our consolidated audited financial statements, which are included elsewhere in this prospectus. We have derived the consolidated statements of operations data for the years ended December 31, 2002 and 2003 and the consolidated balance sheet data as of December 31, 2002, 2003 and 2004 from our audited financial statements, which are not included in this prospectus. The selected consolidated statements of operations data for the three months ended March 31, 2006 and 2007 and the selected consolidated balance sheet data at March 31, 2007 are derived from our unaudited consolidated financial statements which are included elsewhere in this prospectus. Our historical results for any prior period are not necessarily indicative of results to be expected for any future period. (In thousands, except per share data.)

 

 

 

 

 

The following discussion and analysis should be read in conjunction with “Selected Consolidated Financial Information” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and analysis and other parts of the prospectus contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. You should carefully read the “Risk Factors” section of this prospectus to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled “Forward-looking Statements.”

 

Overview

 

We are a biopharmaceutical company developing and commercializing therapies for vascular disorders. Our development efforts are focused on therapies for stroke and other vascular disorders, using our proprietary microbubble technology to treat vascular occlusions, or blood vessel blockages, as well as the resulting ischemia, which is tissue damage caused by a reduced supply of oxygen. Our commercialization efforts are currently focused on our product approved to treat acute massive pulmonary embolism, or blood clots in the lungs.

 

We were organized as an Arizona limited liability company on October 7, 1999, which was our date of inception for accounting purposes. We were subsequently converted to an Arizona corporation on January 12, 2000, and then reincorporated as a Delaware corporation on June 23, 2000. As of June 30, 2007, we had received aggregate net proceeds of approximately $13.8 million from sales of our commercial product Abbokinase to our wholesalers and customers, and we had deposited approximately $4.2 million in escrow as security for the payment of our $15.0 million non-recourse promissory note due in December 2007. From our inception through March 31, 2007, we accumulated a deficit from operations of approximately $65.5 million. We have funded our operations to date primarily through private placements of our preferred and common stock as well as the sale of convertible notes and the receipt of government grants. Through March 31, 2007, we had received net proceeds of approximately $46.8 million from the issuance of shares of our preferred and common stock and convertible notes.

 

Since our inception, we have devoted substantially all of our efforts toward planning, conducting and funding the various stages of development for our product candidates, researching potential new product opportunities based upon our proprietary technologies, and acquiring technology and potential products. We expect our operating losses to increase for at least the next several years due to increasing expenses associated with proposed clinical trials, product development, selling, general and administrative costs and regulatory activities.

 

In September 2005, we acquired the technology and development assets of Abbott Laboratories relating to two recombinant thrombolytic drug candidates. We determined at that time that, since they had not yet received FDA approval and presented no alternative future use, these technologies did not meet established guidelines for technological feasibility sufficiently to be recorded as assets. As a result, the full purchase price consideration of $24.0 million was recorded as acquired in-process research and development expense for the year ended December 31, 2005. In December 2006, we chose not to pursue further development and commercialization of these technologies because we were unable to obtain adequate financing to repay the $15.0 million non-recourse note due December 31, 2006, that we had issued to Abbott Laboratories as partial consideration for the acquisition of these technologies or to pay the costs of such further development and commercialization. Following that decision, Abbott Laboratories indicated its intent to repossess the assets in accordance with its security interest. As a result, we realized a gain of $16.1 million in December 2006 relating to extinguishment of the non-recourse note and accrued interest. We incurred approximately $0.5 million in research and development costs on these products before deciding not to pursue them further.

 

In April 2006, we also acquired from Abbott Laboratories the assets related to Abbokinase, including the remaining inventory of finished product, all regulatory and clinical documentation, validated cell lines, and intellectual property rights, including trade secrets and know-how relating to the manufacture of urokinase using the tissue culture method. Since no employees, equipment, manufacturing facilities or arrangements or sales and marketing organization were included in this transaction, we accounted for it as an acquisition of assets rather than as an acquisition of a business, with a purchase price of $20.0 million. The purchase price has been allocated to the assets acquired based upon the fair value assessments. We commenced selling Abbokinase in October 2006. As of June 30, 2007, we had received aggregate net proceeds of approximately $13.8 million from sales of Abbokinase to our wholesalers and customers, and we had deposited approximately $4.2 million in escrow as security for the payment of our $15.0 million non-recourse note payable to Abbott Laboratories, which will mature on December 31, 2007. At March 31, 2007, our remaining inventory of Abbokinase represented approximately a four-year supply based upon market demand statistics from our wholesalers, but our ability to sell such inventory may be limited by product expiration dates and current stability data. Based on current stability data from the ongoing stability program, as of March 31, 2007, approximately 64% of our vials of Abbokinase that we expect hospitals to purchase will expire between August and October 2007. All of these vials are currently unlabeled and therefore eligible for expiration date extension. The remaining vials of Abbokinase that we expect hospitals to purchase are labeled with expiration dates between December 2008 and August 2009. The next testing point of our ongoing stability program, at which we may obtain data sufficient to extend the expiration dates of our unlabeled inventory, will be completed in the fall of 2007. We will be required to submit this data to the FDA. If the parameters tested are within the specifications previously approved by the FDA, we may then submit a lot release request to the FDA, and upon the FDA’s approval, we may at that time label vials with extended expiration dating to between June and August 2009. We must obtain FDA approval for each lot release of inventory. Inventory is labeled with an expiration date upon approval of a lot release by the FDA. Once labeled, we cannot extend the expiration date of the vials labeled. If we are successful in extending the expiration dates of our unlabeled inventory, we intend to continue the stability program after the fall of 2007 to potentially enable further expiration extensions for future product labeling. Additionally, even if we are successful in extending the product expiration dates, we will need to re-brand the product. We may be unable to sell our existing inventory of Abbokinase before product expiration, and even if we are able to sell the existing inventory the product may be returned prior to use by hospitals and clinics. In order to facilitate obtaining an extension of current expiration dates, we are continuing the stability testing program started by Abbott Laboratories, which has been ongoing for over four years. Based on the testing to date, which has shown that the product changes very little from year to year, we believe it is probable that the stability data will support extension of the inventory expiration dates. As a result, we believe that we will be able to sell this inventory and that we will recover the cost of this inventory. Additionally, if we are successful in extending the product expiration dates, we will need to re-brand the product before selling further inventory.

 

Product Sales, Grant and Other Revenue

 

We have generated only a limited amount of revenue to date, primarily by providing research services for projects funded under various government grants and from Abbokinase sales. We commenced sales of Abbokinase in October 2006 and anticipate that we will generate additional revenue from sales of Abbokinase. However, any such revenue is difficult to predict as to both timing and amount, may not be achieved in any consistent or predictable pattern, and in any case will not be sufficient to prevent us from incurring continued and increasing losses from our development and other activities. Additionally, wholesalers and hospitals may return outdated, short dated or damaged Abbokinase product that is in its original, unopened cartons and received by us prior to 12 months past the expiration date. We have a limited product returns history, therefore we recognize revenue only after inventory has shipped from a wholesaler to a hospital. In April 2007, we sold a total of approximately $9.0 million of Abbokinase, net of discounts and fees, to two of our primary wholesalers. As of June 30, 2007, we had received aggregate net proceeds of approximately $13.8 million from sales of Abbokinase to our wholesalers and customers, and we had deposited approximately $4.2 million into an escrow account as security for repayment of our $15.0 million promissory note due in December 2007. If the escrowed amount were to be applied to the outstanding balance of principal and interest on that note,

the remaining amount due under the note would be approximately $11.9 million as of June 30, 2007. The vials of Abbokinase that we sold have expiration dates ranging from December 2008 to August 2009. We did not request a lot release for or sell any vials of Abbokinase that expire between August and October 2007 because we do not believe the vials would have been sold by the wholesalers and used by hospitals prior to such expiration dates.

 

All product sales recorded relate to sales of Abbokinase in the United States, which we commenced in October 2006. Due to the lack of returns history, we currently account for these product shipments using a deferred revenue recognition model. We do not recognize revenue upon product shipment to a wholesaler but rather, we defer the recognition of revenue until the right of return no longer exists or when the product is sold to the end user hospital as is stipulated by SFAS No. 48, Revenue Recognition When the Right of Return Exists. We record product sales net of chargebacks, distributor fees, discounts paid to wholesalers, and administrative fees paid to Group Purchasing Organizations (GPOs). The allowances are based on historical information and other pertinent data. As of March 31, 2007, we had deferred revenue of approximately $0.6 million. A more detailed discussion of our revenue recognition practices is set forth in Note 2 of the Notes to our Consolidated Financial Statements.

 

Cost of product sales is determined using a weighted-average method and includes the acquisition cost of the inventory as well as additional labeling costs we incur to bring the product to market. Our product pricing is fixed, but could include a variable sales or cash discount depending on the nature of the sale. Our gross margins will be affected by chargebacks, discounts and administrative fees paid to the wholesalers and GPOs.

 

Research and Development Expenses

 

We classify our research and development expenses into four categories of activity, namely, research, development, clinical and regulatory. To date, our research and development efforts have been focused primarily on product candidates from our microbubble technology program. Historically we have not tracked research and development expenses by product candidate. However, in the future we intend to separately track expenses related to activities such as manufacturing and preclinical studies or clinical trials for each of our primary product candidates and products. We expect our research and development expenses to increase with the planned continuation of clinical trials for our SonoLysis product candidates. Clinical development timelines, likelihood of commercialization and associated costs are uncertain and therefore vary widely. We anticipate determining which research and development projects to pursue as well as the level of funding available for each project based on the scientific and clinical results of each product candidate. We currently estimate we will complete the current or imminent stage of development for each primary product candidate as follows:

 

 

At this time, due to the risks inherent in the clinical trial process and the related regulatory process, our development completion dates and costs vary significantly for each product candidate and are very difficult to

estimate. The lengthy process of seeking regulatory approvals and the subsequent compliance with applicable regulations require the expenditure of substantial additional resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals for our product candidates could cause our research and development expenditures to increase and, in turn, have a material adverse effect on our results of operations. We cannot be certain when, if ever, any cash flows from our current product candidates will commence.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of personnel-related expenses and other costs and fees associated with our general corporate activities, such as sales and marketing, administrative support, business development, intellectual property protection, corporate compliance and preparing to become a public reporting company, as well as a portion of our overhead expenses. Our selling expenses have increased and may continue to increase as we expand our infrastructure to support increased commercialization efforts relating to Abbokinase. We also anticipate incurring additional expenses of approximately $1.5 million to $2.0 million per year as a public company following the completion of this offering as a result of additional legal, accounting and corporate governance expenses, including costs associated with tax return preparations, accounting support services, Sarbanes-Oxley compliance expenses, filing annual and quarterly reports with the SEC, directors’ fees, directors’ and officers’ insurance, listing and transfer agent fees, and investor relations expenses.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosed amounts of contingent assets and liabilities and our reported revenue and expenses. Significant management judgment is required to make estimates in relation to clinical trial costs and costs related to public reporting company preparation. We evaluate our estimates, and judgments related to these estimates, on an ongoing basis. We base our estimates of the carrying values of assets and liabilities that are not readily apparent from other sources on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe that the following accounting policies are critical to a full understanding of our reported financial results. Our significant accounting policies are more fully described in Note 2 of our consolidated financial statements.

 

Inventory

 

Inventory is comprised of finished goods and is stated at the lower of cost or market value. We have one commercially available product, marketed as a clot-dissolving, or thrombolytic, urokinase drug called Abbokinase. Abbokinase is FDA approved and marketed for the treatment of acute massive pulmonary embolism. Cost was determined as a result of the purchase price allocation from the acquisition of Abbokinase from Abbott Laboratories in 2006. We estimate that as of March 31, 2007 the vials we expect hospitals to purchase and that are held in inventory either by us or by our wholesalers comprises approximately a four-year supply. We periodically review the composition of inventory in order to identify obsolete, slow-moving or otherwise un-saleable inventory. We will provide a valuation reserve for estimated obsolete or un-saleable inventory in an amount equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. Approximately 64% of our vials of Abbokinase that we expect hospitals to purchase and that are held in inventory either by us or by our wholesalers are not salable after October 2007 based upon their current expiration dates unless the results of an ongoing stability program allows for expiration date extensions. We believe that the expiration dates will be extended. In January 2007, we purchased approximately 1,600 vials of Abbokinase, previously sold by Abbott Laboratories, from one of our wholesale distributors in order to fill immediate market demand for labeled vials while we were waiting for the FDA to approve a lot release and labeling of additional vials in inventory. These vials were placed into inventory that we expect hospitals to purchase.

Clinical Trial Accrued Expenses

 

We record accruals for clinical trial costs associated with clinical research organizations, investigators and other vendors based upon the estimated amount of work completed on each clinical trial. All such costs are charged to research and development expenses based on these estimates. These estimates may or may not match the actual services performed by the organizations as determined by patient enrollment levels and related activities. We monitor patient enrollment levels and related activities to the extent possible through internal reviews, correspondence and discussions with our contract research organization and review of contractual terms. However, if we have incomplete or inaccurate information, we may underestimate or overestimate activity levels associated with various clinical trials at a given point in time. In this event, we could record significant research and development expenses in future periods when the actual level of activities becomes known. To date, we have not experienced material changes in these estimates.

 

Deferred Tax Asset Valuation Allowance

 

Our estimate of the valuation allowance for deferred tax assets requires us to make significant estimates and judgments about our future operating results. Our ability to realize the deferred tax assets depends on our future taxable income as well as limitations on utilization. A deferred tax asset must be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized prior to its expiration. The projections of our operating results on which the establishment of a valuation allowance is based involve significant estimates regarding future demand for our products, competitive conditions, product development efforts, approvals of regulatory agencies and product cost. We have recorded a full valuation allowance on our net deferred tax assets as of December 31, 2005 and 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 net operating loss carry forwards and research and development tax credits.

 

We adopted the Financial Accounting Standards Board’s interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48), effective January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not to be sustained by the taxing authority. The adoption of FIN 48 had no effect on our consolidated financial position or results of operations.

 

Revenue Recognition

 

We provide research services under certain contract and grant agreements, including federal grants from the National Institutes of Health. We recognize revenue for these research services as the services are performed. Revenue from grants is recognized over the contractual period of the related award.

 

Revenue from product sales is recognized pursuant to Staff Bulletin No. 104 (SAB 104), Revenue Recognition in Financial Statements. Accordingly, revenue is recognized when all four of the following criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products has occurred; (iii) the selling price is both fixed and determinable; and (iv) collectibility is reasonably assured. We apply SFAS No. 48, Revenue Recognition When the Right of Return Exists, which among other criteria requires that future returns can be reasonably estimated in order to recognize revenue. The amount of future returns is uncertain due to the lack of returns history data. Due to the uncertainty of returns, we are accounting for these product shipments to wholesale distributors using a deferred revenue recognition model. Under the deferred revenue model, we do not recognize revenue upon product shipment to wholesale distributors; therefore, recognition of revenue is deferred until the product is sold by the wholesale distributor to a hospital or other healthcare provider expected to be the end user.

 

Our customers consist primarily of large pharmaceutical wholesalers who sell directly to hospitals and other healthcare providers. Provisions for product returns and exchanges, sales discounts, chargebacks, managed care and Medicaid rebates and other adjustments are established as a reduction of product sales revenues at the time such revenues are recognized. These deductions from gross revenue are established by us as our best estimate at the time of sale adjusted to reflect known changes in the factors that impact such reserves.

Stock-Based Compensation

 

In the first quarter of 2006, we adopted Statement of Financial Accounting Standards, or SFAS, No. 123R, Share-Based Payment or SFAS 123R, which revises SFAS 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion, or APB, No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires that share-based payment transactions with employees be recognized in the financial statements based on their value and recognized as compensation expense over the requisite service period. Prior to SFAS 123R, we disclosed the pro forma effects of SFAS 123 under the minimum value method. We adopted SFAS 123R effective January 1, 2006, prospectively for new equity awards issued subsequent to December 31, 2005. The adoption of SFAS 123R through December 31, 2006 has resulted in the recognition of additional stock-based compensation expense and a reduction in net income of approximately $955,000 for the 12 months ended December 31, 2006 and $163,000 for the quarter ended March 31, 2007. The impact of adopting SFAS 123R was a decrease in basic and diluted earnings per share of $0.37 and $0.06 for the 12 months ended December 31, 2006 and March 31, 2007, respectively.

 

Under SFAS 123R we calculated the fair value of stock option grants using the Black-Scholes option-pricing model. The weighted average assumptions used in the Black-Scholes model were 7 years for the expected term, 75% for the expected volatility, weighted average risk free rate of 4.90% and 0% dividend yield for the twelve month period ended December 31, 2006. Future expense amounts for any particular quarterly or annual period could be affected by changes in our assumptions or changes in market conditions.

 

The weighted average expected option term for 2006 reflects the application of the simplified method set out in SEC Staff Accounting Bulletin No., or SAB, 107 which was issued in March 2005. The simplified method defines the life as the average of the contractual term of the options and the weighted average vesting period for all option tranches.

 

Estimated volatility for fiscal 2006 also reflects the application of SAB 107 interpretive guidance and, accordingly, incorporates historical volatility of similar public entities.

 

Prior to January 1, 2006, we accounted for employee stock-based compensation in accordance with provisions of APB 25 and FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation — an Interpretation of APB No. 25, and comply with the disclosure provisions of SFAS 123 and related SFAS 148, Accounting for Stock-Based Compensation — Transaction and Disclosure. Under APB 25, compensation expense was based on the difference, if any, on the date of the grant, between the fair value of our stock and the exercise price of the option. We amortize deferred stock-based compensation using the straight-line method over the vesting period.

 

The accounting for and disclosure of employee equity instruments requires judgment by our management on a number of assumptions, including the fair value of the underlying instrument, estimated lives of the outstanding instruments, and the instrument’s volatility. Changes in key assumptions will impact the valuation of such instruments. Because there has been no public market for our stock, our board of directors has determined the fair value of our common stock based on several factors, including, but not limited to, our operating and financial performance and internal valuation analyses considering key terms and rights of the related instruments.

 

Our board of directors estimated the fair value of common stock for options granted during the two-year period prior to the filing of this registration statement, with input from our management, using the market approach and sales to third parties of our common and preferred stock.

 

Results of Operations

 

Quarter Ended March 31, 2006 Compared to 2007

 

Product Sales, Grant and Other Revenue.  Our revenue-producing activities during the first quarter of 2006 and 2007 consisted of providing services under research grants and contracts, and sales of Abbokinase which commenced in October 2006. Our total revenues increased from approximately $0.2 million in the first

quarter of 2006 to $1.2 million in the first quarter of 2007, primarily as a result of our commencement of sales of Abbokinase product which accounted for $1.1 million of our revenue in the first quarter of 2007.

 

Cost of Product Sales.  Cost of product sales was approximately $0.5 million in the first quarter of 2007. There was no cost of product sales for the first quarter of 2006 as we acquired the commercial product in April 2006 and commenced sales in October 2006. The cost of product sales includes the price paid to acquire the asset as well as labeling costs that are directly incurred in bringing the product to market.

 

Research and Development Expenses.  Research and development expenses decreased from approximately $1.7 million to approximately $1.5 million in the first quarter of 2006 and 2007, respectively. This decrease was principally a result of decreased outside contract work performed on grants and pre-clinical studies as well as a decrease in staff and clinical trial expenses.

 

General and Administrative Expenses.  General and administrative expenses decreased from approximately $1.6 million to approximately $1.1 million in the first quarter of 2006 and 2007, respectively. This decrease was principally a result of decreased third party services, mainly consulting and legal.

 

Interest and Other Income.  Interest and other income decreased from approximately $100,000 to approximately $41,000 in the first quarter 2006 and 2007, respectively. This decrease was a result of a lower cash balance throughout the period.

 

Interest Expense.  Interest expense was $0.2 million in both the first quarter of 2006 and 2007 and was due to the interest accrued on a note payable issued in September 2005 and a second note payable issued in April 2006. The note payable issued in 2005, plus interest, was extinguished early in December 2006.

 

Twelve Months Ended December 31, 2005 Compared to 2006

 

Product Sales, Grant and Other Revenue.  Our revenue-producing activities during 2005 and 2006 consisted of providing services under research grants and contracts, and sales of Abbokinase which commenced in October 2006. Our total revenues increased from approximately $0.6 million in 2005 to $1.3 million in 2006, primarily as a result of our commencement of sales of Abbokinase product which accounted for $0.5 million of our revenue in 2006. Our grant and other revenue increased from approximately $0.6 million in 2005 to approximately $0.8 million in 2006, primarily due to the receipt of an additional grant.

 

Cost of Product Sales.  Cost of product sales was approximately $0.2 million in 2006. There was no cost of product sales for the year ending December 31, 2005 as we did not acquire our commercialized product until April 2006 and did not commence product sales until October 2006. The cost of product sales includes the price paid to acquire the asset as well as labeling costs that are directly incurred in bringing the product to market.

 

Research and Development Expenses.  Research and development expenses increased from approximately $3.6 million in 2005 to approximately $8.4 million in 2006. This increase was principally a result of the Company’s continuing transition from a research organization to a clinical development organization, which required the expansion of both clinical and regulatory departments. The main components of increased cost were: approximately $1.7 million in increased compensation associated with increased headcount; approximately $0.9 million in increased expenses for the initiation of a clinical trial in stroke which began in August 2006 as well as other clinical trial activities; approximately $0.3 million in increased preclinical study costs related to our SonoLysis product candidates; $0.1 million in expense for storing our commercial inventory of Abbokinase and related assets and approximately $1.4 million in increased third party service costs and other expenses. Of this total, approximately $0.5 million were costs related to the recombinant thrombolytic drug assets that we decided to relinquish to Abbott Laboratories in December 2006.

 

General and Administrative Expenses.  General and administrative expenses increased from approximately $4.1 million in 2005 to approximately $7.3 million in 2006. This increase was principally a result of our expansion of financing and selling activities, which required additional headcount and third party services. The main components of increased cost were approximately $2.0 million in increased third party service costs, principally legal and accounting expenses related to financing matters, asset acquisitions and matters associated with becoming a public company; approximately $0.7 million in additional compensation

expense to support increased headcount, and stock-based compensation expense including the expense under SFAS 123R; and approximately $0.2 million in third party service costs associated with marketing and sales of Abbokinase.

 

Interest and Other Income.  Interest and other income increased from approximately $0.1 million in 2005 to approximately $0.4 million in 2006, as a result of a higher cash balance throughout the year and higher interest rates.

 

Interest Expense.  Interest expense increased from approximately $0.6 million in 2005 to approximately $1.5 million in 2006, due to the interest accrued on a note payable issued in April 2006 and the payment of a full year of interest in 2006 on a note payable issued in September 2005.

 

Gain on Extinguishment of Debt.  In March 2005, we repurchased a note from a former development partner at a discount. The outstanding principal and accrued interest, totaling approximately $4.3 million, was settled in cash for approximately $0.5 million resulting in a non-recurring gain of approximately $3.8 million. In December 2006, we extinguished a non-recourse debt that had been issued as partial consideration for the acquisition of recombinant thrombolytic drug technologies, resulting in a non-recurring gain of $16.1 million.

 

Year Ended December 31, 2004 Compared to 2005

 

Product Sales, Grant and Other Revenue.  Our revenue-producing activities during 2004 and 2005 consisted solely of providing services under research grants and contracts and did not include any product sales. Revenue was approximately $0.6 million in both 2004 and 2005.

 

Research and Development Expenses.  Research and development expenses increased from approximately $2.5 million in 2004 to approximately $3.6 million in 2005. This increase was principally a result of beginning the transition from a research-focused organization to a clinical development organization, which required the creation of both clinical and regulatory departments. The main components of increased cost were clinical trial costs, consulting, compensation and cost of hiring and increased overhead. Of the total increase, approximately $0.6 million was for the initiation of our pilot study in stroke which began in March 2005; approximately $0.2 million resulted from increased third party service costs; approximately $0.2 million resulted from increased compensation expense to support increased headcount; and approximately $0.5 million resulted from increased overhead, laboratory chemicals and supplies, travel and other expenses. An offset of approximately $0.4 million was due to timing of preclinical and manufacturing expenses.

 

General and Administrative Expenses.  General and administrative expenses increased from approximately $3.2 million in 2004 to approximately $4.1 million in 2005. This increase resulted primarily from the expenditure of approximately $0.6 million in increased compensation expense to support increased headcount; approximately $0.2 million in increased third party service costs, principally legal and accounting expenses related to financing matters and asset acquisitions; and approximately $0.1 million in increased business development and other expenses.

 

Interest and Other Income.  Interest and other income increased from approximately $29,000 in 2004 to approximately $122,000 in 2005, as a result of higher cash balances and higher interest rates.

 

Interest Expense.  Interest expense increased from approximately $0.5 million in 2004 to approximately $0.6 million in 2005, primarily due to the interest on the promissory note issued in September 2005 and the early extinguishment of the note payable to a former development partner in March 2005.

 

Gain on Extinguishment of Debt.  In April 2004, a development partner experienced financial difficulty and began auctioning portions of its investment portfolio. In March 2005, we repurchased our debt from the development partner at a discount. The outstanding principal and accrued interest, totaling approximately $4.3 million, was settled in cash for approximately $0.5 million, resulting in a non-recurring gain of approximately $3.8 million. No other consideration was paid in connection with the repurchase of the debt.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

We have incurred losses since our inception. At March 31, 2007 we had an accumulated deficit of approximately $65.5 million. We have historically financed our operations principally through the private placement of shares of our common and preferred stock and convertible notes, government grants, and, more recently, product sales, which commenced in October 2006. During the years ended December 31, 2004, 2005 and 2006, we received net proceeds of approximately $5.0 million, $17.9 million, $13.0 million, respectively, from the issuance of shares of our common and preferred stock and convertible notes. These amounts do not include the $15.0 million secured non-recourse note and $4.0 million of Series E preferred stock that we issued as partial consideration for an acquisition of recombinant thrombolytic drug technologies in September 2005, or the $15.0 million secured non-recourse note that we issued to acquire Abbokinase and related assets in April 2006.

 

At March 31, 2007, we had approximately $2.7 million in cash and cash equivalents. The exact timing of future sales of Abbokinase will depend on a number of external factors, such as our ability to obtain an extension of the expiration dates for the bulk of our Abbokinase inventory beyond October 2007, our ability to establish additional sales relationships with current customers for that product, inventory levels of the wholesalers that are currently stocking the product, and other competitive and regulatory factors. Based on annualized Intercontinental Marketing Services, or IMS, sales data, we believe the vials of Abbokinase that we acquired and expect hospitals to purchase represent approximately a four-year supply as of March 31, 2007. Based on current stability data as of March 31, 2007, approximately 64% of our vials of Abbokinase that we expect hospitals to purchase will expire between August and October 2007. All of these vials are currently unlabeled and therefore eligible for expiration date extension. The remaining vials of Abbokinase that we expect hospitals to purchase are labeled with expiration dates between December 2008 and August 2009. We are not permitted to sell these vials after expiration. We are continuing the current stability testing program started by Abbott Laboratories, which has been ongoing for over four years. The testing to date has shown that the product changes very little from year to year. However, if the results of the stability testing program are outside the limits established by the FDA, we estimate that approximately 64% of our vials of Abbokinase that we expect hospitals to purchase, or approximately $10.7 million in inventory value out of the total of $16.8 million carried at March 31, 2007, is at risk of being written off. Currently, we believe it is probable that the stability data will support extension of the inventory expiration dates, that we will be able to sell this inventory and that we will recover the cost of this inventory. If the expiration dates of this inventory are extended we will need to re-brand the remaining inventory because our license to use the Abbokinase trademark does not extend beyond the current inventory expiration dates.

 

We allocated the $20.0 million purchase price for Abbokinase as follows:

 

 

The anticipated carrying value of the inventory does not include a reserve for excess inventory. We anticipate that hospitals will not purchase approximately 28% of the total number of vials of Abbokinase inventory that we acquired from Abbott Laboratories, and, consequently, these vials are carried with zero book value assigned, in effect creating a valuation allowance. We anticipate that these vials will not be sold for a variety of reasons, including expiration of vials that are labeled with a fixed expiration date prior to sale, potential future competition from new products entering the market, and use of some of the vials for our own research purposes. Of the remaining vials of Abbokinase that we expect hospitals to purchase and that are held in inventory either by us or by our wholesalers, we estimate that at March 31, 2007, approximately 36% of these vials, or approximately $6.1 million in inventory value, is available for sale without risk of being written off and approximately 64% of these vials, or approximately $10.7 million in inventory value, is available for sale but may be at risk of being written off. We estimate that the remaining vials with zero inventory value will not be sold. The estimated useful life of the Abbokinase trade name is one year, and the estimated useful

life of the other identifiable intangibles is four years from May 2006. While we intend to investigate the requirements for us to manufacture Abbokinase, we currently have no plans to manufacture Abbokinase in the near term. Not manufacturing Abbokinase reduces the period of benefit for the intangible assets to the Company to four years from May 2006, which is directly related to the years of inventory supply.

 

In April 2007, we sold a total of approximately $9.0 million of Abbokinase, net of discounts and fees, to two of our primary wholesalers. As of June 30, 2007, we had received aggregate net proceeds of approximately $13.8 million from sales of Abbokinase to our wholesalers and customers, of which approximately $4.2 million has been placed into an escrow account as security for repayment of our $15.0 million promissory note due in December 2007. These vials have expiration dates ranging from December 2008 to August 2009. We expect that these orders will reduce Abbokinase demand in the near term. In addition, we are required to place 50% of the proceeds from all future sales of Abbokinase into the escrow account as required by our escrow agreement with Abbott Laboratories until the $15.0 million note is repaid. If the escrowed amount were to be applied to the outstanding balance of principal and interest on that note, the remaining amount due under the note would be approximately $11.9 million as of June 30, 2007.

 

Cash Flows

 

Net Cash Used in Operating Activities.  Net cash used in operating activities was approximately $4.1 million, $11.2 million and $16.0 million for the years ended December 31, 2004, 2005 and 2006, respectively, and $2.1 million and $1.2 million for the quarters ended March 31, 2006 and 2007, respectively. The net cash used in each of these periods primarily reflects the net loss for those periods, offset in part by depreciation, amortization of warrant expense and debt discount, and non-cash gain on extinguishment of debt, stock-based compensation and changes in working capital.

 

Net Cash Used in Investing Activities.  Net cash used in investing activities was approximately $0.1 million, $0.6 million and $1.3 million for the years ended December 31, 2004, 2005 and 2006, respectively, and $0.2 million for each of the quarters ended March 31, 2006 and 2007. Net cash used in investing activities primarily reflects purchases of property and equipment, including manufacturing, information technology, laboratory and office equipment.

 

Net Cash Provided by Financing Activities.  Net cash provided by financing activities was approximately $5.0 million, $18.7 million and $13.0 million for the years ended December 31, 2004, 2005 and 2006, respectively, and $0.2 million and $0.1 million for the quarters ended March 31, 2006 and 2007, respectively. Net cash provided by financing activities was primarily attributable to the issuance of common stock totaling approximately $4.4 million net of issuance costs and the issuance of convertible notes totaling approximately $0.6 million in 2004; the issuance of common stock totaling approximately $17.9 million net of issuance costs and the issuance and repayment of secured promissory notes totaling approximately $4.0 million in 2005; and the issuance of Series F preferred stock totaling approximately $13.0 million net of issuance costs in 2006.

 

Our cash flows for the remainder of 2007 and beyond will depend on a variety of factors, including the anticipated revenue and funding requirements discussed above, as well as the timing of completion of the offering contemplated by this prospectus and our use of offering proceeds as described under “Use of Proceeds” elsewhere in this prospectus. Despite our commencement of sales of our Abbokinase product in October 2006, we expect our net cash outflows to continue increasing as we expand our research and development, manufacturing, regulatory and sales and marketing activities. In addition, for the remainder of 2007, our agreement with Abbott Laboratories calls for 50% of the cash receipts from Abbokinase sales after we have received a total of $5.0 million in cash receipts from the sales of Abbokinase, which we surpassed in April 2007, to be held in an escrow account. The balance of the escrow account is to be used to pay down the $15.0 million note that is due to Abbott Laboratories on December 31, 2007.

 

Funding Requirements

 

Based on our existing liquid assets, including the proceeds of our sales of Abbokinase, we believe we have sufficient capital to fund anticipated levels of operations, and pay our debt obligations as they come due, until August 2007, assuming we make no additional sales of Abbokinase to wholesalers or direct to customers.

We have received an audit report from our independent registered public accounting firm containing an explanatory paragraph stating that our historical recurring losses and net capital deficiency raise substantial doubt about our ability to continue as a going concern. We believe that the completion of this offering will enable us to continue as a going concern until at least September 2008, assuming sales of Abbokinase are sufficient to repay the $15.0 million note due December 31, 2007. In April 2007 we sold approximately $9.0 million of Abbokinase, net of discounts and fees, to two of our primary wholesalers. As of June 30, 2007, we had received aggregate net proceeds of approximately $13.8 million from sales of Abbokinase to our wholesalers and customers, of which approximately $4.2 million has been placed into an escrow account as security for repayment of our $15.0 million non-recourse promissory note due in December 2007. These vials have expiration dates ranging from December 2008 to August 2009. If the escrowed amount were to be applied to the outstanding balance of principal and interest on that note, the remaining amount due under the note would be approximately $11.9 million as of June 30, 2007. If we are unable to complete this offering, we will need to obtain alternative financing and modify our operational plan to continue as a going concern.

 

Our funding requirements will, however, depend on numerous factors, including:

 

 

Until we can consistently generate significant cash from our sales of Abbokinase and other operations, we expect to continue to fund our operations primarily from the proceeds of offerings of our equity securities, including this offering, from revenue or payments received under collaborations, grants, and possibly from debt financing. However, we may not be successful in obtaining additional collaboration agreements or grants, or in receiving milestone or royalty payments under any such agreements. If we do not generate sufficient revenue from collaborations and grants, we may require additional funding sooner than we currently anticipate. We cannot be sure that our existing cash and cash equivalents will be adequate, or that additional financing will be available when needed, or that, if available, financing will be obtained on terms favorable to us or our stockholders. Having insufficient funds may require us to delay, scale back or eliminate some or all of our research or development programs or to relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. Failure to obtain adequate financing may also adversely affect our ability to operate as a going concern. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders will likely result. If we raise additional funds by incurring debt obligations, the terms of the debt will likely involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.

 

Contractual Obligations

 

The following table summarizes our outstanding contractual obligations as of March 31, 2007:

 

 

We enter into agreements with clinical sites and contract research organizations, or CROs, that conduct our clinical trials. We make payments to these sites and CROs based upon the number of patients enrolled. For the years ended December 31, 2004, 2005 and 2006, we incurred clinical trial expenses of approximately $0.3 million, $0.9 million and $1.6 million, respectively. Due to the variability associated with these agreements, we are unable to estimate with certainty the future patient enrollment costs we will incur and therefore have excluded these costs from the above table. We do, however, anticipate that these costs will increase significantly in future periods as a result of our initiation of multiple clinical trials for ischemic stroke.

 

We also have contractual payment obligations that are contingent on future events.

 

 

Quantitative and Qualitative Disclosure About Market Risk

 

Our exposure to market risk is confined to our cash and cash equivalents. We invest in high-quality financial instruments, primarily money market funds, which we believe are subject to limited credit risk. We currently do not hedge interest rate exposure. The effective duration of our portfolio is less than three months and no security has an effective duration in excess of three months. Due to the short-term nature of our investments, we do not believe that we have any material exposure to interest rate risk arising from our investments.

 

Most of our transactions are conducted in U.S. dollars, although we do have some development and clinical trial agreements with vendors located outside the U.S. Transactions under certain of these agreements are conducted in U.S. dollars while others occur in the local currency. If the exchange rate were to change by ten percent, we do not believe that it would have a material impact on our results of operations or cash flows.

 

Off-Balance Sheet Transactions

 

At December 31, 2004, 2005 and 2006, and for the quarters ended March 31, 2006 and 2007, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

Recently Issued Accounting Pronouncements

 

In September 2006, the FASB issued SAFS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements, but may change current practice for some entities. SFAS 157 is effective for fiscal years beginning after December 15, 2006. The adoption of SFAS No. 157 is not expected to have a material effect on the Company’s financial position or results of operations.

 

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin, or SAB, No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 requires registrants to quantify misstatements using both the balance sheet and income statement approaches and to evaluate whether either approach results in quantifying an error that is material based on relevant quantitative and qualitative factors. The guidance is effective for the first fiscal period ending after November 15, 2006. The Company is currently evaluating the impact of adopting SAB No. 108 on its financial position, results of operations and cash flows.

 

We are a biopharmaceutical company developing and commercializing therapies for vascular disorders. Our research and development efforts are focused on therapies for stroke and other vascular disorders, using our proprietary microbubble technology to treat vascular occlusions, or blood vessel blockages, as well as the resulting ischemia, which is tissue damage caused by a reduced supply of oxygen. Our commercialization efforts are currently focused on our product approved by the U.S. Food and Drug Administration, or FDA, for the treatment of acute massive pulmonary embolism, or blood clots in the lungs.

 

Over eight million people in the U.S. are afflicted each year with complications related to blood clots. Approximately 700,000 adults in the U.S., or one every 45 seconds, are afflicted with, and 150,000 die as a result of, some form of stroke each year. Stroke is currently the third leading cause of death, and the leading cause of disability, in the United States. Approximately three million Americans are currently disabled from stroke. The American Stroke Association estimates that approximately $62.7 billion will be spent in the U.S. in 2007 for stroke-related medical costs and disability.

 

The vast majority of strokes, approximately 87% according to the American Stroke Association, are ischemic strokes, meaning that they are caused by blood clots, while the remainder are the more deadly hemorrhagic strokes caused by bleeding in the brain. Currently available treatment options for ischemic stroke are subject to significant therapeutic limitations. For example, the most widely used treatment for ischemic stroke is a clot-dissolving, or thrombolytic, drug that can be administered only during a narrow time window and poses a risk of bleeding, resulting in 6% or less of ischemic stroke patients receiving such treatment. To facilitate increased administration of stroke therapies, in 2005 the Centers for Medicare and Medicaid Services, or CMS, responded to requests by the American Stroke Association and related groups for higher reimbursement amounts for ischemic stroke patients treated with a thrombolytic drug by approximately doubling the amount of reimbursement provided for such treatment to $11,578 per patient.

 

In addition to the brain and the lungs, blood clots can block blood flow and cause damage to other tissues in the body such as the heart, in the case of coronary arterial disease, and the legs and other extremities, in the case of peripheral vascular disease. We believe our development and research stage products may address significant unmet medical needs not only for stroke but also for clot-induced damage in tissues other than the brain.

 

Our Commercial and Development Stage Products

 

The following table summarizes the status of our commercial product and development stage product candidates:

 

 

SonoLysis Program.  Our SonoLysis program is focused on the development of two product candidates that involve the administration of our proprietary MRX-801 microbubbles and ultrasound, with or without a thrombolytic drug to break up blood clots and restore blood flow to oxygen deprived tissues. SonoLysis+tPA therapy involves the administration of MRX-801 microbubbles, ultrasound and the thrombolytic drug alteplase, or tPA. Alteplase is the formulation of tPA that is approved for treatment of acute ischemic stroke. Alteplase is manufactured by Genentech Inc. and is widely available under the trade name Activase. SonoLysis therapy includes the administration of MRX-801 microbubbles and ultrasound without a thrombolytic drug. Our MRX-801 microbubbles are a proprietary formulation of a lipid shell encapsulating an inert biocompatible gas. We believe the sub-micron size of our MRX-801 microbubbles allows them to penetrate a blood clot, so that when ultrasound is applied their expansion and contraction, or cavitation, can break the clot into very small

particles. We believe that these product candidates have the potential to treat a broad variety of vascular disorders associated with blood clots.

 

Our initial therapeutic focus for our SonoLysis program is ischemic stroke. Although Abbokinase is a thrombolytic drug that we own, it is approved only for the treatment of acute massive pulmonary embolism. We chose to use tPA as the thrombolytic drug in our SonoLysis+tPA therapy because it is the only FDA approved drug for the treatment of ischemic stroke. The FDA has restricted tPA’s use to patients who are able to begin treatment within three hours of onset of ischemic stroke symptoms and who do not have certain risk factors for bleeding, such as recent surgery or taking medications that prevent clotting. According to Datamonitor, approximately 23% of ischemic stroke patients arrive at a hospital within three hours of onset of symptoms. However, due to the three hour window for treatment and other limitations, only 1.6% to 2.7% of patients with ischemic stroke in community hospitals, and only 4.1% to 6.3% in academic hospitals or specialized stroke centers are treated with a thrombolytic therapy. For these patients who are eligible for treatment with tPA, we believe SonoLysis+tPA therapy may have advantages over tPA alone, including more rapid and complete restoration of blood flow. In addition, we believe our SonoLysis therapy may have an improved bleeding and safety profile over tPA and therefore may represent a new treatment option for ischemic stroke patients ineligible for treatment with tPA by extending the treatment window beyond three hours from onset of symptoms, as well as broadening treatment availability to patients for whom tPA is contraindicated due to risk of bleeding. Our two SonoLysis product candidates being developed as potential treatments for ischemic stroke are further described below:

 

 

Abbokinase.  Our commercially available urokinase product, which we market as Abbokinase, is a thrombolytic drug. Urokinase is a natural human protein primarily produced in the kidneys that stimulates the body’s natural clot-dissolving processes. Abbokinase is FDA approved and marketed for the treatment of acute massive pulmonary embolism. Abbokinase has been administered to over four million patients, and we estimate that approximately 400 acute care hospitals in the U.S. include Abbokinase on their pharmacy formulary today. We acquired approximately 153,000 vials of Abbokinase from Abbott Laboratories in April 2006, and began selling Abbokinase in October 2006. At the time of our acquisition of Abbokinase, we estimated that hospitals would purchase, and we would thereby recognize revenue for, approximately 111,000 vials, or approximately 72% of the total vials we acquired, which we believe represented approximately a four-year supply of inventory. We also estimated that hospitals would not purchase approximately 42,000 vials, or approximately 28% of the vials we acquired, due to expiration of labeled vials, potential future competition from new products entering the market, and our own use of some of the vials for research purposes. As of March 31, 2007, we have recognized revenue on approximately 5,800 vials of Abbokinase sold by our wholesalers to hospitals. Data we have obtained from our wholesalers, as well as our current sales data, lead us to believe that we will sell approximately $12 to $14 million of Abbokinase to hospitals per year between 2007 and 2011. Our sales and marketing staff continue to detail the product to physicians and support the product in the marketplace. We believe Abbokinase sales will provide us with near-term revenue and an opportunity to form relationships with vascular physicians and acute care institutions that regularly administer blood clot therapies. As of March 31, 2007, approximately 64% of our Abbokinase vials that we expect hospitals to purchase are unlabeled and will no longer be saleable after October 2007 based on their current expiration dates. In order to facilitate obtaining an extension of these expiration dates, we are continuing the stability testing program started by Abbott Laboratories, which has been ongoing for over four years. Based on the testing to date, which has shown that the product changes very little from year to year, we believe it is probable that the stability data will support extension of the inventory expiration dates. The next testing point of our ongoing stability program at which we may obtain data sufficient to extend the expiration dates of our unlabeled inventory will be completed in the fall of 2007. If the parameters tested are within the specifications previously approved by the FDA, we may then label vials at that time with extended expiration dating to between June and August 2009. We must obtain FDA approval for each lot release of inventory. Inventory is labeled with an expiration date upon approval of a lot release by the FDA. Once labeled, we cannot extend the expiration date of the vials labeled. If we are successful in extending the expiration dates of our unlabeled inventory, we intend to continue the stability program after the fall of 2007 to potentially enable further expiration extensions for future product labeling. In connection with our Abbokinase acquisition, we issued a $15.0 million non-recourse promissory note that matures in December 2007 and bears interest at the rate of 6% per annum. If we are unable to satisfy this debt obligation when due, Abbott Laboratories will have the right to reclaim our remaining inventory of Abbokinase, along with a portion of the cash we have received

from our sales of Abbokinase. In April 2007 we sold approximately $9.0 million of Abbokinase, net of discounts and fees, to two of our primary wholesalers. As of June 30, 2007, we had received aggregate net proceeds of approximately $13.8 million from sales of Abbokinase to our wholesalers and customers, of which approximately $4.2 million has been placed into an escrow account as security for repayment of our $15.0 million non-recourse promissory note due in December 2007. These vials have expiration dates ranging from December 2008 to August 2009. If the escrowed amount were to be applied to the outstanding balance of principal and accrued interest on that note, the remaining balance due under the note would be approximately $11.9 million as of June 30, 2007. Although we acquired cell lines from Abbott Laboratories that could be used to manufacture urokinase, we do not currently intend to undertake any efforts to manufacture urokinase in the near term. We are evaluating the market opportunity for urokinase, as well as the cost, complexity, time and expertise required to manufacture urokinase.

 

Our Research Stage Product Candidates

 

The following table summarizes the status of our research stage product candidates:

 

 

Additional SonoLysis Opportunities.  We believe SonoLysis therapy may be suitable for administration for ischemic stroke in an ambulance before arriving at a hospital because it does not involve use of a thrombolytic drug and its associated risk of bleeding. To pursue an ambulance-based ischemic stroke treatment, we would be required to show either that hemorrhage can be ruled out in an ambulance setting, or that SonoLysis therapy has no detrimental effect on a hemorrhagic stroke. Additionally, we believe that the ability of our SonoLysis+tPA therapy to reduce the time required to dissolve a blood clot could make this therapy suitable for use in treating a broad variety of vascular disorders beyond ischemic stroke. For example, we believe SonoLysis+tPA therapy could potentially enable more rapid treatment of recently formed acute clots, such as those that cause myocardial infarction, or heart attack. We also believe SonoLysis+tPA therapy has the potential to treat more established sub-acute and chronic clots, such as those in peripheral vascular indications that cannot be effectively treated with thrombolytic therapy alone. We have used microbubbles and ultrasound with a thrombolytic drug both to conduct preclinical animal studies with academic collaborators to treat myocardial infarction, as well as to conduct clinical proof of concept trials to treat patients with occluded dialysis grafts, peripheral artery occlusive disease and deep vein thrombosis. In many countries, we believe that various risk factors for formation of blood clots such as high blood pressure, obesity, diabetes, aging population, and limited mobility caused by injury, illness or simply long distance air travel are increasing, resulting in a growing unmet medical that we believe our SonoLysis product candidates could address and help reduce the need for angioplasty, stents and vascular surgery.

 

Other Research Stage Opportunities.  We are exploring a number of potential future product development opportunities based on our microbubble technology, including:

 

 

Our Business Strategy

 

Our goal is to become the leading provider of therapies for stroke and other vascular disorders by developing and marketing products to treat occlusions as well as the resulting ischemia. The key elements of our business strategy are to:

 

 

 

Industry Background

 

The formation of a blood clot is a natural process by which blood thickens and coagulates into a mass of blood cells, platelets and strands of fibrin. Thrombosis occurs when a blood clot, or thrombus, begins to block a blood vessel. Formation of a clot is the body’s primary mechanism for obstructing blood flow and curtailing bleeding from wounds or other injuries to blood vessels. Blood clots can be caused by a variety of factors other than injury or trauma, such as the rupture of vulnerable plaque in a vessel. Blood clots can also arise in connection with surgical and other medical procedures, such as catheter-based administration of dialysis or other treatments, which can lead to clotting around the site of an incision or within a penetrated blood vessel. An embolism occurs if all or part of a blood clot breaks away and lodges in another part of the body. When a blood clot blocks normal blood flow within the body, it can have a variety of undesirable effects, such as causing pain and swelling, ischemia or tissue damage, stroke, or even death.

 

Over eight million people in the U.S. are afflicted each year with complications related to blood clots. Our business is currently focused primarily on two segments of the thrombosis market in which safe and rapid removal of blood clots is essential for patient care, namely ischemic stroke and acute massive pulmonary embolism.

 

Ischemic Stroke

 

Approximately 700,000 adults in the U.S., or one every 45 seconds, are afflicted with, and 150,000 die as a result of, some form of stroke each year. Stroke is currently the third leading cause of death, and the leading cause of disability, in the United States. Approximately three million Americans are currently disabled from stroke. The American Stroke Association estimates that approximately $62.7 billion will be spent in the U.S. in 2007 for stroke related medical costs and disability.

 

The vast majority of strokes, approximately 87% according to the American Stroke Association, are ischemic strokes, meaning that they are caused by blood clots, while the remainder are hemorrhagic strokes, or caused by bleeding in the brain, and are more deadly. However, available treatment options for ischemic stroke are subject to significant therapeutic limitations. For example, the most widely used treatment for

ischemic stroke is alteplase, or tPA, a drug that can be administered only during a narrow time window and poses a risk of bleeding, resulting in 6% or less of ischemic stroke patients receiving such treatment. In 2005, in response to requests by the American Stroke Association and related groups for higher reimbursement amounts for ischemic stroke patients treated with a thrombolytic drug, the Centers for Medicare and Medicaid Services, or CMS, approximately doubled the amount of reimbursement provided for such treatment to $11,578 per patient.

 

When blood clots block arteries that supply blood to the brain, they reduce the oxygen supply to brain tissues, a condition known as cerebral ischemia which can gradually degrade the oxygen-deprived tissues and result in long-term impairment of brain functions. More than 600,000 Americans have an ischemic stroke each year. Approximately 80% of U.S. ischemic stroke patients reach an emergency room within 24 hours after the onset of stroke symptoms, according to Datamonitor; but by contrast, only about 23% of U.S. ischemic stroke patients reach an emergency room within the FDA-mandated three-hour time window for treatment with the currently approved thrombolytic drug, tPA. Due to this three-hour treatment window and other limitations, according to Datamonitor only 1.6% to 2.7% of patients with ischemic stroke in community hospitals, and only 4.1% to 6.3% in academic hospitals or specialized stroke centers, are treated with thrombolytic therapy.

 

Acute Massive Pulmonary Embolism

 

According to the National Institutes of Health, approximately 600,000 people in the U.S. every year experience a blood clot that lodges in the lungs, known as a pulmonary embolism. A portion of these are classified as acute massive pulmonary emboli, meaning that they involve obstruction of blood flow to a lobe or multiple segments of the lungs. Acute massive pulmonary emboli, which result in nearly 60,000 deaths in the U.S. annually, must be treated quickly, as most of these deaths occur within 30 to 60 minutes after the onset of symptoms.

 

Existing Blood Clot Therapies and Their Limitations

 

Various different treatments currently exist for the prevention and treatment of blood clots. Aspirin and other anti-platelets as well as heparin and other anticoagulants are commonly used to prevent or reduce the incidence of blood clots, but have no effect in eliminating such blood clots once they have formed. We focus on the treatment of blood clots once they have formed. Currently available therapeutic approaches for dissolving or otherwise eradicating blood clots before they cause serious medical consequences or death fall into two categories: clot-dissolving drugs, or thrombolytics, and mechanical devices and procedures.

 

Thrombolytic Drugs

 

Thrombolytic drugs dissolve blood clots by breaking up fibrin, the protein that provides the structural scaffold of blood clots. The most widely used thrombolytic drug today is a form of tissue plasminogen activator, commonly referred to as tPA. tPA is marketed in several different formulations that are approved for a variety of specific vascular disorders, such as: alteplase for acute ischemic stroke, acute massive pulmonary embolism, central venous catheter clearance and acute myocardial infarction; and reteplase and tenecteplase for acute myocardial infarction. Other thrombolytic agents include urokinase, or Abbokinase, which is approved for treatment of acute massive pulmonary embolism; and streptokinase, which is approved for treatment of acute massive pulmonary embolism, acute myocardial infarction and deep vein thrombosis. Worldwide annual sales of thrombolytic drugs are approximately $500 million.

 

Thrombolytic drugs involve a variety of risks and potential side effects that can limit their usefulness:

 

 

 

Mechanical Devices and Procedures

 

There are several mechanical means for removing or destroying blood clots. Thrombectomy, or surgical clot removal, is used to treat patients with occluded dialysis grafts and some clots in the peripheral vascular system as well as in acute massive pulmonary embolism. These procedures are invasive and entail delays, costs and risks that accompany any major surgery. Although these procedures are less suitable for removing blood clots from the brain, there are devices approved for these cranial surgical procedures.

 

In addition, there are some mechanical devices that can be introduced through a catheter-based delivery system to mechanically break up a blood clot, or to ensnare and retract a clot through the vascular system and out of the body. These mechanical devices are generally not found outside of major medical centers, as they require a catheter laboratory and skilled personnel to administer the therapy. While they do not cause the same bleeding risk as thrombolytic drugs, these mechanical interventions pose some risk of damaging other tissues during treatment, as well as a risk of breaking off a piece of the clot that can itself become the cause of a stroke or embolism in some other part of the body.

 

Our Products and Product Candidates

 

We are currently pursuing two product candidates to treat vascular disorders: our SonoLysis+tPA therapy is in the clinical development phase as a treatment for ischemic stroke and our SonoLysis therapy without a thrombolytic drug is in the preclinical development phase as a potential treatment for ischemic stroke. In addition, we are currently selling Abbokinase, which is approved for the treatment of acute massive pulmonary embolism.

 

SonoLysis Microbubble Technology

 

Prior to the founding of our company and while employed by ImaRx Pharmaceutical Corp., members of our scientific team invented the microbubble technology that became Definity, a microbubble product that has been administered safely as a diagnostic ultrasound contrast agent since it received regulatory approval in 2001. Definity is marketed by Bristol-Myers Squibb and has been approved by the FDA for diagnostic ultrasound contrast applications in cardiology. We have an agreement with Bristol-Myers Squibb pursuant to which they agreed that they may only sell Definity to the non-targeted, diagnostic ultrasound imaging contrast agent market, and we agreed not to sell our products in the same market. Therefore, we do not believe Definity is a competitor with our product candidates. Our proprietary MRX-801 microbubbles are similar in composition to Definity microbubbles, which we believe may improve the prospects for acceptance of our SonoLysis therapy by physicians, regulators, health care providers and third-party payors. However, we have designed our MRX-801 microbubbles with a proprietary formulation of a lipid shell and an inert biocompatible gas for use as a therapeutic agent that results in approximately three times more microbubbles per unit volume than Definity. We believe the sub-micron size of our MRX-801 microbubbles allows them to

penetrate and disperse within a blood clot, so that their expansion and contraction, or cavitation, can break the clot into very small particles, which we believe reduces the risk that an embolism may occur downstream from the original blood clot. In addition, we have developed a proprietary MRX-801 microbubbles manufacturing process that we believe enables us to reliably and cost-effectively create sterile and stable submicron-sized bubbles from a suspension of lipid nanoparticles. We believe our SonoLysis therapy can be used with or without a thrombolytic drug to treat ischemic stroke and other vascular disorders.

 

SonoLysis+tPA Therapy

 

Our most advanced development program, SonoLysis+tPA therapy, involves the administration of our proprietary MRX-801 microbubbles, ultrasound and tPA as a potential treatment for ischemic stroke. To administer our SonoLysis+tPA therapy, MRX-801 microbubbles and tPA are injected intravenously into the bloodstream. The MRX-801 microbubbles are distributed naturally throughout the body and are carried to the site of the blood clot. The ultrasound is administered to the site of the blood clot, and the energy from the ultrasound causes the MRX-801 microbubbles to expand and contract vigorously, or cavitate. We believe this cavitation both mechanically breaks up the blood clot and helps the administered tPA permeate the clot to facilitate clot dissolving activity. The gas released by the MRX-801 microbubbles is then cleared from the body by exhaling, and the lipid shell is metabolized like other fats in the body. We believe that this therapeutic approach incorporates two complementary mechanisms of action, mechanical and enzymatic, that can reduce the time required to dissolve a blood clot and help ensure more rapid and complete restoration of blood flow to at risk brain tissues in patients with ischemic stroke.

 

An independent academic investigator has conducted a clinical trial to evaluate the effects of administering diagnostic microbubbles (not our MRX-801 microbubbles) on the speed and degree of cerebral artery recanalization in combination with ultrasound and tPA. That clinical trial involved 111 patients with acute ischemic stroke who presented within three hours after onset of symptoms. Of the patients in the clinical trial, 38 patients were treated with microbubbles and ultrasound after administration of tPA. The results of the clinical trial indicated that the rate of complete recanalization after two hours in the patients who received microbubbles, ultrasound and tPA was significantly higher, at 54.5%, than a combination of the 40.8% rate in patients who received tPA and ultrasound only, and the 23.9% rate in patients who received tPA alone. These differences were statistically significant, with a p-value of 0.038. A p-value measures the likelihood that a difference between the investigational and control groups is due to random chance. A p-value of less than or equal to 0.05 means the chance that the difference is due to random chance is less than 5.0%, and is a commonly accepted threshold for denoting a meaningful difference between investigational and control groups. Since this clinical trial did not involve our MRX-801 microbubbles, the results of any clinical trials using our proprietary microbubbles may differ from these results.

 

This data from an independent investigator provided proof of concept support for the Phase I/II clinical trial that we recently initiated using our MRX-801 microbubbles and ultrasound in combination with tPA. This is a Phase I/II dose-escalation trial designed to expand upon the prior work of the academic investigators. We initiated this trial in January 2007, and intend to enroll a total of 72 patients in medical centers in the United States and Europe. Patients will be enrolled in four successive cohorts, or groups. Patients randomized to the treatment arm will receive an increasing dose of our MRX-801 microbubbles and the standard dose of tPA. A Data and Safety Monitoring Board will review the data from each cohort before granting approval to enroll patients in the next successive cohort utilizing the next higher dose of MRX-801 microbubbles. We anticipate enrollment for this trial will be completed in the first half of 2008 and intend to initiate a Phase II study following completion of the ongoing Phase I/II study.

 

We believe that the synergistic combination of the mechanical action of our proprietary MRX-801 microbubbles and ultrasound, together with the enzymatic activity of tPA, will reduce the time required to dissolve a blood clot, enable the clot to be dissolved more completely and restore blood flow more quickly to at risk brain tissues in patients with ischemic stroke, all without increasing the risk of bleeding associated with tPA. We believe that accelerated restoration of blood flow could improve outcomes for ischemic stroke patients who are currently eligible to receive thrombolytic therapy. We estimate that if approved by the FDA over 90,000 ischemic stroke patients in the U.S. could be eligible for SonoLysis+tPA therapy annually.

 

SonoLysis Therapy

 

Our SonoLysis therapy involves administration of our MRX-801 microbubbles with ultrasound, but without the external administration of a thrombolytic drug. To administer our SonoLysis therapy, MRX-801 microbubbles are injected intravenously into the bloodstream, disperse naturally throughout the body and are carried to the site of the blood clot. Ultrasound is then administered to the site of the blood clot, and the energy from the ultrasound causes the MRX-801 microbubbles to expand and contract vigorously, or cavitate. We believe this cavitation both mechanically breaks up the blood clot and helps to enhance the body’s natural clot dissolving processes. The gas released by the MRX-801 microbubbles is then cleared from the body by exhaling, and the lipid shell is processed like other fats in the body.

 

We believe SonoLysis therapy represents a new approach to the treatment of ischemic stroke and since it does not involve use of a thrombolytic drug and its associated risk of bleeding, SonoLysis therapy may offer several advantages over other treatments for ischemic stroke, including an extended treatment window, rapid initiation of treatment, and availability for use in patients for whom thrombolytic drugs cannot be used due to risk of bleeding. Recent studies have shown that nearly 25% of ischemic stroke victims still have at-risk but viable brain tissue as long as 24 hours after onset of stroke symptoms. Because SonoLysis therapy does not involve use of an externally administered thrombolytic drug or the associated risk of bleeding, we believe SonoLysis therapy may offer a treatment option for ischemic stroke patients who arrive at a hospital after tPA’s approved three hour window. In addition, we believe SonoLysis therapy also could offer a treatment option to ischemic stroke patients who arrive at a hospital within the three hour window but are ineligible for tPA due to recent surgery, taking certain medications or other factors that increase bleeding risk. This unique treatment approach could enable us to offer an effective therapy to ischemic stroke patients with fewer risks and restrictions, thus potentially affording a treatment option to more patients than can be treated with tPA today.

 

We have conducted preclinical animal studies to evaluate the safety of our MRX-801 microbubbles as well as to evaluate the ability of our SonoLysis therapy to break up blood clots. We enrolled 24 patients in a proof of concept clinical trial that applied ultrasound to Definity microbubbles as a means for breaking up blood clots in thrombosed dialysis grafts, eleven of which also received tPA. This clinical trial demonstrated improved restoration of blood flow, based on imaging results only. There was one adverse event reported, involving moderate bleeding and oozing at an unspecified site, that may have been related to the treatment. No other adverse events were determined to be related to the treatment. We have not yet conducted any clinical trials using our proprietary MRX-801 microbubbles with ultrasound to treat blood clot indications without a thrombolytic drug. We intend to conduct additional preclinical studies of SonoLysis therapy through the first half of 2008 and initiate a Phase II study to treat patients with ischemic stroke following completion of the SonoLysis+tPA therapy Phase I/II clinical trial. Because of the preclinical data package as well as our ongoing Phase I/II clinical trial evaluating SonoLysis+tPA therapy in patients with ischemic stroke, we believe no Phase I study will be required prior to initiating the Phase II study for SonoLysis therapy.

 

We believe that our SonoLysis therapy may be used in the treatment of ischemic stroke patients in a variety of settings where tPA is not approved, such as in a hospital but when treatment is initiated after the three hour window, in an ambulance prior to arrival at a hospital, or in a hospital when treatment is initiated within the three hour window but the patient is ineligible for tPA due to recent surgery, taking certain medications or other factors that increase bleeding risk. We estimate that if approved by the FDA over 200,000 ischemic stroke patients in the U.S. could be eligible for SonoLysis therapy annually.

 

Abbokinase

 

We are currently selling Abbokinase, which is approved for the treatment of acute massive pulmonary embolism. Abbokinase is a tissue culture form of urokinase, a natural human protein primarily produced in the kidneys that stimulates the body’s natural clot-dissolving processes. Urokinase breaks up blood clots by converting plasminogen, an inactive ingredient in human blood, into the enzyme plasmin, which in turn degrades the fibrin protein strands that are essential to the structural integrity of a clot. Abbokinase is approved by the FDA for the treatment of acute massive pulmonary embolism. Abbokinase has been

administered to over four million patients since its approval, and we estimate that approximately 400 acute care hospitals in the U.S. include Abbokinase on their pharmacy formulary today. We acquired Abbokinase from Abbott Laboratories in April 2006, and commenced selling Abbokinase in October 2006. We believe that Abbokinase sales will provide us with a source of near-term revenue as well as an opportunity to form relationships with vascular physicians and acute care institutions that regularly administer blood clot therapies.

 

Prior to 1998, Abbokinase was approved by the FDA for acute massive pulmonary embolism, catheter occlusion clearance and acute myocardial infarction. The product was withdrawn from the market in 1998 due to concerns over the manufacturing process, including failure to screen donors and test materials for infectious disease, and inadequate storage and handling of materials to prevent contamination with infectious agents. After revising its manufacturing processes to the FDA’s satisfaction, in 2002 Abbott Laboratories obtained FDA approval to resume commercial sales of Abbokinase for use in treating acute massive pulmonary embolism. In 2004, however, Abbott Laboratories halted its Abbokinase sales and marketing effort when it decided to divest its thrombolytic drug assets. The FDA’s approval of Abbokinase was not withdrawn or suspended in 2004 and has not been withdrawn or suspended at any time since then. Based upon generally recognized industry sales measures, known as IMS data, sales of Abbokinase to end user customers since the product’s relaunch were approximately $4 million, $27 million, $33 million, and $19 million in 2002, 2003, 2004, and 2005, respectively, and based upon data provided by our wholesalers, sales in 2006 were approximately $12 million. In our acquisition of Abbokinase in April 2006, we purchased substantially the entire inventory of Abbokinase in existence, except for that previously sold to and held by wholesalers and end user customers, and we believe we are currently the only company selling the product into the distribution network.

 

We acquired Abbokinase and related assets from Abbott Laboratories, including the remaining inventory of finished product, all regulatory and clinical documentation, validated cell lines, and intellectual property rights, including trade secrets and know-how relating to the manufacture of urokinase using the tissue culture method. We have limited patent rights associated with Abbokinase, and our right to use the Abbokinase trademark does not extend to additional product that we might manufacture in the future. In our acquisition of Abbokinase, we received approximately 153,000 vials of Abbokinase. At the time of our acquisition we estimated that hospitals would purchase, and we would thereby recognize revenue for, approximately 111,000 vials of Abbokinase, or approximately 72% of the total vials we acquired, which we believe represented approximately a four-year supply of inventory. We also estimated that hospitals would not purchase approximately 42,000 vials, or approximately 28% of the vials we acquired. Approximately $16.7 million of the $20.0 million purchase price for Abbokinase was allocated to the vials we expect hospitals to purchase. Of our vials of Abbokinase held in inventory either by us or by our wholesalers as of March 31, 2007, approximately 64% of the vials we expect hospitals to purchase, or approximately $10.7 million in inventory value, are unlabeled and will expire by October 2007 based on current stability data. The remaining approximately 36% of the vials we expect hospitals to purchase, or approximately $6.1 million in inventory value, are labeled and will expire at various times between December 2008 and August 2009. We are continuing the ongoing stability testing program initiated by Abbott Laboratories to support a request for extension of the expiration dates of this inventory. The testing to date has shown that the product changes very little from year to year. Currently, we believe it is probable that the stability data will support extension of the inventory expiration dates. We anticipate that the next testing point of our ongoing stability program, at which we may obtain data sufficient to extend the expiration dates of our unlabeled inventory, will be completed in the fall of 2007. We will be required to submit this data to the FDA. If the parameters tested are within the specifications previously approved by the FDA, we may then at that time or any subsequent time submit a lot release request to the FDA, and upon approval, label vials with extended expiration dating to between June and August 2009. If the expiration dates of this inventory are extended, we will need to re-brand the remaining inventory because our license to use the Abbokinase trademark does not extend beyond the current inventory expiration dates. In May 2007 we obtained FDA approval of a new product trade name and labeling reflecting the new trade name.

 

To sell Abbokinase for the treatment of acute massive pulmonary embolism, we are required to continue an ongoing 200-patient immunogenicity clinical trial that commenced in 2003. The purpose of this trial is to

evaluate the rate and severity of immune, or allergic, response in patients who are treated with Abbokinase. Since the original approval of Abbokinase, the FDA has changed its requirements for approval of biologic agents and now requires the sponsor to demonstrate in clinical trials that the biologic product does not induce an immune response in the patients treated. This is now one of the routine safety evaluations for all biologic agents. Abbokinase is a biologic agent and, although its original approval pre-dated this requirement, the FDA required this study to be conducted as a condition of re-approval in 2004. We can market and sell our Abbokinase inventory while this trial progresses, subject to existing expiration dates.

 

Additional SonoLysis Product Opportunities

 

It is well known that brain tissue degrades quickly when blood flow is cut off or restricted. We believe that SonoLysis therapy may be administered rapidly via intravenous infusion, perhaps even in an ambulance setting, to quickly restore blood flow, to minimize tissue damage, and to improve the odds for full or improved patient recovery. To pursue an ambulance-based ischemic stroke treatment, we would be required to show either that hemorrhage can be ruled out in an ambulance setting, or that SonoLysis therapy has no detrimental effect on a hemorrhagic stroke.

 

We believe that the ability of our SonoLysis+tPA therapy to reduce the time required to dissolve a blood clot could make this therapy suitable for use in treating a broad variety of vascular disorders beyond ischemic stroke. For example, we believe SonoLysis+tPA therapy could potentially enable the more rapid treatment of recently formed acute clots, such as those that cause myocardial infarction, or heart attack. We also believe this therapy has the potential as a treatment for more established sub-acute and chronic clots, such as those in peripheral vascular indications that cannot be effectively treated with thrombolytic therapy alone.

 

Current treatments for blood clots in the heart have limitations. While more than one thrombolytic drug is approved to treat myocardial infarction, these drugs take time to dissolve the clot. Thus, the standard of care for most interventional cardiologists is angioplasty, or using a balloon-tipped catheter to reopen the blood vessel more quickly. A stent is often used as well to help keep the vessel propped open. However, catheter-based therapy requires time to access a specialized catheter lab facility, ensure the availability of highly trained physicians, prepare the patient, and thread the catheter to the site of the clot. We believe that the synergistic combination of the mechanical action of SonoLysis therapy, together with the enzymatic activity of a thrombolytic drug, may reduce the time required to dissolve an acute blood clot in the heart, enable the clot to be dissolved more completely and restore blood flow more quickly to at risk heart tissues, all delivered rapidly in an emergency room setting. We believe our SonoLysis+tPA therapy may restore blood flow in certain patients before they reach the catheter lab, and thus could help reduce the need for more invasive and costly angioplasty and stents, and the associated complications.

 

Similarly, current treatments for blood clots in the peripheral vascular system also have limitations. Mechanical thrombectomy and vascular surgery is the standard of care for acute cases of peripheral artery occlusive disease and deep vein thrombosis, but some physicians use thrombolytic drugs off label in this area as well. Mechanical thrombectomy and vascular surgery are invasive procedures that take place in a costly operating room setting and have the potential for complications. Thrombolytic therapy requires the placement of a catheter in a catheter lab followed by thrombolytic drug infusion, often over several hours or over night, in an intensive care or physician clinic setting. We believe that the synergistic combination of the mechanical action of SonoLysis therapy, together with the enzymatic activity of a thrombolytic drug, may reduce the time required to dissolve large sub-acute and chronic blood clots often found in the legs with fewer complications than mechanical thrombectomy, vascular surgery or thrombolytic therapy alone. We believe that the speed of our SonoLysis+tPA therapy could enable more patients to be treated in a lower cost, outpatient physician clinic setting. The recent introduction of various intravascular ultrasound devices could be used as a component in this therapy.

 

We have used microbubbles and ultrasound with a thrombolytic drug both to conduct preclinical animal studies with academic collaborators to treat myocardial infarction, as well as to conduct clinical proof of concept trials to treat patients with occluded dialysis grafts, peripheral artery occlusive disease and deep vein thrombosis. However, we have not conducted any clinical trials in this area with our MRX-801 microbubbles.

Currently we intend to focus our SonoLysis development efforts in ischemic stroke, but we intend to further explore the application of our SonoLysis technology in cardiology and peripheral vascular disorders in the future when additional resources are available or with a development partner.

 

In many countries worldwide, the risk factors for formation of blood clots are increasing, such as high blood pressure, obesity, diabetes, aging population, and limited mobility caused by injury, illness or simply long distance air travel. We believe there is a growing unmet medical need for improved treatments for blood clot related vascular disorders that our SonoLysis product candidates could address and help reduce the need for angioplasty, stents and vascular surgery.

 

Research Stage Opportunities

 

We are exploring a number of potential future product development opportunities based on our microbubble technology. These opportunities include pursuing applications in oxygen delivery, targeted SonoLysis, drug delivery as well as researching new microbubbles product opportunities.

 

Oxygen Delivery

 

We are exploring a number of potential future product development opportunities based on our microbubble technology. These opportunities include our NanO₂ technology as well as researching new microbubble product opportunities.

 

Our lead research stage program is our NanO₂ program that utilizes our proprietary MRX-804 microbubbles for carrying oxygen to parts of the body afflicted with a reduced supply of blood or oxygen. NanO₂ does not involve the application of ultrasound. NanO₂ is administered intravenously as an emulsion. We believe upon entering the bloodstream it converts from a liquid to a gas forming microbubbles with a high oxygen carrying capacity. We believe that NanO₂ can be used to treat a broad variety of disorders in which reduced blood flow results in oxygen-deprived tissues, such as injuries that involve significant blood loss, ischemic stroke and heart attack. Because MRX-804 microbubbles are smaller than red blood cells, we believe NanO₂ will be able to penetrate clots and other blockages of blood vessels and deliver oxygen to tissues beyond the blockage. In addition, we believe that NanO₂ has the capacity to carry more oxygen per unit volume than red blood cells, potentially enabling a modest-sized dose to keep tissues alive until normal blood flow can be restored. Unlike human blood, we anticipate that NanO₂ may be able to be stored at room temperature, making it mobile for potential battlefield or ambulance environments. We are conducting additional research on the application of our MRX-804 microbubbles in ischemic stroke and conducting preclinical animal studies of NanO₂ to treat hemorrhagic shock.

 

We have not yet conducted any clinical trials using our proprietary MRX-804 microbubbles to treat oxygen-deprived tissues, but we are planning and conducting various preclinical studies using our MRX-804 microbubbles. We are working with academic collaborators who have conducted a variety of preclinical animal studies evaluating MRX-804 microbubbles as an oxygen delivery agent. One group of collaborators has conducted preclinical studies testing the ability of MRX-804 microbubbles to prevent hemorrhagic shock in pigs with significant blood loss. All five of the pigs treated with NanO₂ in this study survived, while four of the five control pigs died. These same collaborators have also recently received a $700,000 grant from the U.S. Army to conduct an additional preclinical animal study in rats and pigs evaluating NanO₂ as a potential treatment for hemorrhagic shock. ImaRx is participating in this preclinical study and the outcome will impact the type and timing of future clinical trials, if any, for NanO₂.

 

In addition to ischemic stroke and hemorrhagic shock, we believe that NanO₂ can be used to treat other ischemic conditions such as myocardial infarction. We also believe that our proprietary MRX-804 microbubbles may have applications beyond oxygen delivery. Because NanO₂ has the ability to absorb and transport many different gases, it also has the potential to help remove unwanted gases from tissues, such as anesthesia gases that cause post-operative cognitive disorder, carbon monoxide which can build to toxic or even fatal levels, or nitrogen that can cause decompression sickness. Our academic collaborators have performed preclinical animal studies demonstrating the feasibility of using NanO₂ to absorb and transport gases other than oxygen, such as nitrogen.

 

Other Research Stage Opportunities

 

Targeted SonoLysis Therapy.  Our research team has developed MRX-802, our next generation SonoLysis microbubbles with targeting technology that causes the microbubbles to bind to blood clots. We believe that our MRX-802 targeted microbubbles will have a greater ability to break-up blood clots than non-targeted microbubbles when combined with ultrasound. We have demonstrated in laboratory experiments that our MRX-802 targeted microbubbles improved binding to blood clots. We have conducted preclinical animal studies with academic collaborators evaluating MRX-802 targeted microbubbles and ultrasound to treat various clot disorders, including myocardial infarction. To further the research on our next generation SonoLysis technology, we have received and are near the mid-point of our work on an approximately $1.2 million grant from the National Institutes of Health, or NIH, to study MRX-802 targeted microbubbles to treat vascular clots.

 

Targeted Drug Delivery.  In addition to our targeted SonoLysis technology, our research team has demonstrated the ability to add a drug payload to our microbubbles or use a liquid instead of a gas core to create sub-micron sized targeted droplets for drug delivery. When administered, the drug is encapsulated in the microbubbles or droplets and inactive. Ultrasound can then be used to cause the microbubbles or droplets to deliver their payload at a desired location in a patient’s body. Our proprietary targeted drug delivery microbubbles, MRX-803 comprises a gas core and an oil layer containing a drug payload surrounded by a lipid shell. We have received an approximately $1.0 million subcontract and are near the mid-point of our work under that subcontract to study our proprietary MRX-803 targeted drug delivery microbubbles to treat a variety of tumors. We believe this technology has the potential for broad applications, including delivering drugs to dissolve blood clots or arterial plaque as well as treat a variety of cancer types.

 

Future Microbubbles Research.  Our proprietary microbubbles are biocompatible spheres of varying size and composition that we believe could be adapted, by changing their composition and size, for a variety of additional applications. These applications could include the delivery of genetic materials to targeted sites in the body, destroying cancer cells with high intensity focused ultrasound, or HIFU, as well as identifying and treating vulnerable plaque. In addition, we believe that the competitive position of our microbubbles-based therapies will be aided by our broad portfolio of issued patents, patent applications and exclusive licenses relating to the use of microbubbles and ultrasound for a wide variety of applications.

 

Manufacturing

 

We currently do not have, and do not intend to establish, our own manufacturing facilities. Instead, we plan to engage third parties to manufacture our products and product candidates, which we believe will allow us to focus on our core research and product development programs. We also believe that the use of experienced manufacturers will give us access to facilities and processes that are qualified under the FDA’s current Good Manufacturing Practices, or cGMP, greater manufacturing specialization and expertise, higher levels of flexibility and responsiveness and faster delivery of products than we might achieve through in-house manufacturing. Specialized manufacturers are often used in the biopharmaceutical industry because they relieve product developers from the infrastructure required to support compliance with applicable cGMP requirements, and other rules and regulations of foreign regulatory authorities.

 

Our contract manufacturers will be subject to unannounced inspections by the FDA and corresponding foreign and state agencies to ensure strict compliance with cGMP and other applicable governmental quality control and record-keeping regulations. In addition, transfer of ownership of products could trigger a manufacturing inspection requirement from the FDA. We do not have control over and cannot ensure third-party manufacturers’ compliance with these regulations and standards. If one of our manufacturers fails to maintain compliance, the production of our products or product candidates could be interrupted, which could result in substantial delays, additional costs and lost sales.

 

We have contracted with a third party to produce small quantities of our MRX-801 microbubbles for clinical research purposes. We manufacture MRX-804 internally in small quantities for research and preclinical purposes. Neither we nor any other third party currently manufactures Abbokinase. While we intend to investigate the requirements for us to manufacture Abbokinase, we currently have no plans to

manufacture Abbokinase in the near term. In order to manufacture Abbokinase, we would need to have our manufacturing process validated by the FDA and would likely be required to conduct additional preclinical studies, and possibly additional clinical trials, to demonstrate its comparability, safety and efficacy. The manufacturing process for Abbokinase involves a roller bottle production method that is used infrequently today, is available from a very limited number of manufacturers worldwide, and may be difficult to qualify for necessary regulatory approvals.

 

Sales and Marketing

 

We commenced selling Abbokinase in the U.S. in October 2006. Our internal sales and marketing staff, currently consisting of three individuals, manages our relationships with third-party distribution partners and institutional Abbokinase customers, and oversees our related direct and indirect advertising and promotional activities. We intend to focus our sales and marketing activities on servicing the existing demand for Abbokinase through existing distribution channels, and we believe that our current staffing will be sufficient to meet these needs.

 

For the marketing and sale of potential future products in the U.S., we intend to gradually expand our U.S. sales force and broaden our domestic sales and marketing efforts to the community of vascular physicians and acute care institutions that we believe will be most critical to acceptance and widespread adoption of our products. Outside of the U.S., we intend to rely primarily on distribution partners. We may also enter into strategic relationships with pharmaceutical and other companies for the marketing and distribution of some of our products, and may rely on third parties for advertising and promotion of our products, particularly for markets outside the U.S. We intend to have our distribution partners manage any third-party logistics.

 

Competition

 

The market for therapies to treat vascular disorders associated with blood clots is highly competitive. Numerous companies either offer or are developing competing treatments for ischemic stroke and acute massive pulmonary embolism. Many of these competitors have significantly greater financial resources and expertise in development and regulatory matters than we do, as well as more established products, distribution and reimbursement. We expect that our competitors will also continue to develop new or improved treatments for the vascular disorders we are targeting.

 

To become accepted as treatments for ischemic stroke or acute massive pulmonary embolism, we believe competing therapies must offer a combination of efficacy, safety, rapid effect, ease of administration, approved window of administration and cost-effectiveness. While we believe that our products and product candidates will offer advantages over many of the currently available competing therapies, our business could be negatively impacted if our competitors’ present or future offerings are more effective, safer or less expensive than ours, or more readily accepted by regulators, health care providers or third-party payors.

 

There are two principal groups of competitors offering treatments to break up or remove blood clots: thrombolytic drug companies, and vendors of mechanical thrombectomy or similar devices.

 

Thrombolytic Drug Competitors

 

The U.S. market for thrombolytic drugs is dominated by Genentech, Inc., which manufactures tPA, the most widely used thrombolytic drug. We are not a significant competitor in the sale of thrombolytic drugs, since we recently acquired our only approved product, Abbokinase, which is approved by the FDA only for treatment of acute massive pulmonary embolism. Genentech’s tPA in various formulations is currently the only thrombolytic drug that has been approved by the FDA for treatment of ischemic stroke, and is also approved for acute massive pulmonary embolism, as well as catheter occlusion clearance and myocardial infarction indications. We are aware that other thrombolytic drugs are also under development, such as desmoteplase, which is a recombinant form of a derivative of vampire bat saliva being developed by PAION AG, and ancrod, which is an enzyme derived from Malaysian pit viper venom being developed by Neurobiological Technologies, Inc., both of which are currently in separate Phase III clinical trials for treatment of ischemic stroke. Other companies also offer or are developing thrombolytic drugs for treatment of blood clots

associated with myocardial infarction and peripheral vascular occlusions, but since we view thrombolytic drugs as complementary to our SonoLysis therapy, we do not consider those product offerings or programs to be competitive with our current business strategy.

 

Device Competitors

 

We believe that the primary device-based treatment for ischemic stroke clots is the Mechanical Embolus Removal in Cerebral Ischemia retrieval system or the MERCI system, which is an intravascular catheter-based therapy marketed by Concentric Medical, Inc. This device is used to engage the clot and retract it through the catheter and out of the body. Other devices are also approved and marketed for treating blood clots associated with peripheral vascular and coronary indications and with dialysis access grafts, such as the Fogarty Catheter by Edwards Lifesciences, formerly a division of Baxter International, AngioJet by Possis Medical, Inc., Micro-Infusion Catheter by EKOS Corp., and Resolution Endovascular System by OmniSonics Medical Technologies, Inc. A variety of companies also offer catheter-delivery systems for thrombolytic drugs or other drugs used in the treatment of blood clots, but we do not consider these devices to be directly competitive with our current business strategy.

 

We are unaware of any other companies that are developing bubble technologies for therapeutic use in vascular disorders.

 

Material Contracts

 

Following is a summary of our material contracts, other than contracts entered into in the ordinary course of business, to which we are a party:

 

April 2006 Agreements with Abbott Laboratories

 

In April 2006, we acquired from Abbott Laboratories the assets related to Abbokinase, including the remaining inventory of finished product, all regulatory and clinical documentation, validated cell lines, and intellectual property rights, including trade secrets and know-how relating to the manufacture of urokinase using the tissue culture method, for consideration consisting of $5.0 million in cash and a 6% non-recourse promissory note for $15.0 million that matures on December 31, 2007. The note is secured by the acquired inventories and related assets and an escrow of 50% of proceeds from our sales of such inventories in excess of $5.0 million, up to a maximum escrow of $15.0 million. As of June 30, 2007, we had received aggregate net proceeds of approximately $13.8 million from the sale of a portion of our Abbokinase inventory, and we had escrowed approximately $4.2 million of the proceeds from sales of Abbokinase as of June 30, 2007. As part of this arrangement we entered into a trademark license agreement with Abbott Laboratories in which it granted to us an exclusive, non-transferable license, without any sublicense rights, to use the Abbokinase trademark. We must adhere to certain quality control standards when marketing and selling the Abbokinase inventory under the trademark. This trademark license automatically terminates on the earlier to occur of the completion of our sale of the acquired Abbokinase inventory or the expiration dates that were applicable to our Abbokinase inventory as of the date it was transferred to us. Abbott Laboratories is also entitled to terminate the license if we are in material breach of the agreement and fail to cure such breach within 15 days notice, or if we commit a non-material breach of the agreement and fail to cure it within 30 days.

 

License Agreement with Bristol-Myers Squibb Medical Imaging, Inc.

 

We are party to an exclusive, worldwide, royalty-free license agreement with Bristol-Myers Squibb Medical Imaging, Inc. (as successor to DuPont Contrast Imaging, Inc.) dated October 7, 1999 for the use of intellectual property related to targeted and tissue-specific diagnostic ultrasound products, outside the field of contrast enhancement of diagnostic ultrasound imaging. The intellectual property covered by this agreement addresses microbubble compositions, methods of use and manufacturing processes that encompass most of our development and research stage product candidates. Under the agreement, to the extent we develop any products or technology in the area of thrombus imaging or sonothrombolysis, which is the use of ultrasound to break up blood clots, we must first offer Bristol-Myers the right to negotiate an exclusive license for such

product or technology for development and commercialization for a period of 90 days before offering it to any third party for license. This license is indefinite in duration and contains no express termination provisions. On September 1, 2005, Bristol-Myers executed a letter waiving their right of first negotiation in our current MRX-801 microbubbles, and that we have satisfied all of our obligations under the license agreement with respect to our MRX-801 microbubbles, as they existed on that date. This acknowledgement encompasses our proprietary MRX-801 microbubbles together with ultrasound, with or without a thrombolytic drug, currently under development.

 

License Agreement with UNEMED Corporation

 

On October 10, 2003, UNEMED Corporation granted us an exclusive, worldwide license, with sublicense rights, to intellectual property and patents relating to the use of microbubbles together with ultrasound for the treatment of thrombosis. The intellectual property covered by this agreement addresses microbubble compositions and methods for treating thrombosis that likely encompass our SonoLysis therapy and SonoLysis+tPA therapy product candidates. We are obligated to pay UNEMED a royalty of 2% on any future net sales of products or processes which utilize the licensed technology, of which there have been no sales to date. We are also obligated to pay license maintenance fees in amounts from $3,000 to $7,000 annually for the life of the agreement. These fees are creditable against any royalty payments owed by us to UNEMED in the applicable calendar year. The license agreement will terminate contemporaneously with the expiration of the licensed patents, or on October 17, 2015. We may terminate the agreement, in our sole discretion, upon 90 days written notice for any reason. UNEMED may terminate the agreement for cause upon either 45 days or 90 days written notice, depending on the cause for termination, or at any time if we fail to meet certain milestones. Upon termination of the license, we would likely be required to change our SonoLysis therapy product development plans.

 

License Agreement with Dr. med. Reinhard Schlief

 

On January 4, 2005, Dr. med. Reinhard Schlief granted us an exclusive, worldwide license, with the right to sublicense, to intellectual property and patents relating to methods of destroying cells by applying ultrasound to them in the presence of microbubbles. This intellectual property may encompass our SonoLysis therapy and SonoLysis+tPA therapy product candidates. As consideration for this license, we reimbursed Dr. Schlief for certain past out-of-pocket costs, such as maintenance fees and patent transfer fees, and also granted Dr. Schlief a five-year warrant to purchase up to 4,000 shares of our common stock at an exercise price of $15.00 per share. We are obligated to pay Dr. Schlief a royalty of 2% of net sales revenue derived from the sale of products that utilize the licensed technology. The license agreement will terminate contemporaneously with the expiration of the licensed patents, or on January 10, 2012. We may terminate the license, with or without cause, upon 60 days written notice and Dr. Schlief may terminate the agreement, with cause, 60 days after notice of the default is provided if the default has not been cured. Upon termination or expiration of the license, our plans for developing our MRX-801 microbubbles would likely not change.

 

License Agreement with University of Arkansas

 

On February 14, 2006, the University of Arkansas granted us an exclusive, worldwide license, with the right to sublicense, intellectual property and patents relating to the use of a specific ultrasound device to be used in conjunction with bubbles, a thrombolytic drug, or a combination of bubbles and a thrombolytic drug to break up blood clots. This intellectual property may encompass our SonoLysis therapy and SonoLysis+tPA therapy product candidates. To maintain this license we must meet certain product development milestones. We are obligated to pay the University of Arkansas a one-time fee of $25,000 within 30 days after the first commercial sale of a product incorporating the licensed technology, and varying royalties depending on the amount of net revenue derived from the sale of products using the licensed technology, subject to minimum annual royalties of $5,000 per year commencing February 10, 2007, increasing to $7,000 per year on February 10, 2009, and each year thereafter. The maximum aggregate royalty payable under this license is $20.0 million. We are also obligated to pay a one-time success fee of $250,000 in the first year that net revenue derived from the sale of products using the licensed technology exceeds $10.0 million. The license agreement will terminate contemporaneously with the expiration of the licensed patents, or on September 3,

2024. In addition, we may terminate this license at any time upon 90 days written notice to the University of Arkansas and the University may terminate the agreement for cause upon 90 days written notice. Upon termination or expiration of the license, our plans for developing our MRX-801 microbubbles would likely not change.

 

Patents and Proprietary Rights

 

Our success depends in part on our ability to develop a competitive advantage over potential competitors for the use of bubbles and ultrasound for treatment of blood clots and vascular diseases in various parts of the body. Our ability to obtain intellectual property that protects our MRX-801 microbubbles and ultrasound treatment in the presence or absence of drugs will be important to our success. Our strategy is to protect our proprietary positions by, among other things, filing U.S. and foreign patent applications related to our technology, inventions and improvements that are directed to the development of our business and our competitive advantages. Our strategy also includes developing know-how and trade secrets, and licensing technology related to bubbles and ultrasound from third parties. As of May 31, 2007 we owned 57 issued U.S. patents, 30 U.S. pending patent applications, 41 foreign patents and 72 international or foreign patent applications. In addition, as of May 31, 2007, we have licensed patents from third parties that grant us rights to 86 U.S. patents, at least five U.S. patent applications, and their respective international and foreign patent and patent application counterparts.

 

The U.S. patents that we own cover certain applications related to bubble compositions and methods of making and using such bubbles with ultrasound for the treatment of blood clots. Patents that cover our core technology expire between 2009 and 2024.

 

We have several pending patent claims, including allowed claims that have not yet issued, that cover additional elements of our bubble technology. For example, we have pending claims directed to the following aspects of bubble technology:

 

 

We plan to file additional patent applications on inventions that we believe are patentable and important to our business and intend to aggressively pursue and defend patent protection on our proprietary technologies.

 

Our ability to operate without infringing the intellectual property rights of others and to prevent others from infringing our intellectual property rights will also be important to our success. To this end, we have reviewed all patents owned by third parties of which we are aware that are related to bubble technology and gas filled vesicles, in the presence or absence of ultrasound, and thrombolysis using gas filled vesicles, and believe that our current products do not infringe any valid claims of the third party patents that we have analyzed. There are a large number of patents directed to therapies for blood clots, and there may be other patents or pending patent applications of which we are currently unaware that may impair our ability to operate. We are currently not aware of any third parties infringing our issued claims.

 

In July 2003 we received a notice from a third party who owns a patent relating to the administration of ultrasound to break up blood clots indicating that we may need a license to its patent if we intend to administer our therapies according to the methods claimed in its patent.

 

When appropriate, we actively seek protection for our products, technologies, know-how and proprietary information by licensing intellectual property from third parties. We have obtained rights relating to our product candidates and future development programs from third parties as appropriate.

 

Government Regulation

 

We are subject to extensive regulation by the FDA and comparable regulatory agencies in state, local and foreign jurisdictions in connection with the development, manufacture and commercialization of our product candidates.

 

Categories of Regulation

 

In the U.S., our marketed product and product candidates are subject to regulation as drugs, biologics, which are drugs derived from a living source, or medical devices. In some cases, our product candidates may fall into multiple categories and require regulatory approval in more than one category. For example, Abbokinase is a biologic, but it is subject to regulation as a drug. Our SonoLysis therapy and our SonoLysis+tPA therapy involve a combination of drug and device, which would require approval as a combination product before we could market either of these therapies. Our proprietary MRX-801 microbubbles, which are injected into the bloodstream, have been designated as a drug by the FDA. Outside the U.S., our product candidates are also subject to regulation as drugs, biologics or medical devices, and must meet similar regulatory hurdles as in the U.S. to gain approval and reach the market.

 

Drug and Biologics Regulation

 

The process required by the FDA before drug or biologic product candidates may be marketed in the U.S. generally involves the following:

 

 

Prior to commencing the first human clinical trial, we must submit an IND application to the FDA. The IND application automatically becomes effective 30 days after receipt by the FDA, unless the FDA within such period raises concerns or questions about the preclinical drug testing or nonclinical safety evaluation in animals, or the design or conduct of the first proposed clinical trial. In such a case, the IND application sponsor and the FDA must resolve any outstanding concerns before the clinical trial may begin. A separate submission must be made for each successive clinical trial conducted during product development. The FDA must not object to the submission before each clinical trial may start and continue. Further, an independent Institutional Review Board, or IRB, for investigations in human subjects within each medical center in which an investigator wishes to participate in the clinical trial must review and approve the preclinical drug testing and nonclinical safety evaluation and efficacy in animals or prior human clinical trials as well as the design and goals of the proposed clinical trial before the clinical trial commences at that center. Regulatory authorities, an IRB or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

 

For purposes of NDA or BLA approval, human clinical trials are typically conducted in three sequential phases that may overlap. Moreover, the objectives of each phase may be split or combined, leading to

Phase I/II and other similar trials that may be used to satisfy the requirements of otherwise separate clinical trials as follows:

 

Phase I:  Phase I clinical trials are usually conducted in normal, healthy volunteers or a limited patient population to evaluate the product candidate for safety, dosage tolerance, absorption, metabolism, distribution and excretion.

 

Phase II:  Phase II clinical trials are conducted in a limited patient population, the population for which the indication applies, to further identify and measure possible adverse effects or other safety risks, to determine the efficacy of the product candidate for the specific targeted disease and to determine dosage tolerance and optimal dosage. Multiple Phase II clinical trials may be conducted to obtain information prior to beginning Phase III clinical trials.

 

Phase III:  When Phase II clinical trials demonstrate that a dose range of the product candidate appears to be effective and has an acceptable safety profile, Phase III clinical trials are undertaken in a larger patient population to confirm clinical efficacy and to further evaluate safety at multiple, and often internationally located, clinical trial sites.

 

Phase II or III studies of drugs are generally required to be listed in a public clinical trials registry, such as www.clinicaltrials.gov. The FDA may require, or companies may pursue, additional clinical trials after a product is approved. These so-called Phase IV clinical studies may be made a condition to be satisfied after a drug receives approval. The results of Phase IV clinical studies may confirm the effectiveness of a product and may provide important safety information to augment the FDA’s voluntary adverse drug reaction reporting system.

 

The results of product development, preclinical testing and clinical trials are submitted to the FDA as part of an NDA or BLA. The submission of an NDA or BLA must be accompanied by a user fee of several hundred thousand dollars, unless a particular waiver applies. The FDA may deny approval of an NDA or BLA if the applicable regulatory criteria are not satisfied or for any other reason, or it may require additional clinical data or an additional Phase III clinical trial. Satisfaction of FDA requirements or similar requirements of state, local and foreign regulatory agencies typically takes several years.

 

Any products manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including record-keeping requirements and reporting of adverse experiences with the products. The FDA also closely regulates the marketing and promotion of commercialized products. A company is permitted to make only those claims relating to safety and efficacy that are approved by the FDA. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties.

 

Medical Device Regulation

 

The process required by the FDA before medical devices may be marketed in the U.S. pursuant to clearance or approval generally involves FDA review of the following:

 

 

Unless an exemption applies, each medical device distributed commercially in the U.S. requires either prior 510(k) clearance or pre-market approval, referred to as a PMA, from the FDA. The FDA classifies medical devices into one of three classes. Class I devices are subject only to general controls, such as establishment registration and device listing, labeling, medical devices reporting, and prohibitions against adulteration and misbranding. Class II medical devices require prior 510(k) clearance before they may be commercially marketed in the U.S. The FDA will clear marketing of a medical device through the 510(k) process if the FDA is satisfied that the new product has been demonstrated to have the same intended use and

is substantially equivalent to another legally marketed device, including a 510(k)-cleared, or predicate, device, and otherwise meets the FDA’s requirements. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a predicate device, are placed in Class III, generally requiring submission of a PMA supported by clinical trial data. Currently we have one shaker device that is a Class I device that we use to form our MRX-801 microbubbles.

 

To obtain 510(k) clearance, a notification must be submitted to the FDA demonstrating that a proposed device is substantially equivalent to a predicate device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of a PMA application. The FDA’s 510(k) clearance process generally takes from three to 12 months from the date the application is submitted, but can take significantly longer. If the FDA determines that the device, or its intended use, is not substantially equivalent to a previously-cleared device or use, the device is automatically placed into Class III, requiring the submission of a PMA. Any modification to a 510(k)-cleared device that would constitute a major change in its intended use, design or manufacture, requires a new 510(k) clearance or, possibly, in connection with safety and effectiveness, a PMA.

 

Clinical trials are generally required to support a PMA application and are sometimes required for 510(k) clearance. To perform a clinical trial in the U.S. for a significant risk device, prior submission of an application for an IDE to the FDA is required. An IDE amendment must also be submitted before initiating a new clinical study under an existing IDE, such as initiating a pivotal clinical trial following the conclusion of a feasibility clinical trial. The FDA responds to an IDE or an IDE amendment for a new clinical trial within 30 days. The FDA may approve the IDE or amendment, grant an approval with certain conditions, or identify deficiencies and request additional information. It is common for the FDA to require additional information before approving an IDE or amendment for a new clinical trial, and thus final FDA approval on a submission may require more than the initial 30 days. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, and any available data on human clinical experience, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The animal and laboratory testing must meet the FDA’s good laboratory practice requirements.

 

Clinical trials are subject to extensive recordkeeping and reporting requirements. Our clinical trials must be conducted under the oversight of an IRB for the relevant clinical trial sites and must comply with FDA regulations, including but not limited to those relating to good clinical practices. We, the FDA or the IRB may suspend a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits. Even if a clinical trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA approval to market the product in the U.S. Similarly, in Europe the clinical study must be approved by a local ethics committee and in some cases, including studies with high-risk devices, by the ministry of health in the applicable country.

 

Once a device is in commercial distribution, we or our agents are subject to ongoing regulatory compliance including Quality System Regulation and cGMP compliance, recordkeeping, adverse experience reporting, and conformity of promotion and advertising materials to the approved instructions for use.

 

Regulatory Enforcement

 

Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA or state authorities, which may include any of the following sanctions:

 

 

 

Employees

 

We had 32 full-time employees as of May 31, 2007, of whom 12 were engaged in executive, administrative, business development and intellectual property functions, and 20 were engaged in research, development and clinical or regulatory activities. We anticipate that we will need to recruit additional personnel to manage our expanded research and development programs and manage our planned clinical trials and regulatory applications, in accordance with our business strategy. We believe relations with our employees are generally good. None of our employees is covered by a collective bargaining agreement.

 

Facilities

 

Our current facilities are located in three leased buildings in Tucson, Arizona. One facility provides office, storage and laboratory space, is approximately 3,500 square feet, and is subject to a one-year lease at approximately $30,000 per year that terminates December 31, 2007. The second facility serves as our corporate headquarters and principal laboratory facility, is approximately 6,200 square feet, and is subject to a six-year lease at approximately $64,000 per year that terminates on October 31, 2008. This lease may be extended at our option for up to four additional six-year periods. Our headquarters facility is owned by a partnership whose beneficial owners include two of our executive officers and several of our stockholders. Our third facility is a temporary modular office space which is used for our expanded administrative staff, and is subject to a month-to-month lease, with a minimum two-year term that expires on September 30, 2007. Our annual rent for this facility is approximately $22,000.

 

Legal Proceedings

 

From time to time, we may be involved in litigation relating to claims arising out of our operations. We are not currently subject to any material legal proceedings and are also not aware of any pending legal, arbitration or governmental proceedings against us that may have material effects on our financial position or results of operations.

 

Our executive officers and directors and their respective ages and positions as of June 28, 2007 are as follows:

 

 

 

 

Bradford A. Zakes has served as our President and Chief Executive Officer since October 2006 and as a director since March 2007. From July 2006 to October 2006, Mr. Zakes served as our Chief Operating Officer, and from August 2005 to July 2006, Mr. Zakes served as our Vice President, Business Development. From December 2001 to August 2005, Mr. Zakes served as Director, Business Management at ICOS Corporation, a biotechnology company. From March 1999 to December 2001, Mr. Zakes served as President of Heart Research Centers International, a clinical research organization. Mr. Zakes holds a B.S. in Biology from Oregon State University, an M.S. degree in Toxicology from the American University and an M.B.A. from Duke University’s Fuqua School of Business.

 

Greg Cobb has served as our Chief Financial Officer since April 2005. He was a co-founder and Managing Director of Catalyst Partners, LLC, a boutique merger, acquisition and business development firm, from April 2002 to April 2005. Mr. Cobb served as our interim Chief Financial Officer from October 2001 to April 2002. From July 2000 to November 2001, he was a Managing Director of the Arizona Angels Investor Network, Inc. Mr. Cobb holds a B.S. in Computer Engineering from Iowa State University and a J.D. and an M.B.A. from Arizona State University.

 

Terry Matsunaga, Ph.D. has served as our Vice President, Research since March 2004. From October 1999 to March 2004, he served as our Senior Director, New Product Development. Dr. Matsunaga holds an AB from the University of California, Berkeley, and a Ph.D. in Pharmaceutical Chemistry and a Pharm.D. degree in Clinical Pharmacy from the University of California, San Francisco.

 

John McCambridge has served as our Vice President, Sales and Marketing since May 2006. From December 1997 to February 2006, Mr. McCambridge was the President and Chief Operating Officer of MRI Medical, a designer and manufacturer of highly engineered silicone medical devices. From December 1987 to January 1997, Mr. McCambridge was Senior Vice President of Sales and Marketing for Genzyme Tissue Repair, formerly BioSurface Technology, a developer of novel biologic therapeutics for the repair of human

skin and cartilage tissue. Mr. McCambridge holds a B.S. in Business Administration from the University of Delaware.

 

Kevin Ontiveros has served as our Vice President, Legal Affairs and General Counsel since March 2007 and has served as our Secretary since July 2007. Prior to joining us he was employed from April 1996 to March 2007 at NPS Pharmaceuticals, Inc. a biopharmaceutical company, where he served in several positions, including Vice President Corporate Law, Associate General Counsel, Assistant Corporate Secretary and Senior Director Corporate Law. Mr. Ontiveros holds a LL.M. Taxation from the University of Florida College of Law and a J.D. from the University of Utah College of Law.

 

Rajan Ramaswami, Ph.D. has served as our Vice President, Product Development since March 2005. From September 2001 to February 2005, Dr. Ramaswami served as our Vice President, Research and Development, and from October 1999 to September 2001, he served as our Senior Director of Product Development. Dr. Ramaswami holds a MS/Ph.D. in Polymer Chemistry from Carnegie-Mellon University.

 

Walter Singleton has served as our Chief Medical Officer since May 2006. Dr. Singleton changed his status with us from full time employee to consultant in June 2007. From August 2005 to April 2006, Dr. Singleton served as a consultant to us and other pharmaceutical and biotechnology companies through New Drug Development Services, a company that he founded in 1996 to advise companies in all areas of drug development and medical affairs. From October 2004 to July 2005, Dr. Singleton served as Vice President, Regulatory Affairs for Inovio, Inc., a biotechnology company. From October 2000 to December 2003, Dr. Singleton was Senior Vice President of New Drug Development at Chugai Pharma U.S.A. (formerly Chugai Biopharmaceuticals, Inc.) a Japanese biotechnology company. Dr. Singleton holds a Masters Degree, B.M. and a B.Ch. degree (equivalent to M.D. in the U.S.) and a Masters Degree in Animal Physiology from Oxford University Medical School.

 

Lynne E. Weissberger, Ph.D. has served as our Vice President, Regulatory Affairs, Quality Assurance and Regulatory Compliance since February 2006. From January 2004 to December 2005, Dr. Weissberger served as Senior Director at Myogen, Inc., a biotechnology company. From April 1996 to December 2003, Dr. Weissberger served as an Associate Director for G.D. Searle, Pharmacia and Pfizer, which are pharmaceutical companies. Dr. Weissberger holds a Ph.D. in Nutrition and Physiology from Cornell University.

 

Reena Zutshi, Ph.D. has served as our Vice President, Operations since October 2006. Prior to being appointed to that position she served as Vice President, Program Management from October 2005 to October 2006. From June 2001 to October 2005, Dr. Zutshi held various positions with us, including Director of Research and Development. Dr. Zutshi holds a Ph.D. in Organic Chemistry from Purdue University. She received her postdoctoral training at Yale University, Department of Chemistry.

 

Richard E. Otto has served as a director since July 2004 and as Chairman of the Board of Directors since February 2006. From February 2003 to December 2006, Mr. Otto served as President and Chief Executive Officer of Corautus Genetics, Inc., a gene therapy company. Mr. Otto founded Clique Capital, a venture capital company, in January 1999, where he was employed until January 2002. Mr. Otto serves on the board of directors of Medi-Hut Co., Inc. Mr. Otto holds a B.S. in Chemistry and Zoology from the University of Georgia and engaged in graduate studies in Biochemistry at Medical College of Georgia.

 

Richard L. Love has served as a director since March 2006. From January 2005 to January 2006 Mr. Love served as Managing Director of TGEN Accelerator LLC for his employer Translational Genomics Research Institute. From January 2003 to January 2005, Mr. Love served as Chief Operating Officer for Translational Genomics Research Institute, from January 2002 to January 2003 Mr. Love served as a director of Parexel International, a pharmaceutical services company, and ILEX Oncology, Inc., a biotechnology company evaluating cancer therapeutics, and from June 1993 to January 2002 Mr. Love served as Chief Executive Officer and a director of ILEX Oncology, Inc. Mr. Love also serves as a director for Parexel International, Systems Medicine Inc., Medical Consultant Services, Xilas Medical and Molecular Profiling Institute. Mr. Love holds B.S. and M.S. degrees in Chemical Engineering from the Virginia Polytechnic Institute.

 

Thomas W. Pew has served as a director since January 2004. Since 1994, Mr. Pew has been a private investor in formative-stage biotechnology companies and currently serves as a director for AGF Pharma. He holds a B.A. in Economics from Cornell University.

 

Philip Ranker has served as a director since February 2006. Since August 2004, Mr. Ranker has served as the Chief Financial Officer and Vice President of Finance of Nastech Pharmaceutical Company, Inc. From September 2001 to August 2004, Mr. Ranker served as Director of Finance for ICOS Corporation. From July 1998 to December 2000, Mr. Ranker served as Assistant Controller of Scholastic Corporation. Mr. Ranker holds a B.A. in Accounting from the University of Kansas.

 

James M. Strickland has served as a director since August 2000. Since February 2004, Mr. Strickland has served as the Chief Executive Officer of Thayer Medical Corporation, a medical device company. Since March 1998, Mr. Strickland has served as the General Partner and Managing Director of the Coronado Venture Funds, a group of venture investing partnerships formed in 1988. Mr. Strickland holds B.S. and M.S. degrees in Electrical Engineering from the University of New Mexico and an M.S. in Industrial Administration from Carnegie Institute of Technology (now Carnegie-Mellon University).

 

Board Composition

 

Our board of directors is currently composed of six members, all of whom are non-employee members other than Bradford A. Zakes, our President and Chief Executive Officer. There is currently one vacant seat on our board of directors. Upon completion of this offering, our bylaws will be amended and restated to provide that the authorized number of directors may be changed only by resolution of the board of directors.

 

We believe that the composition of our board of directors meets the requirements for independence under the current requirements of the NASDAQ Capital Market. As required by the NASDAQ Capital Market, we anticipate that our independent directors will meet in regularly scheduled executive sessions at which only independent directors are present. We intend to comply with any governance requirements that are or become applicable to us.

 

Committees of the Board of Directors

 

Our board of directors has an audit committee, a compensation committee and a nominating and corporate governance committee, each of which has the composition and responsibilities described below.

 

Audit Committee

 

Our audit committee is composed of Richard Otto, James Strickland and Philip Ranker, each of whom is a non-employee member of our board of directors. Mr. Otto is the chairperson of the audit committee. Our board of directors has determined that each of Messrs. Otto, Strickland and Ranker is an “audit committee financial expert” as defined under SEC rules and regulations. We believe that the composition of our audit committee meets the requirements for independence and financial sophistication under the current requirements of the NASDAQ Capital Market and SEC rules and regulations. In addition, our audit committee has the specific responsibilities and authority necessary to comply with the current requirements of the NASDAQ Capital Market and SEC rules and regulations.

 

Our audit committee is responsible for, among other things, overseeing the independent auditors, reviewing the financial reporting, policies and processes, overseeing risk management, related party transactions and legal compliance and ethics and preparing the audit committee reports required by SEC rules.

 

Compensation Committee

 

Our compensation committee is composed of James Strickland, Thomas Pew and Richard Love, each of whom is a non-employee member of our board of directors. James Strickland is the chairperson of the compensation committee. We believe that the composition of our compensation committee meets the requirements for independence under the current requirements of the NASDAQ Capital Market and SEC rules and regulations.

 

Our compensation committee is responsible for, among other things, reviewing and recommending compensation and annual performance objectives and goals for our Chief Executive Officer, reviewing and making recommendations to the board of directors regarding incentive-based or equity-based compensation plans, employment agreements, severance arrangements, change in control agreements and other benefits, compensations, compensation policies or arrangement for other executive officers and preparing the compensation committee reports required by SEC rules.

 

Nominating and Corporate Governance Committee

 

Our nominating and corporate governance committee is composed of Richard Otto, Richard Love, Thomas Pew and Philip Ranker. Mr. Otto is the chairperson of the nominating and corporate governance committee. We believe that the composition of our nominating and corporate governance committee meets the requirements for independence under the current requirements of the NASDAQ Capital Market.

 

Our nominating and corporate governance committee is responsible for, among other things, identifying, evaluating and recommending individuals qualified to become directors, reviewing and making recommendations to the board of directors regarding board of director and committee compensation, committee composition and reviewing compliance with corporate governance principles applicable to our company.

 

Code of Conduct

 

Our board of directors has adopted a code of conduct that establishes the standards of ethical conduct applicable to all directors, officers and employees of our company. The code addresses, among other things, conflicts of interest, compliance with disclosure controls and procedures and internal control over financial reporting, corporate opportunities and confidentiality requirements. The audit committee is responsible for applying and interpreting our code of conduct.

 

Compensation Committee Interlocks and Insider Participation

 

None of our executive officers currently serves, or served during 2006, on the compensation committee or board of directors of any other entity that has one or more executive officers serving as a member of our board of directors or compensation committee. Prior to establishing the compensation committee, our full board of directors made decisions relating to compensation of our executive officers. No member of our compensation committee has ever been an officer or employee of the company.

 

Compensation Discussion and Analysis

 

Role of Board of Directors and Compensation Committee

 

Our compensation policy is set by the board of directors, with the advice and recommendation of the compensation committee. The board has delegated to the compensation committee the responsibility for implementing, reviewing and continually monitoring adherence with our compensation policy. The compensation committee is responsible for establishing, reviewing, approving and recommending to the board for final approval each of our compensation programs. In addition, the compensation committee is responsible for ensuring that the total compensation paid to our executive officers, including the named executive officers referenced in the Summary Compensation Table below, is consistent with our compensation policy and objectives.

 

Compensation Policy and Objectives

 

Our compensation policy consists of three fundamental objectives: (1) to attract, retain and motivate talented and dedicated executives and employees; (2) to align cash incentives and a portion of stock option vesting to achievement of specified individual and company performance objectives; and (3) to align our executives’ and employees’ interests with those of our stockholders by rewarding short-term and long-term

performance. To accomplish our compensation objectives, the compensation committee works together with the chief executive officer and chief financial officer to establish key strategic goals. These goals include developing our product candidates, establishing and maintaining key strategic relationships, managing our cash position and growing our business, as measured by metrics such as achievement of clinical development, regulatory or other milestones by targeted dates, the achievement of specified revenue, cash burn and year-end cash targets.

 

Elements and Setting of Compensation

 

We have not retained a compensation consultant to advise us with respect to executive compensation or our compensation programs. Our compensation committee conducts an annual review of the aggregate level of compensation for each of our executives, as well as the principal elements comprising their total compensation. This review is based on input from members of our board of directors and publicly available data relating to the compensation practices and policies of other companies within and outside our industry, while at the same time taking into consideration the geographic location of our company and our financial resources. We believe that gathering this information is an important part of our compensation-related decision-making process. Our compensation committee evaluates both individual executive performance and corporate performance with the goal of setting compensation at levels the committee and the board of directors believe are comparable to executives in other companies of similar size and stage of development operating in the biopharmaceutical industry while taking into account our relative performance, our own strategic goals and our financial metrics at the time.

 

Executive compensation consists of the following elements:

 

Base Salary.  Base salaries for our executives are established based on the scope of their responsibilities, taking into account compensation paid by other companies in our industry and in our region for similar positions, and our cash resources available for the payment of salaries to executives. Base salaries are reviewed annually, and adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance and experience. For 2007, this review occurred in the first quarter. In general, our executives’ base salaries are below market rates. In addition, nearly all of our employees are eligible for an increase of up to 5% in their base salary each calendar year, based upon their achievement of individual performance goals and the results of a skills assessment conducted annually.

 

When setting salaries for our executives in 2007, our compensation committee reviewed a salary survey produced by Equilar, Inc. that compared our executive salaries against a group of 33 publicly-traded biotechnology and biopharmaceutical companies that were chosen based on their market capitalization and number of employees. The companies used in this analysis are companies against which we believe we compete for both talent and for stockholder investment. The companies included in the survey were:

 

 

Quarterly Cash Bonus.  In April 2007 we adopted a quarterly cash incentive bonus plan for all of our employees, including our executive officers. The quarterly cash incentive bonuses are intended to compensate employees for the achievement of both company-wide and departmental quarterly goals. Amounts payable

under the quarterly cash incentive bonus plan are calculated as a percentage of the applicable employee’s base salary with the attainable bonus ranging from 5% up to a maximum of 12.5% of the employee’s base salary per quarter, with more senior employees being eligible for bonuses based on higher percentages of their base salaries. The company-wide targets and the departmental objectives are given roughly equal weight in the bonus analysis. The company-wide targets generally include achievement of clinical trial milestones, completion of strategic or partnering transactions, completion of financing transactions, achieving sales targets and advancing in our research programs. Departmental objectives are necessarily tied to the particular area of responsibility of the department and the department’s performance in attaining those objectives relative to external forces, internal resources utilized and overall departmental group effort. The compensation committee determines whether the quarterly cash incentive awards, if any, for all employees were earned for a particular quarter.

 

Options.  Our 2000 Stock Plan authorizes us to grant options to purchase shares of common stock to our employees, directors and consultants. Our board of directors administers the stock option plan. Stock option grants are made at the commencement of employment and, occasionally, following a significant change in job responsibilities or to meet other special retention or performance objectives. The compensation committee recommends to our board of directors for approval stock option awards to executive officers based upon a review of competitive compensation data, its assessment of individual performance, a review of each executive’s existing long-term incentives, and retention considerations. Periodic stock option grants are made at the discretion of the board of directors to eligible employees and, in appropriate circumstances, the compensation committee and the board of directors considers the recommendations of members of management, including our chief executive officer and our chief financial officer. In 2006, certain named executive officers were awarded stock options in the amounts indicated in the section entitled “Grants of Plan Based Awards.” These options were awarded for purposes of retention and to provide continued incentive for the recipients, and were not tied to the recipients’ achievement of specific milestones or objectives. In addition, our board of directors has approved granting options to purchase an aggregate of 233,321 shares to our employees effective and contingent upon the closing of this offering. Historically, stock options granted by us are immediately exercisable, have an exercise price equal to the fair market value of our common stock on the day of grant, typically vest 25% per annum based upon continued employment over a four-year period, and generally expire ten years after the date of grant. The options granted upon the closing of this offering will have an exercise price equal to the price per share in this offering. Incentive stock options also include certain other terms necessary to assure compliance with the Internal Revenue Code of 1986, as amended.

 

2007 Performance Incentive Plan.  Our 2007 Performance Incentive Plan authorizes us to grant incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance shares and units, deferred compensation awards, other cash-based or stock-based awards and non-employee director awards. Our board of directors will administer the plan. Similar to our 2000 Stock Plan, we expect that stock option awards will be made at the commencement of employment and, occasionally, following a significant change in job responsibilities or to meet other special retention or performance objectives. The compensation committee will review and recommend to the board of directors for approval stock option awards to executive officers based upon a review of competitive compensation data, its assessment of individual performance, a review of each executive’s existing long-term incentives, and retention considerations. Periodic stock option awards will continue to be made at the discretion of the board of directors to eligible employees and, in appropriate circumstances, the compensation committee and the board of directors will consider the recommendations of members of management, as discussed above. Our 2007 Performance Incentive Plan will become effective upon the signing of the underwriting agreement for this offering. Following the closing of this offering and the issuance of the options in connection therewith, we will cease to grant additional stock options under our 2000 Stock Plan.

 

Other Compensation.  Our executive officers who were parties to employment agreements prior to this offering will continue, following this offering, to be parties to such employment agreements in their current form until such time as the compensation committee determines in its discretion that revisions to such employment agreements are advisable. In addition, consistent with our compensation philosophy, we intend to continue to maintain our current benefits and perquisites for our executive officers; however, the compensation

committee in its discretion may revise, amend or add to the officers’ executive benefits and perquisites if it deems it advisable. We believe these benefits and perquisites are currently lower than median competitive levels for comparable companies. We currently have no plans to change either the employment agreements or levels of benefits and perquisites provided thereunder.

 

Role of Executive Officers in Compensation Decisions

 

Bradford A. Zakes, our President and Chief Executive Officer, Greg Cobb, our Chief Financial Officer, and Kevin Ontiveros, our General Counsel, generally attend all meetings of the compensation committee. Generally, all compensation committee meetings include an executive session at which no company executives are present. Mr. Zakes and Mr. Cobb work together with our compensation committee to develop total compensation recommendations for our named executive officers other than themselves. Mr. Zakes and Mr. Cobb do not participate with the compensation committee in the determination of their respective total compensation. After review and discussion as to the appropriate level of compensation for our employees and executives, the compensation committee will render a final recommendation of the committee for total compensation and then submits its recommendation to our board of directors for consideration and approval.

 

Impact of Accounting and Tax Treatment

 

Deductibility of Compensation.  Section 162(m) of the Internal Revenue Code limits the deductibility for federal income tax purposes of certain compensation paid in any year by a publicly held corporation to its chief executive officer and its four other most highly compensated officers to $1 million per executive. The $1 million cap does not apply to “performance-based” compensation as defined under Section 162(m) or to compensation paid pursuant to certain plans that existed prior to a corporation becoming publicly held. We believe that awards made under our 2000 Stock Plan and 2007 Performance Incentive Plan will not be subject to the $1 million cap because we will not become a public company until this offering closes. Once the private-to-public transition rule is not available, we intend that awards made under our 2007 Performance Incentive Plan will qualify as “performance-based” compensation for purposes of Section 162(m). We believe we can continue to preserve related federal income tax deductions, although individual exceptions may occur.

 

Accounting for Share-Based Compensation.  On January 1, 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R) “Share-Based Payment,” or SFAS 123(R), to account for all stock grants under all of our plans. Prior to adoption of SFAS 123(R), we accounted for share-based compensation pursuant to Accounting Principles Board Opinion No. 25, or APB 25, “Accounting for Stock Issued to Employees.” Due to our prior accounting practices and transition provisions of SFAS 123(R), options granted prior to adopting of SFAS 123(R) retain their prior accounting treatment and previously deferred share-based compensation continues to be recognized on pre-adoption grants.

 

SUMMARY COMPENSATION TABLE

 

The following table sets forth information regarding compensation earned by our former Chief Executive Officer, our current Chief Executive Officer, our Chief Financial Officer and our three other most highly compensated executive officers for the fiscal year ended December 31, 2006. We refer to these officers collectively as our “named executive officers.” The compensation described in this table does not include medical, group life insurance or other benefits that are available generally to all of our salaried employees.

 

2006 Summary Compensation Table