Albireo
Biodel Inc (Form: 10-K, Received: 12/14/2010 15:09:12)
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
     
(Mark One)
   
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended September 30, 2010
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          .
 
Commission File Number 001-33451
 
BIODEL INC.
(Exact Name of Registrant as Specified in Its Charter)
 
     
Delaware   90-0136863
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)
     
100 Saw Mill Road
Danbury, CT
(Address of Principal Executive Offices)
  06810
(Zip Code)
 
Registrant’s telephone number, including area code
(203) 796-5000
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Stock, par value $0.01 per share
  The NASDAQ Global Market
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o      No  þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o      No  þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ      No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o      No  o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
         
Large accelerated filer  o
      Accelerated filer  þ
Non-accelerated filer  o
      Smaller reporting company  o  
       (Do not check if a smaller reporting company)
       
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b2 of the Exchange Act).  Yes  o      No þ
 
The aggregate market value of the common stock of the registrant held by non-affiliates was $81 million based on the last sales price at which the common stock was last sold on the NASDAQ Global Market on March 31, 2010.
 
The number of shares outstanding of the registrant’s common stock, as of November 30, 2010 was 26,433,982.
 
Portions of the registrant’s definitive Proxy Statement, or the 2011 Proxy Statement, which will be filed with the Securities and Exchange Commission not later than 120 days after September 30, 2010, for its 2011 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report. With the exception of the portions of the 2011 Proxy Statement expressly incorporated into this Annual Report on Form 10-K by reference, such document shall not be deemed filed as part of this Annual Report on Form 10-K.
 


 

 
BIODEL INC.
 
INDEX TO REPORT ON FORM 10-K
 
                 
        Page
 
PART I
  Item 1:     Business     3  
  Item 1A:     Risk Factors     18  
  Item 1B:     Unresolved Staff Comments     36  
  Item 2:     Properties     36  
  Item 3:     Legal Proceedings     37  
  Item 4:     Removed and Reserved     37  
 
PART II
  Item 5:     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     37  
  Item 6:     Selected Financial Data     38  
  Item 7:     Management’s Discussion and Analysis of Financial Condition and Results of Operations     39  
  Item 7A:     Quantitative and Qualitative Disclosures About Market Risk     53  
  Item 8:     Financial Statements and Supplementary Data     53  
  Item 9:     Changes in and Disagreements With Accountants on Accounting and Financial Disclosures     53  
  Item 9A:     Controls and Procedures     53  
  Item 9B:     Other Information        
 
PART III
  Item 10:     Directors, Executive Officers and Corporate Governance     56  
  Item 11:     Executive Compensation     56  
  Item 12:     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     56  
  Item 13:     Certain Relationships and Related Transactions, and Director Independence     56  
  Item 14:     Principal Accountant Fees and Services     56  
 
PART IV
  Item 15:     Exhibits and Financial Statement Schedules     56  
EX-10.23        
EX-10.24        
EX-21.1        
EX-23.1        
EX-31.01        
EX-31.02        
EX-32.01        


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FORWARD-LOOKING STATEMENTS
 
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that involve substantial risks and uncertainties. Such forward-looking statements include statements about future activities related to the complete response letter regarding our new drug application, or NDA, for Linjeta tm ; the timing and adequacy our response to the complete response letter; the consequences of the complete response letter; and the company’s focus, goals, strategy, research and development programs, and ability to develop and commercialize product candidates. All statements, other than statements of historical facts, included in this Annual Report on Form 10-K regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
 
Our forward-looking statements in this Annual Report on Form 10-K are subject to a number of known and unknown risks and uncertainties that could cause actual results, performance or achievements to differ materially from those described or implied in the forward-looking statements, including:
 
  •  our ability to respond to the complete response letter regarding our NDA for Linjeta tm (formerly known as VIAject ® ) in a timely manner and the possibility that information we provide in response to the letter may not be sufficient for the approval of Linjeta tm or another rapid-acting insulin or insulin analog by the U.S. Food and Drug Administration, or FDA;
 
  •  our ability to secure approval by the FDA for our product candidates under Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act, or FFDCA, and the degree to which we are able to clarify with the FDA related regulatory requirements;
 
  •  our ability to conduct the additional pivotal clinical trials the FDA requested in the complete response letter or other tests or analyses required by the FDA to secure approval to commercialize Linjeta tm ;
 
  •  our ability to develop and commercialize formulations of Linjeta tm or other rapid-acting insulin or insulin analog formulations that may be associated with less injection site discomfort than the formulation that is the subject of the complete response letter we received from the FDA;
 
  •  the progress, timing or success of our product candidates, particularly Linjeta tm , and that of our research, development and clinical programs, including any resulting data analyses;
 
  •  our ability to enter into collaboration arrangements for the commercialization of our product candidates and the success or failure of any such collaborations into which we enter, or our ability to commercialize our product candidates ourselves;
 
  •  our ability to enforce our patent for Linjeta tm and our ability to secure additional patents for Linjeta tm and for our other product candidates;
 
  •  our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;
 
  •  the degree of clinical utility of our products;
 
  •  the ability of our major suppliers, including suppliers of insulin, to produce our product or products in our final dosage form;
 
  •  our commercialization, marketing and manufacturing capabilities and strategies; and
 
  •  our ability to accurately estimate anticipated operating losses, future revenues, capital requirements and our needs for additional financing.
 
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


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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 Annual Report, particularly in Item 1A of this Annual Report, and in our other public filings with the Securities and Exchange Commission that could cause actual results or events to differ materially from the forward-looking statements that we make.
 
You should read this Annual Report and the documents that we have filed as exhibits to the Annual Report completely and with the understanding that our actual future results may be materially different from what we expect. It is routine for internal projections and expectations to change as the year, or each quarter in the year, progresses, and therefore it should be clearly understood that the internal projections and beliefs upon which we base our expectations are made as of the date of this Annual Report on Form 10-K and may change prior to the end of each quarter or the year. While we may elect to update forward-looking statements at some point in the future, we do not undertake any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.


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PART I
 
ITEM 1:    BUSINESS
 
Overview
 
We are a specialty biopharmaceutical company focused on the development and commercialization of innovative treatments for diabetes that may be safer, more effective and more convenient for patients. We develop our product candidates by applying our proprietary formulation technologies to existing drugs in order to improve their therapeutic profiles. Our most advanced product candidate is Linjeta tm (formerly known as VIAject ® ). We have formulated Linjeta tm as a rapid-acting mealtime insulin for the treatment of patients with Type 1 and Type 2 diabetes. Earlier stage product candidates include follow-on and second generation rapid-acting mealtime insulins or insulin analogs, VIAtab tm , a sublingual tablet formulation of insulin, a line of basal insulins, and a stabilized formulation of glucagon.
 
Diabetes is a disease characterized by abnormally high levels of blood glucose and inadequate levels of insulin. Glucose is a simple sugar used by all the cells of the body to produce energy and support life. Humans need a minimum level of glucose in their blood at all times to stay alive. Insulin is a peptide hormone naturally secreted by the pancreas to regulate the body’s management of glucose. When a healthy individual begins a meal, the pancreas releases a natural spike of insulin called the first-phase insulin release, which is critical to the body’s overall control of glucose. Virtually all patients with diabetes lack the first-phase insulin release. All patients with Type 1 diabetes must treat themselves with mealtime insulin injections to compensate for the lack of natural pancreatic first phase insulin release. As the disease progresses, patients with Type 2 diabetes also require mealtime insulin. However, none of the currently marketed mealtime insulin products adequately mimics the first-phase insulin release. As a result, patients using insulin typically have inadequate levels of insulin in their systems at the start of a meal and too much insulin in their systems between meals. This, in turn, results in the lack of adequate glucose control associated with diabetes. The long-term adverse effects of elevated glucose levels include blindness, loss of kidney function, nerve damage and loss of sensation and poor circulation in the periphery, which in some severe cases, may lead to amputations.
 
Advances in insulin technology in the 1990s led to the development of new molecules, referred to as rapid-acting insulin analogs, which are similar to insulin, but are absorbed into the blood more rapidly.
 
Linjeta tm Development Status.   Linjeta tm is our proprietary injectable formulation of recombinant human insulin designed to be absorbed into the blood faster than the currently marketed rapid-acting insulin analogs. We have completed two pivotal Phase 3 clinical trials of Linjeta tm , one in patients with Type 1 diabetes and the other in patients with Type 2 diabetes. In both clinical trials we compared Linjeta tm to Humulin ® R, a form of recombinant human insulin, to determine if Linjeta tm is not inferior to Humulin ® R in the management of blood glucose levels, as measured by the mean change in patients’ glycosylated hemoglobin, or HbA1c, levels from baseline. Patients in both clinical trials were treated for a period of six months. HbA1c is a measure of a patient’s average blood glucose level over a period of approximately three months.
 
In December 2009, we submitted a new drug application, or NDA, to the U.S. Food and Drug Administration, or FDA, under section 505(b)(2) of the FFDCA for approval to market Linjeta tm as a treatment for diabetes. The NDA included results from pharmacokinetic and standardized meal studies, our two pivotal six month Phase 3 clinical trials of Linjeta tm in patients with Type 1 and Type 2 diabetes, as well as results from the long-term 18 month safety extension trials for patients who completed the pivotal Phase 3 clinical trials. The NDA sought approval for a 100 IU/cc liquid formulation of Linjeta tm that we determined was bioequivalent to the two-part 25 IU/cc lyophilized powder formulation of Linjeta tm that was used in our pivotal Phase 3 clinical trials. The FDA accepted the NDA for review with a Prescription Drug User Fee Act, or PDUFA, action date for the NDA of October 30, 2010.
 
On November 1, 2010, we announced that the FDA issued a complete response letter requesting additional information regarding our NDA for Linjeta tm . The complete response letter stated that the FDA’s review cycle was complete and that the application could not be approved in its present form. The FDA requested that we conduct two new Phase 3 clinical trials using the final commercial formulation of Linjeta tm ,


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one in patients with Type 1 diabetes and the other in patients with Type 2 diabetes, to establish efficacy and safety as related to hypoglycemia and toleration. The FDA also requested additional data related to stability and manufacturing of our final commercial formulation of Linjeta tm . We have contacted the FDA to formally request a meeting to discuss the complete response letter.
 
Other Corporate Developments.   In October 2009, we executed a letter of intent to purchase a disposable insulin pen designed by Wockhardt, Ltd. for use with Linjeta tm . As of September 30, 2010, we were operating under the same letter of intent.
 
In March 2010, we appointed Dr. Errol B. De Souza as our President and Chief Executive Officer and Dr. Charles Sanders as our board chairman. Dr. Solomon S. Steiner, our former Chairman, President and Chief Executive Officer, became our Chief Scientific Officer and remains a member of our board. Dr. Sanders is currently taking a leave of absence from our board of directors due to medical reasons. During Dr. Sanders’ leave of absence, Dr. Brian J.G. Pereira is serving as our Lead Director.
 
In August 2010, we entered into definitive agreements with two institutional investors to sell 2,398,200 shares of our common stock and warrants to purchase 2,398,200 shares of our common stock, resulting in gross proceeds to us, after deducting placement agents’ fees and offering expenses, of approximately $8.7 million.
 
In September 2010, we announced that Linjeta tm would replace VIAject ® as the proposed trade name for the insulin formulation that is the subject of the complete response letter we received from the FDA.
 
In November 2010, we announced that we had been awarded approximately $1.2 million in research grants under the Internal Revenue Service’s therapeutic discovery tax credit program. This program was created under the Patient Protection and Affordable Care Act of 2010 to provide tax credits or grants representing up to 50 percent of eligible qualified investments in therapeutic discovery projects during tax years 2009 and 2010. We applied for and will receive these funds to support our Linjeta tm , VIAtab tm , glucagon, extended glargine and glucose-sensing glargine insulin development projects.
 
Fiscal Year 2011 Strategic Focus.   The complete response letter we received from the FDA with regard to Linjeta tm has caused us to limit some of our product development and research and development activities. We plan to focus our efforts over the next several months as follows:
 
  •  Determine Whether to Advance our Current Formulation of Linjeta tm through Pivotal Phase 3 Clinical Trials.   In light of the extensive nature of the FDA’s comments regarding our NDA, we do not anticipate commencing new pivotal Phase 3 clinical trials with our current formulation of Linjeta tm prior to meeting with the FDA and, separately, determining whether one of our other proprietary rapid-acting insulin or insulin analog formulations should be advanced in its place. These alternate formulations generally use the same or similar excipients as Linjeta tm , but may present improvements with regard to injection site discomfort. In fiscal year 2011, we intend to conduct preclinical studies and Phase 1 clinical trials studies to determine whether one or more of our newer insulin formulations is likely to offer a combination of pharmacokinetic, stability and tolerability characteristics that is preferable to Linjeta tm . Following our meeting with the FDA regarding Linjeta tm , and based on our analysis of the preclinical and Phase 1 clinical data for our alternate formulations, we will determine the number, type and duration of additional trials we intend to conduct prior to initiating Phase 3 clinical trials with a proprietary rapid-acting insulin.
 
  •  Advance Proof-of-Concept Formulations.   We intend to make limited investments in our VIAtab tm , glucagon, extended glargine and glucose-sensing basal insulin development programs. Our goal is to advance proof-of-concept formulations that we can discuss with potential corporate partners. Because we are focusing on therapeutic indications in large markets, we believe that these larger companies have the marketing, sales and financial resources to maximize the commercial potential of our technologies and products.


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Diabetes and the Insulin Market
 
Diabetes Overview
 
Glucose is a simple sugar used by all the cells of the body to produce energy and support life. Humans need a minimum level of glucose in their blood at all times to stay alive. The primary manner in which the body produces blood glucose is through the digestion of food. When a person is not getting this glucose from food digestion, glucose is produced from stores and released by the liver. The body’s glucose levels are regulated by insulin. Insulin is a peptide hormone that is naturally secreted by the pancreas. Insulin helps glucose enter the body’s cells to provide a vital source of energy.
 
When a healthy individual begins a meal, the pancreas releases a natural spike of insulin called the first-phase insulin release. In addition to providing sufficient insulin to process the glucose coming into the blood from digestion of the meal, the first-phase insulin release acts as a signal to the liver to stop making glucose while digestion of the meal is taking place. Because the liver is not producing glucose and there is sufficient additional insulin to process the glucose from digestion, the blood glucose levels of healthy individuals remain relatively constant and their blood glucose levels do not become too high.
 
Diabetes is a disease characterized by abnormally high levels of blood glucose and inadequate levels of insulin. There are two major types of diabetes — Type 1 and Type 2. In Type 1 diabetes, the body produces no insulin. In the early stages of Type 2 diabetes, although the pancreas does produce insulin, the body loses its early phase insulin response to a meal. In addition, the body’s cells do not respond as well as they should to a normal amount of insulin, a condition known as insulin resistance. According to the Centers for Disease Control and Prevention, or CDC, Type 2 diabetes is the more prevalent form of the disease, affecting approximately 90% to 95% of all people diagnosed with diabetes.
 
Even before any other symptoms are present, one of the first effects of Type 2 diabetes is the loss of the meal-induced first-phase insulin release. In the absence of the first-phase insulin release, the liver will not receive its signal to stop making glucose. As a result, the liver will continue to produce glucose at a time when the body begins to produce new glucose through the digestion of the meal. As a result, the blood glucose level of patients with diabetes rises too high after eating, a condition known as hyperglycemia. Hyperglycemia causes glucose to attach unnaturally to certain proteins in the blood, interfering with these proteins’ ability to perform their normal function of maintaining the integrity of the small blood vessels. With hyperglycemia occurring after each meal, the tiny blood vessels eventually break down and leak. The long-term adverse effects of hyperglycemia include blindness, loss of kidney function, nerve damage and loss of sensation and poor circulation in the periphery, potentially requiring amputation of the extremities.
 
Between two and three hours after a meal, an untreated diabetic’s blood glucose becomes so elevated that the pancreas receives a signal to secrete an inordinately large amount of insulin. In a patient with early Type 2 diabetes, the pancreas can still respond and secretes this large amount of insulin. However, this occurs at the time when digestion is almost over and blood glucose levels should begin to fall. This inordinately large amount of insulin has two detrimental effects. First, it puts an undue extreme demand on an already compromised pancreas, which may lead to its more rapid deterioration and eventually render the pancreas unable to produce insulin. Second, too much insulin after digestion leads to weight gain, which may further exacerbate the disease condition.
 
The figure below, which is derived from an article in the New England Journal of Medicine, illustrates the differences in the insulin release profiles of a healthy individual and a person in the early stages of Type 2 diabetes. In response to an intravenous glucose injection, which simulates eating a meal, the healthy individual produces the first-phase insulin release. In contrast, the patient with Type 2 diabetes lacks the first-phase insulin release and


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releases the insulin more slowly and over time. As a result, in the early stages of the disease, the Type 2 patient’s insulin level is too low at the initiation of a meal and too high after meal digestion.
 
First Phase Insulin Release
 
(LINE GRAPH)
 
Current Treatments for Diabetes and their Limitations
 
Because patients with Type 1 diabetes produce no insulin, the primary treatment for Type 1 diabetes is daily intensive insulin therapy. The treatment of Type 2 diabetes typically starts with management of diet and exercise. Although helpful in the short-run, treatment through diet and exercise alone is not an effective long-term solution for the vast majority of patients with Type 2 diabetes. When diet and exercise are no longer sufficient, treatment commences with various non-insulin oral medications. These oral medications act by increasing the amount of insulin produced by the pancreas, by increasing the sensitivity of insulin-sensitive cells, by reducing the glucose output of the liver or by some combination of these mechanisms. These treatments are limited in their ability to manage the disease effectively and generally have significant side effects, such as weight gain. Because of the limitations of non-insulin treatments, many patients with Type 2 diabetes deteriorate over time and eventually require insulin therapy to support their metabolism.
 
Insulin therapy has been used for more than 80 years to treat diabetes. This therapy usually involves administering several injections of insulin each day. These injections consist of administering a long-acting basal injection one or two times per day and an injection of a rapid-acting insulin at mealtime. Although this treatment regimen is accepted as effective, it has limitations. First, patients generally dislike injecting themselves with insulin due to the inconvenience and pain of needles. As a result, patients tend not to comply adequately with the prescribed treatment regimens and are often inadequately medicated.
 
More importantly, even when properly administered, insulin injections do not replicate the natural time-action profile of insulin. In particular, the natural spike of the first-phase insulin release in a person without diabetes results in blood insulin levels rising within several minutes of the entry into the blood of glucose from a meal. By contrast, injected insulin enters the blood slowly, with peak insulin levels occurring within 80 to 100 minutes following the injection of regular human insulin.
 
A potential solution is the injection of insulin directly into the vein of diabetic patients immediately before eating a meal. In studies of intravenous injections of insulin, patients exhibited better control of their blood glucose for 3 to 6 hours following the meal. However, for a variety of medical reasons, intravenous injection of insulin before each meal is not a practical therapy.
 
One of the key improvements in insulin treatments was the introduction in the 1990s and 2000s of rapid-acting insulin analogs, such as Humalog ® , NovoLog ® and Apidra ® . However, even with the rapid-acting insulin analogs, peak insulin levels typically occur within 50 to 70 minutes following the injection. Because the rapid-acting insulin analogs do not adequately mimic the first-phase insulin release, diabetics using insulin therapy continue to have inadequate levels of insulin present at the initiation of a meal and too much insulin


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present between meals. This lag in insulin delivery can result in hyperglycemia early after meal onset. Furthermore, the excessive insulin between meals may result in an abnormally low level of blood glucose known as hypoglycemia. Hypoglycemia can result in loss of mental acuity, confusion, increased heart rate, hunger, sweating and faintness. At very low glucose levels, hypoglycemia can result in loss of consciousness, coma and even death. According to the American Diabetes Association, or ADA, patients with Type 1 diabetes have a serious hypoglycemic event approximately once per year, many of which require hospital emergency room visits.
 
A More Rapid-Acting Mealtime Insulin
 
Linjeta tm is our proprietary formulation of injectable human insulin to be taken at mealtime. Linjeta tm is designed to be absorbed into the blood faster than the currently marketed rapid-acting insulin analogs. One of the key features of our formulation of insulin is that it allows the insulin to disassociate, or separate, from the six molecule, or hexameric, form to the single molecule, or monomeric, form and inhibits re-association to the hexameric form. We believe that by favoring the monomeric form, Linjeta tm allows for more rapid delivery of insulin into the blood as the human body requires insulin to be in the form of a single molecule before it can be absorbed into the body to produce its desired biological effects. Based upon our preclinical and clinical data, we believe Linjeta tm may produce a profile of insulin levels in the blood that approximates the natural first-phase insulin release following a meal that is normally seen in persons without diabetes.
 
Clinical Trials of Linjeta tm
 
Phase 1 and Phase 2 Clinical Trials.   We have conducted Phase 1 and Phase 2 clinical trials comparing the performance of Linjeta tm to Humalog ® , the largest selling rapid-acting insulin analog in the United States, and Humulin ® R. In these trials, we observed that Linjeta tm produced a release profile into the blood that more closely approximates the natural first-phase insulin release in response to a meal that is seen in healthy individuals.
 
Pivotal Phase 3 Clinical Trials.   We completed our two pivotal Phase 3 clinical trials of Linjeta tm in July 2008. Our pivotal Phase 3 clinical trials were open-label, parallel group, randomized trials conducted at centers in the United States, Germany and India. The trials were designed to compare the efficacy and safety of Linjeta tm to Humulin ® R. One of the trials tested Linjeta tm in patients with Type 1 diabetes and the other in patients with Type 2 diabetes. We enrolled more than 400 patients in each trial for a six month treatment period. Approximately one-half of the patients in each trial were treated with Linjeta tm and the remainder with Humulin ® R. The primary objective of the trials was to determine if Linjeta tm was not inferior to Humulin ® R in the management of blood glucose levels, as measured by the mean change in patients’ glycosylated hemoglobin, or HbA1c, levels from baseline to the end of the trial. HbA1c levels are a measure of patients’ average blood glucose levels over a period of approximately 3 months. HbA1c is the FDA’s preferred endpoint for diabetes trials. Predefined secondary endpoints in the trials included rates of mild and moderate and severe hypoglycemic events, and changes in body weight.
 
Approximately 400 patients with Type 1 and Type 2 diabetes who completed the pivotal Phase 3 clinical trials elected to participate in a long term safety extension trial in which all patients were treated with Linjeta tm as their mealtime insulin. The last patient visit in the extension trial was in February 2010.
 
In September 2008, we announced results from a preliminary analysis of the data from our pivotal Phase 3 clinical trials of Linjeta tm . In our Type 1 trial, we found that data from patients with Type 1 diabetes in India were anomalous when compared to data from the United States and Germany for the same trial. When HbA1c data from patients in India were included in the analysis of the Type 1 trial, change in HbA1c favored the Humulin ® R treatment group. In our Type 2 trial, we found that Linjeta ® was comparable to Humulin ® R in terms of blood glucose control, when measured by the mean change in patients’ HbA1c levels.
 
In December 2009, we submitted an NDA to the FDA under section 505(b)(2) of the FFDCA for clearance to market Linjeta tm as a treatment for diabetes. The NDA included results from pharmacokinetic and standardized meal studies, our pivotal six month Phase 3 clinical trials of Linjeta tm in patients with Type 1 and Type 2 diabetes, as well as interim results from the long-term 18 month safety extension trials for patients


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who completed the pivotal Phase 3 clinical trials. The NDA sought approval for a 100 IU/cc liquid formulation of Linjeta tm that we determined was bioequivalent to the two-part 25 IU/cc lyophilized powder formulation of Linjeta tm that was used in our pivotal Phase 3 clinical trials. We believed at the time of our NDA filing that the FDA could conclude, on the basis of our pharmacokinetic and pharmacodynamic studies as well as our two pivotal Phase 3 clinical trials, that the efficacy and safety of Linteja tm were established. The FDA accepted the NDA for review with a PDUFA action date for the NDA of October 30, 2010.
 
Complete Response Letter.   On November 1, 2010, we announced that the FDA issued a complete response letter requesting additional information regarding our NDA for Linjeta tm . The complete response letter stated that the FDA’s review cycle is complete and that the application cannot be approved in its present form. The complete response letter included comments related to clinical trials, statistical analysis and chemistry, manufacturing and controls. With regard to efficacy, the FDA stated that, in the Type 1 trial analysis, excluding data from India was post-hoc and therefore not sufficient for establishing conclusive evidence of efficacy. In the Type 2 trial analysis, the FDA acknowledged that non-inferiority was established in the completer population but stated that non-inferiority was not established in the intent-to-treat population because the agency did not consider a post-hoc modification of the statistical model as establishing conclusive evidence of efficacy. With regard to safety, the FDA commented that unequivocal non-inferiority needs to be achieved in order to compare the risk of hypoglycemia. The FDA requested that the company conduct two new Phase 3 clinical trials using the commercial formulation of Linjeta tm , one in patients with Type 1 diabetes and the other in patients with Type 2 diabetes, to establish efficacy and safety as related to hypoglycemia and toleration. The FDA also requested additional data related to stability and manufacturing and identified resolution of manufacturing issues related to recent site inspections at third-party manufacturers, Hyaluron, Inc. and Wockhardt, Ltd. as a requisite for approval. We have contacted the FDA to formally request a meeting to discuss the complete response letter.
 
Tolerability.   The Linjeta tm formulation used in the pivotal Phase 3 clinical trials was a two vial presentation, with one vial containing lyophilized insulin and the second vial containing 10 ml of the proprietary Linjeta tm diluent, which upon reconstitution yields a concentration of 25 IU/ml at a pH of 4. We have also developed two pre-mixed, liquid formulations of Linjeta tm at concentrations of 100 IU/ml that we determined are bioequivalent to the 25 IU/ml, two-vial, presentation used in the pivotal Phase 3 clinical trials. One of these formulations is at a pH of 4, and the other is at a pH of 7.
 
In October 2009, we completed a trial studying the tolerability of the pH 7 100 IU/ml liquid formulation of Linjeta tm compared to both the Linjeta tm pH4 25 IU/ml two-part lyophilized formulation and to Humalog ® . This was a double blind, randomized trial in which patients were injected with each of the three study drugs in triplicate, for a total of 9 doses, each given on separate days. The primary endpoint of the trial was injection site discomfort as measured on a visual analog scale. A secondary endpoint was the patient’s qualitative description of severity (mild, moderate or severe). Results from the tolerability trial indicated that the liquid formulation of Linjeta tm presented a statistically significant reduction in injection site discomfort when compared to the lyophilized formulation. However, some patients experienced more injection site discomfort with the liquid formulation of Linjeta tm than they did with Humalog ® . As measured by a visual analog scale where 0 represents no discomfort and 100 represents the worst possible discomfort, the 25 IU/ml lyophilized formulation of Linjeta tm and the pH 7 100 IU/ml liquid formulation of Linjeta tm received scores (arithmetic mean±SE) of 22.0 ± 2.78 and 17.3 ± 2.50 (p = 0.041 for difference between Linjeta tm formulations), respectively, compared to a score of 5.3 ± 1.02 for Humalog ® . The mean qualitative severity ratings were in the mild range or lower for all three study drugs.
 
In July 2010, we completed a Phase 1 single-center, double-blind, randomized crossover trial in 13 subjects with Type 1 diabetes who received a single injection of the pH 7 100 IU/ml liquid formulation of Linjeta tm or one of two modified liquid formulations, each on a separate day. The purpose of the clinical trial was to compare the pharmacokinetic characteristics and toleration of Linjeta tm to the two modified formulations. We found that the modified formulations, when compared to the proposed commercial formulation that is the subject of the complete response letter we received from the FDA, were associated with similar rates of absorption, lower maximal insulin concentrations and substantially improved toleration profiles. As measured by a visual analog scale described above, the modified formulations received scores (arithmetic mean±SE) of 9.0 ±2.55 and 4.0 ± 1.17 compared to a score of 20.6 ± 6.68 for the proposed commercial formulation of Linjeta tm (p = 0.112 and p = 0.028 for difference between each respective modified formulation and Linjeta tm ). The mean


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qualitative severity ratings were in the mild range for Linjeta tm and were significantly improved for the two modified formulations. The modified formulations generally use the same or similar excipients as Linjeta tm , while varying the ratios of salts.
 
Use of Linjeta tm in Insulin Pumps.   In September 2010, we performed a preliminary analysis of data from a double-blind, two-period crossover study comparing Linjeta tm to Humalog ® with regard to glucose control when administered through an insulin pump. Twenty patients with Type 1 diabetes received one of the study drugs for 72 hours, after which the patients crossed over to the other study drug. The clinical trial included in-patient and out-patient periods. In the in-patient period, blood glucose levels were measured following a standard meal challenge. In both the in-patient and out-patient periods, blood glucose levels were measured using continuous glucose monitoring devices. Our preliminary analysis of the data resulting from this clinical trial indicated that for the in-patient meal challenge, neither Linjeta tm nor Humalog ® were as effective in controlling peak blood glucose levels as would be expected had the study drugs been administered through standard injections. The initial peak in blood glucose levels following the meal challenge was higher for Linjeta tm than for Humalog ® . Also, in the period of time following the mean postprandial peak, Linjeta tm was associated with higher glucose levels on average, whereas Humalog ® was associated with more hypoglycemia. During the out-patient portion of the study, overall glucose control was comparable between the two study drugs. We continue to analyze the data resulting from this clinical trial and intend to present final results at an appropriate scientific forum. Additionally, we are conducting studies in an animal model of diabetes in an effort to optimize the parameters for delivery of Linjeta tm through insulin pumps.
 
Development status.   In light of the extensive nature of the FDA’s comments regarding our NDA, we do not anticipate commencing new pivotal Phase 3 clinical trials with our current formulation of Linjeta tm prior to meeting with the FDA and, separately, determining whether one of our other proprietary rapid-acting insulin or insulin analog formulations should be advanced in its place. These alternate formulations generally use the same or similar excipients as Linjeta tm , but may present improvements with regard to injection site discomfort. In fiscal year 2011, we intend to conduct preclinical studies and Phase 1 clinical trials to determine whether one or more of our newer insulin formulations is likely to offer a combination of pharmacokinetic, stability and tolerability characteristics that is preferable to Linjeta tm . Following our meeting with the FDA regarding Linjeta tm and based on our analysis of the preclinical and Phase 1 clinical data for our alternate formulations, we will determine the number, type and duration of additional trials we intend to conduct prior to initiating Phase 3 clinical trials with a proprietary rapid-acting insulin.
 
Government Regulation
 
The FDA and other federal, state, local and foreign regulatory agencies impose substantial requirements upon the clinical development, approval, labeling, manufacture, marketing and distribution of drug products. These agencies regulate, among other things, research and development activities and the testing, approval, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, advertising and promotion of our product candidates. The regulatory approval process is generally lengthy and expensive, with no guarantee of a positive result. Moreover, failure to comply with applicable FDA or other requirements may result in civil or criminal penalties, recall or seizure of products, injunctive relief including partial or total suspension of production, or withdrawal of a product from the market.
 
United States Government Regulation
 
The FDA regulates, among other things, the research, manufacture, promotion and distribution of drugs in the United States under the FFDCA and other statutes and implementing regulations. Biodel intends to seek FDA approval for its product candidates in an NDA, and not under an application submitted for approval as a biologic under the Public Health Service Act. The process required by the FDA before a drug product candidate may be marketed in the United States under an NDA generally involves the following:
 
  •  completion of extensive nonclinical laboratory tests, animal studies and formulation studies, all performed in accordance with the FDA’s Good Laboratory Practice, or GLP, regulations;
 
  •  submission to the FDA of an IND which must become effective before human clinical trials may begin;


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  •  for some products, performance of adequate and well-controlled human clinical trials in accordance with the FDA’s regulations, including Good Clinical Practices, to establish the safety and efficacy of the product candidate for each proposed indication;
 
  •  submission to the FDA of an NDA;
 
  •  satisfactory completion of an FDA preapproval inspection of the manufacturing facilities at which the product is produced to assess compliance with current Good Manufacturing Practice, or cGMP, regulations; and
 
  •  FDA review and approval of the NDA prior to any commercial marketing, sale or shipment of the drug.
 
The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our product candidates will be granted on a timely basis, if at all.
 
Nonclinical tests include laboratory evaluations of product chemistry, formulation and stability, as well as studies to evaluate toxicity in animals and other animal studies. The results of nonclinical tests, together with manufacturing information and analytical data, are submitted as part of an IND to the FDA. Some nonclinical testing may continue even after an IND is submitted. The IND also includes one or more protocols for the initial clinical trial or trials and an investigator’s brochure. An IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions relating to the proposed clinical trials as outlined in the IND and places the clinical trial on a clinical hold. In such cases, the IND sponsor and the FDA must resolve any outstanding concerns or questions before any clinical trials can begin. Clinical trial holds also may be imposed at any time before or during studies due to safety concerns or non-compliance with regulatory requirements. An independent institutional review board, or IRB, at each of the clinical centers proposing to conduct the clinical trial must review and approve the plan for any clinical trial before it commences at that center. An IRB considers, among other things, whether the risks to individuals participating in the trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the consent form signed by the trial participants and must monitor the study until completed.
 
Clinical Trials.   Clinical trials involve the administration of the product candidate to human subjects under the supervision of qualified medical investigators according to approved protocols that detail the objectives of the study, dosing procedures, subject selection and exclusion criteria, and the parameters to be used to monitor participant safety. Each protocol is submitted to the FDA as part of the IND.
 
Human clinical trials are typically conducted in three sequential phases, but the phases may overlap, or be combined.
 
  •  Phase 1 clinical trials typically involve the initial introduction of the product candidate into healthy human volunteers. In Phase 1 clinical trials, the product candidate is typically tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and pharmacodynamics.
 
  •  Phase 2 clinical trials are conducted in a limited patient population to gather evidence about the efficacy of the product candidate for specific, targeted indications; to determine dosage tolerance and optimal dosage; and to identify possible adverse effects and safety risks.
 
  •  Phase 3 clinical trials are undertaken to evaluate clinical efficacy and to test for safety in an expanded patient population at geographically dispersed clinical trial sites. The size of Phase 3 clinical trials depends upon clinical and statistical considerations for the product candidate and disease, but sometimes can include several thousand patients. Phase 3 clinical trials are intended to establish the overall risk-benefit ratio of the product candidate and provide an adequate basis for product labeling.
 
Clinical testing must satisfy extensive FDA regulations. Reports detailing the results of the clinical trials must be submitted at least annually to the FDA and safety reports must be submitted for serious and unexpected adverse events. Success in early stage clinical trials does not assure success in later stage clinical trials. The FDA, an IRB or we may suspend a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk.


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New Drug Applications.   Assuming successful completion of the required clinical trials, the results of product development, nonclinical studies and clinical trials are submitted to the FDA as part of an NDA. An NDA also must contain extensive manufacturing information, as well as proposed labeling for the finished product. An NDA applicant must develop information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing the product in accordance with cGMP. The manufacturing process must be capable of consistently producing quality product within specifications approved by the FDA. The manufacturer must develop methods for testing the quality, purity and potency of the final product. In addition, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the product does not undergo unacceptable deterioration over its shelf life. Prior to approval, the FDA will conduct an inspection of the manufacturing facilities to assess compliance with cGMP.
 
The FDA reviews all NDAs submitted before it accepts them for filing. The FDA may request additional information rather than accept an NDA for filing. In this event, the NDA must be resubmitted with the additional information and is subject to review before the FDA accepts it for filing. After an application is filed, the FDA may refer the NDA to an advisory committee for review, evaluation and recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendation of an advisory committee, but it considers them carefully when making decisions. The FDA may deny approval of an NDA if the applicable regulatory criteria are not satisfied. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than we interpret the same data. The FDA may issue a complete response letter, which may require additional clinical or other data or impose other conditions that must be met in order to secure final approval of the NDA. If a product receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. In addition, the FDA may require us to conduct Phase 4 testing which involves clinical trials designed to further assess a drug’s safety and effectiveness after NDA approval, and may require surveillance programs to monitor the safety of approved products which have been commercialized. Once issued, the FDA may withdraw product approval if ongoing regulatory requirements are not met or if safety or efficacy questions are raised after the product reaches the market. The agency may also impose requirements that the NDA holder conduct new studies, make labeling changes, implement Risk Evaluation and Mitigation Strategies, and take other corrective measures.
 
Section 505(b)(2) NDAs.   There are two types of NDAs: the full NDA and the Section 505(b)(2) NDA. We intend to file Section 505(b)(2) NDAs that might, if accepted by the FDA, save time and expense in the development and testing of our product candidates. A full NDA is submitted under Section 505(b)(1) of the FFDCA, and must contain full reports of investigations conducted by the applicant to demonstrate the safety and effectiveness of the drug. A Section 505(b)(2) NDA may be submitted for a drug for which one or more of the investigations relied upon by the applicant was not conducted by or for the applicant and for which the applicant has no right of reference from the person by or for whom the investigations were conducted. A Section 505(b)(2) NDA may be submitted based in whole or in part on published literature or on the FDA’s finding of safety and efficacy of one or more previously approved drugs, which are known as reference drugs. Thus, the filing of a Section 505(b)(2) NDA may result in approval of a drug based on fewer clinical or nonclinical studies conducted by the applicant than would be required under a full NDA. The number and size of studies that need to be conducted by the sponsor depends on the amount and quality of data pertaining to the reference drug that are publicly available, and on the similarity of and differences between the applicant’s drug and the reference drug. In some cases, extensive, time-consuming, and costly clinical and nonclinical studies may still be required for approval of a Section 505(b)(2) NDA.
 
Because we are developing new formulations of previously approved chemical entities, such as insulin, our drug approval strategy is to submit Section 505(b)(2) NDAs to the FDA. We plan to pursue similar routes for submitting applications for our product candidates in foreign jurisdictions if available. The FDA may not agree that our product candidates are approvable as Section 505(b)(2) NDAs. Insulin is a small protein molecule which is known to be associated with significant intra- and inter-patient variability of absorption and resulting glucose lowering response. This makes it more difficult to demonstrate that two insulin substances are highly similar than would be the case with many small molecule drugs. The availability of the


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Section 505(b)(2) NDA pathway for insulin is even more controversial than for small molecule drugs, and the FDA may not accept this pathway for our insulin drug candidates. There is no specific guidance available for insulin Section 505(b)(2) NDAs, and no insulin product has been approved under a Section 505(b)(2) NDA. If the FDA determines that Section 505(b)(2) NDAs are not appropriate and that full NDAs are required for our product candidates, the time and financial resources required to obtain FDA approval for our product candidates could substantially and materially increase, and our products might be less likely to be approved. If the FDA requires full NDAs for our product candidates, or requires more extensive testing and development for some other reason, our ability to compete with alternative products that arrive on the market more quickly than our product candidates would be adversely impacted.
 
Patent Protections.   An applicant submitting a Section 505(b)(2) NDA must certify to the FDA with respect to the patent status of the reference drug upon which the applicant relies in support of approval of its drug. With respect to every patent listed in the FDA’s Orange Book, which is the FDA’s list of approved drug products, as claiming the reference drug or an approved method of use of the reference drug, the Section 505(b)(2) applicant must certify that: (1) there is no patent information listed by the FDA for the reference drug; (2) the listed patent has expired; (3) the listed patent has not expired, but will expire on a particular date; (4) the listed patent is invalid, unenforceable, or will not be infringed by the manufacture, use, or sale of the product in the Section 505(b)(2) NDA; or (5) if the patent is a use patent, that the applicant does not seek approval for a use claimed by the patent. If the applicant files a certification to the effect of clause (1), (2) or (5), FDA approval of the Section 505(b)(2) NDA may be made effective immediately upon successful FDA review of the application, in the absence of marketing exclusivity delays, which are discussed below. If the applicant files a certification to the effect of clause (3), the Section 505(b)(2) NDA approval may not be made effective until the expiration of the relevant patent and the expiration of any marketing exclusivity delays.
 
If the Section 505(b)(2) NDA applicant provides a certification to the effect of clause (4), referred to as a paragraph IV certification, the applicant also must send notice of the certification to the patent owner and the holder of the NDA for the reference drug. The filing of a patent infringement lawsuit within 45 days of the receipt of the notification may prevent the FDA from approving the Section 505(b)(2) NDA for 30 months from the date of the receipt of the notification unless the court determines that a longer or shorter period is appropriate because either party to the action failed to reasonably cooperate in expediting the action. However, the FDA may approve the Section 505(b)(2) NDA before the 30 months have expired if a court decides that the patent is invalid, unenforceable, or not infringed, or if a court enters a settlement order or consent decree stating the patent is invalid or not infringed.
 
Notwithstanding the approval of many products by the FDA pursuant to Section 505(b)(2), over the last few years certain brand-name pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA’s interpretation of Section 505(b)(2) is successfully challenged in court, the FDA may be required to change its interpretation of Section 505(b)(2) which could delay or even prevent the FDA from approving any Section 505(b)(2) NDA that we submit. The pharmaceutical industry is highly competitive, and it is not uncommon for a manufacturer of an approved product to file a citizen petition with the FDA seeking to delay approval of, or impose additional approval requirements for, pending competing products. If successful, such petitions can significantly delay, or even prevent, the approval of the new product. Moreover, even if the FDA ultimately denies such a petition, the FDA may substantially delay approval while it considers and responds to the petition.
 
Marketing Exclusivity.   Market exclusivity provisions under the FFDCA can delay the submission or the approval of Section 505(b)(2) NDAs, thereby delaying a Section 505(b)(2) product from entering the market. The FFDCA provides five-year marketing exclusivity to the first applicant to gain approval of an NDA for a new chemical entity, or NCE, meaning that the FDA has not previously approved any other drug containing the same active moiety. This exclusivity generally prohibits the submission of a Section 505(b)(2) NDA for any drug product containing the active moiety during the five-year exclusivity period. However, submission of a Section 505(b)(2) NDA that certifies that a listed patent is invalid, unenforceable, or will not be infringed, as discussed above, is permitted after four years, but if a patent infringement lawsuit is brought within 45 days after such certification, FDA approval of the Section 505(b)(2) NDA may automatically be stayed until


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7.5 years after the NCE approval date. The FFDCA also provides three years of marketing exclusivity for the approval of new and supplemental NDAs for product changes, including, among other things, new indications, dosage forms, routes of administration or strengths of an existing drug, or for a new use, if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by FDA to be essential to the approval of the application. Five-year and three-year exclusivity will not delay the submission or approval of another full NDA; however, as discussed above, an applicant submitting a full NDA under Section 505(b)(1) would be required to conduct or obtain a right of reference to all of the preclinical and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.
 
Other types of exclusivity in the United States include orphan drug exclusivity and pediatric exclusivity. The FDA may grant orphan drug designation to a drug intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making available in the United States a drug for this type of disease or condition will be recovered from sales in the United States for that drug. Seven-year orphan drug exclusivity is available to a product that has orphan drug designation and that receives the first FDA approval for the indication for which the drug has such designation. Orphan drug exclusivity prevents approval of another application for the same drug for the same orphan indication, for a period of seven years, regardless of whether the application is a full NDA or a Section 505(b)(2) NDA, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity. Pediatric exclusivity, if granted, provides an additional six months to an existing exclusivity or statutory delay in approval resulting from a patent certification. This six-month exclusivity, which runs from the end of other exclusivity protection or patent delay, may be granted based on the voluntary completion of a pediatric study in accordance with an FDA-issued “Written Request” for such a study.
 
Section 505(b)(2) NDAs are similar to full NDAs filed under Section 505(b)(1) in that they are entitled to any of these forms of exclusivity if they meet the qualifying criteria. They also are entitled to the patent protections described above, based on patents that are listed in the FDA’s Orange Book in the same manner as patents claiming drugs and uses approved for NDAs submitted as full NDAs.
 
Other Regulatory Requirements.   Maintaining substantial compliance with appropriate federal, state and local statutes and regulations requires the expenditure of substantial time and financial resources. Drug manufacturers are required to register their establishments with the FDA and certain state agencies, and after approval, the FDA and these state agencies conduct periodic unannounced inspections to ensure continued compliance with ongoing regulatory requirements, including cGMPs. In addition, after approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval. The FDA may require post-approval testing and surveillance programs to monitor safety and the effectiveness of approved products that have been commercialized. Any drug products manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including:
 
  •  record-keeping requirements;
 
  •  reporting of adverse experiences with the drug;
 
  •  providing the FDA with updated safety and efficacy information;
 
  •  reporting on advertisements and promotional labeling;
 
  •  drug sampling and distribution requirements; and
 
  •  complying with electronic record and signature requirements.
 
In addition, the FDA strictly regulates labeling, advertising, promotion and other types of information on products that are placed on the market. There are numerous regulations and policies that govern various means for disseminating information to health-care professionals as well as consumers, including to industry sponsored scientific and educational activities, information provided to the media and information provided


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over the Internet. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved label.
 
The FDA has very broad enforcement authority and the failure to comply with applicable regulatory requirements can result in administrative or judicial sanctions being imposed on us or on the manufacturers and distributors of our approved products, including warning letters, refusals of government contracts, clinical holds, civil penalties, injunctions, restitution, and disgorgement or profits, recall or seizure of products, total or partial suspension of production or distribution, withdrawal of approvals, refusal to approve pending applications, and criminal prosecution resulting in fines and incarceration. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability. In addition, 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.
 
Regulations Outside the United States
 
In addition to regulations in the United States, we will be subject to a variety of laws and regulations in other jurisdictions governing clinical trials and commercial sales and distribution of our products. Whether or not we obtain FDA approval for a product, we must obtain the necessary approvals by the comparable regulatory authorities of countries outside the United States before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement also vary between jurisdictions.
 
To obtain regulatory approval of a drug under European Union regulatory systems, we may submit applications for marketing authorizations either under a centralized or decentralized procedure. The centralized procedure is compulsory for medicines produced by certain biotechnological processes, new active substances indicated for the treatment of certain diseases such as AIDS, cancer, neurodegenerative disorders and diabetes, and products designated as orphan medicinal products, and optional for other new active substances and those products which constitute a significant therapeutic, scientific or technical innovation. The procedure provides for the grant of a single marketing authorization that is valid for all European Union member states, as well as for Iceland, Liechtenstein, and Norway. The decentralized procedure provides for approval by one or more other, or concerned, member states of an assessment of an application performed by one member state, known as the reference member state. Under this procedure, an applicant submits an application, or dossier, and related materials including a draft summary of product characteristics, and draft labeling and package leaflet, to the reference member state and concerned member states. The reference member state prepares a draft assessment and drafts of the related materials within 120 days after receipt of a valid application. Within 90 days of receiving the reference member state’s assessment report, each concerned member state must decide whether to approve the assessment report and related materials. If a member state cannot approve the assessment report and related materials on the grounds of potential serious risk to the public health, the disputed points may eventually be referred to the European Commission, whose decision is binding on all member states.
 
Competition
 
The pharmaceutical industry is characterized by intense competition and rapidly evolving technology. For several decades, scientists have attempted to improve the bioavailability of injected formulations and to devise alternative non-invasive delivery systems for the delivery of macromolecules such as insulin. If approved, our product candidates will compete against many products with similar indications.
 
If approved, our primary competition for Linjeta tm will be rapid-acting mealtime injectable insulins such as Humalog ® , which is marketed by Eli Lilly, NovoLog ® , which is marketed by Novo Nordisk, and Apidra ® , which is marketed by Sanofi-Aventis.
 
In addition, other development stage rapid-acting insulin formulations may be approved and compete with Linjeta tm . Halozyme Therapeutics, Inc. has conducted a Phase 1 and multiple Phase 2 clinical trials of


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Humulin ® R and Humalog ® in combination with a recombinant human hyaluronidase enzyme and has reported that in each case the combination yielded pharmacokinetics and glucodynamics that better mimicked physiologic mealtime insulin release and activity than Humulin ® R or Humalog ® alone. Novo Nordisk has reported that they have initiated clinical development of an ultra-fast-acting insulin analogue intended to provide faster onset of action than the currently available fast-acting insulin analogs.
 
Several companies are also developing alternative insulin systems for diabetes, including MannKind Corporation, which has an inhalable insulin product candidate for which an NDA was submitted in early 2009 with an upcoming PDUFA date of December 29, 2010. The approval and acceptance of an inhaled insulin such as MannKind’s product could reduce the overall market for injectable prandial insulin.
 
Treatment practices can also change with the introduction of new classes of therapy. Currently GLP-1 analogs such as exantide, marketed by Eli Lilly, and liraglutide, marketed by Novo Nordisk, are growing in usage and could delay the start of insulin usage in some patients therefore decreasing the size of the prandial insulin market.
 
While at this time there are no approved generic or biosimilar insulin analogs in the market in the United States or Europe, in other countries such as India there are multiple approved manufacturers of insulin analogs such has Humalog ® . Both Humalog ® and NovoLog ® have limited remaining patent protection in the United States and Europe. Biocon, an established biosimilar manufacturer, has entered into a collaboration with Pfizer to commercialize biosimilar versions of Humalog ® and NovoLog ® . The possible introduction of lower priced brands or substitutable generic versions of these products could negatively impact the revenue potential of Linjeta tm .
 
Intellectual Property and Proprietary Technology
 
Our technologies have been developed exclusively by our employees, without input from third parties.
 
On October 9, 2007 the United States Patent and Trademark Office issued U.S. Patent No. 7,279,457 encompassing Linjeta tm and VIAtab tm . The patent will expire no earlier than January 2026.
 
On October 12, 2008 we reported that we received a notice of allowance from the European Patent Office for patent claims encompassing Linjeta tm and VIAtab tm . The European Patent granted as EP 1 740 154 on June 17, 2009 and expire on March 11, 2025 in the designated countries if all annuity fees are paid.
 
We have a policy of filing for patent protection on all our product candidates. Our patents and patent applications consist of the following:
 
  •  one granted United States patent, three foreign patents, and several pending United States patent applications and corresponding foreign and international patent applications relating to our Linjeta tm and VIAtab tm technology;
 
  •  one foreign patent and one pending foreign patent application relating to our technology for enhancing delivery of drugs in a form for absorption through the skin into the blood, a process known as transdermal drug delivery;
 
  •  one granted United States patent, one foreign patent, one pending United States patent application and corresponding foreign patent applications relating to sublingual and/or oral delivery devices that can be used to deliver the certain insulin based products; and
 
  •  two granted United States patents, several United States patent applications and a corresponding foreign and international patent applications relating to other early stage product candidates.
 
Our pending patent applications, those we may file in the future, or those we may license from third parties, may not result in patents being issued.
 
The individual active and inactive ingredients in our Linjeta tm and VIAtab tm product candidates have been known and used for many years and, therefore, are no longer subject to patent protection, except in proprietary combinations. Accordingly, our patent and pending applications are directed to the particular formulations of these ingredients in our products, and to their use. Although we believe our formulations and their use are


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patented and provide a competitive advantage, our patents may not prevent others from marketing formulations using the same active and inactive ingredients in similar but different formulations.
 
We require our employees, consultants and members of our scientific advisory board to execute confidentiality agreements upon the commencement of employment, consulting or collaborative relationships with us. These agreements provide that all confidential information developed or made known during the course of the relationship with us be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees, the agreements provide that all inventions resulting from work performed for us, utilizing our property or relating to our business and conceived or completed by the individual during employment shall be our exclusive property to the extent permitted by applicable law.
 
Manufacturing
 
We have previously used our laboratory in Danbury, Connecticut to meet the limited manufacturing requirements of some of our product candidates through Phase 2 clinical trials. We intend to continue to do so in the future. We intend to also manufacture our product candidates by contracting with third parties that operate manufacturing facilities in accordance with cGMP. To date, we have relied on two commercial manufacturers — Hyaluron, Inc. and Wockhardt, Ltd. — to manufacture our Linjeta tm product candidate. Hyaluron, Inc. and Wockhardt, Ltd. have each recently undergone an inspection by the FDA in which deficiencies were identified and a warning letter from the FDA was issued. The FDA has required that these deficiencies be corrected prior to the approval or manufacture of Linjeta tm or the manufacture of our other product formulations for use in clinical trials. At this time, the ability of, and the length of time that may be required by, Hyaluron, Inc. and Wockhardt, Ltd. to remediate the deficiencies identified by the FDA is uncertain. Failure by either Hyaluron, Inc. or Wockhardt, Ltd. to adequately and timely remediate the deficiencies identified by the FDA may delay the execution of our strategic plans, including the manufacturing of study drugs for use in clinical trials.
 
We have contracted with N.V. Organon (formerly known as Diosynth B.V.), a global producer of insulin, to supply us with all of the insulin that we will need for the testing and manufacturing of our product candidates. Our agreement with N.V. Organon will terminate in December 2011, and we are discussing the possibility of extending the agreement. We believe that our current supplies of insulin, together with the quantities of insulin called for under our existing supply agreement, will be sufficient to allow us to complete our current and anticipated future clinical trials of Linjeta tm or alternative rapid-acting insulin formulations using regular human insulin, as well as support the commercial launch of the product if approved by the FDA. We may seek to qualify another insulin supplier to serve as additional or alternative supplier.
 
Sales and Marketing
 
We currently have no sales and marketing capabilities and no distribution capabilities. Our current strategy is to selectively enter into collaboration agreements with leading pharmaceutical or biotechnology companies for the commercialization of our product candidates.
 
Employees
 
At September 30, 2010 we had 55 full time-employees and several part-time consultants who perform services for us on a regular basis. We consider our employee relations to be good.
 
Additional Information
 
Our website is www.biodel.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnished it to, the Securities and Exchange Commission. Our reports filed with the Securities and Exchange Commission are also available at the Securities and Exchange Commission’s website at www.sec.gov.


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Executive Officers of the Registrant
 
The following table sets forth our executive officers, their respective ages and positions as of November 30, 2010:
 
             
Name
 
Age
 
Position
 
Dr. Errol B. De Souza
    57     President and Chief Executive Officer
Dr. Solomon S. Steiner
    73     Chief Scientific Officer
Gerard Michel
    47     Chief Financial Officer, Vice President, Corporate Development and Treasurer
Dr. Alan Krasner
    47     Chief Medical Officer
Paul Bavier
    38     General Counsel and Secretary
Erik Steiner
    44     Vice President, Operations
 
Dr. De Souza joined our management and board of directors in March 2010. Dr. De Souza has nearly two decades of experience in the biopharmaceutical industry. From March 2009 until March 2010, Dr. De Souza was a pharmaceutical and biotechnology consultant. From April 2003 to January 2009, Dr. De Souza was president and chief executive officer of Archemix Corporation, a privately-held biopharmaceutical company focused on aptamer therapeutics. From September 2002 to March 2003, he was president, chief executive officer and a director of Synaptic Pharmaceuticals Corporation, a publicly traded biopharmaceutical company that was acquired by H. Lundbeck A/S in March 2003. Dr. De Souza is a member of the board of directors of each of the following publicly traded companies: Bionomics Ltd., Palatin Technologies, Inc. and Targacept, Inc. Dr. De Souza received his B.A. (Honors) in physiology and his Ph.D. in neuroendocrinology from the University of Toronto and he received his postdoctoral fellowship in neuroscience from The Johns Hopkins University School of Medicine. We believe Dr. DeSouza’s qualifications to sit on our board of directors include his extensive experience with pharmaceutical companies, and his years of experience providing services to pharmaceutical and biotechnology organizations, including evaluating business plans involving clinical trials.
 
Dr. Solomon S. Steiner co-founded our company and served as our Chairman, President and Chief Executive Officer since our inception in December 2003 until March 2010 when he became our Chief Scientific Officer and remained a member of our board of directors. In 1991, Dr. Steiner founded Pharmaceutical Discovery Corporation, or PDC, a biopharmaceutical corporation. Dr. Steiner served as PDC’s Chief Executive Officer and Chairman of the Board of Directors from its inception until December 2001, when PDC was merged with two other companies to form MannKind Corporation. From December 2001 to February 2003, Dr. Steiner served on MannKind’s Board of Directors and as a Corporate Vice President and Chief Scientific Officer. In 1985, Dr. Steiner founded and was the Chairman of the Board of Directors and President of Clinical Technologies Associates, Inc., or CTAI, now known as Emisphere Technologies, Inc. Under his leadership CTAI went public in February of 1989. Dr. Steiner is an inventor of Emisphere’s oral delivery system for peptides and mucopolysaccharides. Dr. Steiner is currently an adjunct full professor at New York Medical College and research full professor of psychiatry and neurology at New York University School of Medicine. Dr. Steiner received a Ph.D. from New York University. We believe Dr. Steiner’s extensive experience in the pharmaceutical, biotechnology and healthcare industries provides valuable background and insight to our board of directors.
 
Mr. Gerard Michel joined our company in November 2007 as Chief Financial Officer, Vice President of Corporate Development and Treasurer. From October 2003 to November 2007, Mr. Michel served as Chief Financial Officer and from April 2006 to November 2007, Vice President, Corporate Development of NPS Pharmaceuticals, a biopharmaceutical company. From June 1995 to July 2002, Mr. Michel served as a Principal of the consulting firm Booz-Allen & Hamilton. Mr. Michel received an MBA and B.S. from University of Rochester, and an M.S., in Microbology from The University of Rochester School of Medicine and Dentistry.
 
Dr. Alan Krasner joined our company in May 2008 as Chief Medical Officer. From 2002 to 2008, Dr. Krasner served as Director of the Department of Clinical Research Metabolic Diseases at Pfizer Global Research and Development where he was responsible for the design, execution, clinical analysis, and reporting


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of multiple, global clinical trials supporting registration of late stage drug candidates. Dr. Krasner currently serves as a consulting physician at the Joslin Diabetes and Endocrinology Center of the Lawrence and Memorial Hospital in New London, Connecticut. Dr. Krasner holds a B.S. from the Medical Education Honors Program at Northwestern University and a M.D. from Northwestern University Medical School. He completed his residency at Johns Hopkins Hospital in internal medicine and subsequently received a fellowship from Johns Hopkins Hospital in endocrinology and metabolism.
 
Mr. Paul Bavier has served as our general counsel and secretary since December 2008. From October 2007 to December 2008, Mr. Bavier served as our deputy general counsel. From November 2004 to October 2007, Mr. Bavier served as assistant general counsel at Gerber Scientific, Inc. Mr. Bavier began his legal career as an associate in the corporate law department of Ropes & Gray in Boston. He holds a B.A. from Middlebury College and a J. D. from the University of Michigan Law School.
 
Mr. Erik Steiner co-founded our company and has served as our Vice President, Operations since our inception in December 2003. From February 2003 to December 2003, Mr. Steiner co-founded and served as the Vice President, Operations of Steiner Ventures. From May 1999 to February 2003, Mr. Steiner served as Head of Operations of Cabot McMullen Inc., a film and television production company. Prior thereto, Mr. Steiner served as Administrative Director and Fiscal Administrator of the New Jersey Public Interest Research Group. Mr. Steiner is Solomon Steiner’s son.
 
ITEM 1A.    RISK FACTORS
 
Risks Related to Our Financial Position and Need for Additional Capital
 
We have incurred significant losses since our inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.
 
Since our inception in December 2003, we have incurred significant operating losses. Our net loss was approximately $38.3 million for the year ended September 30, 2010. As of September 30, 2010, we had a deficit accumulated during the development stage of approximately $164.8 million. We have invested a significant portion of our efforts and financial resources in the development of Linjeta tm . In October 2010, the FDA notified us that it would not approve our NDA for Linjeta tm unless and until we conduct two new Phase 3 clinical trials, one in Type 1 diabetes and the other in Type 2 diabetes, using the final commercial formulation of Linjeta tm , we address deficiencies with the chemistry, manufacturing and controls, or CMC, section of the NDA, and our primary third-party manufacturers adequately remediate facility inspection observations. In light of the extensive nature of the FDA’s comments, we do not anticipate commencing new pivotal Phase 3 clinical trials with Linjeta tm prior to meeting with the FDA to clarify their requests and, separately, determining whether related rapid-acting insulin or insulin analogs that we are formulating should be advanced instead. These alternate formulations generally use the same or similar excipients as the formulation of Linjeta tm in our NDA, but they may present improvements with regard to injection site discomfort. After meeting with the FDA to discuss the complete response letter we received for Linjeta tm , we expect to determine our preferred development, clinical and regulatory program for our rapid-acting insulin or insulin analog formulations and whether to advance our current formulation of Linjeta tm in additional pivotal Phase 3 clinical trials. We expect to continue to incur significant operating losses for at least the next several years as we may:
 
  •  conduct pre-clinical studies and Phase 1 clinical trials to study formulations of Linjeta tm and other related rapid-acting insulin and insulin analog formulations that that may be associated with less injection site discomfort than the formulation that is the subject of the complete response letter we received from the FDA;
 
  •  commence a stability program to determine whether any of our alternate formulations of rapid-acting insulins or insulin analogs are likely to present a commercially acceptable stability profile;
 
  •  conduct additional clinical trials of Linjeta tm , including two potential pivotal Phase 3 clinical trials requested by the FDA to support approval;


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  •  produce additional validation batches of Linjeta tm vials, cartridges, and disposable pens to support our NDA for Linjeta tm ;
 
  •  purchase recombinant human insulin and other materials consistent with our existing contractual obligations; and
 
  •  conduct additional clinical development of our other product candidates.
 
To become and remain profitable, we must succeed in developing and eventually commercializing drugs with significant market potential. This will require us to be successful in a range of challenging activities, including successfully completing preclinical testing and clinical trials of our product candidates, obtaining regulatory approval for these product candidates and manufacturing, marketing and selling those products for which we may obtain regulatory approval. We may never succeed in these activities and may never generate revenues that are significant or large enough to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable could depress the market price of our common stock and could impair our ability to raise capital, expand our business or continue our operations. A decline in the market price of our common stock could also cause you to lose all or a part of your investment.
 
We will need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs or commercialization efforts.
 
We are a development stage company with no commercial products. All of our product candidates are still being developed. All but Linjeta tm are in early stages of development, and we are in the process of determining whether to commence new pivotal Phase 3 clinical trials with our current formulation of Linjeta tm or advance one of our other proprietary rapid-acting insulin or insulin analog formulations instead. Our product candidates will require significant additional clinical development, regulatory approvals and related investment before they can be commercialized. While we have reduced expenditures on our development programs that are not related to rapid-acting mealtime insulins, we do not expect our research and development expenses to decrease as we continue our formulation work. Unless we are successful in consummating a strategic partnership to develop and commercialize Linjeta tm or an alternate rapid-acting insulin or insulin analog, we may need to raise substantial additional capital to develop and commercialize a competitive mealtime insulin product. Such financing may not be available on terms acceptable to us, or at all. If we are unable to obtain financing on favorable terms, our business, results of operations and financial condition may be materially adversely affected.
 
Based upon our current plans, we believe that our existing cash, cash equivalents and marketable securities will enable us to fund our anticipated operating expenses and capital expenditures at least through the second quarter of fiscal year 2012. We cannot assure you that our plans will not change or that changed circumstances will not result in the depletion of our capital resources more rapidly than we currently anticipate. Our future capital requirements will depend on many factors, including:
 
  •  our ability to respond to the complete response letter regarding our NDA for Linjeta tm in a timely manner and the possibility that information we provide in response to the letter may not be sufficient for the approval of Linjeta tm or another rapid-acting insulin or insulin analog by the FDA;
 
  •  our ability to secure approval by the FDA for our product candidates under Section 505(b)(2) of the FFDCA and the degree to which we are able to clarify with the FDA related regulatory requirements;
 
  •  our ability to conduct the additional pivotal clinical trials that the FDA requested in the complete response letter or other tests or analyses required by the FDA to secure approval to commercialize Linjeta tm ;
 
  •  our ability to develop and commercialize formulations of Linjeta tm or other rapid-acting insulin or insulin analog formulations that may be associated with less injection site discomfort than the formulation that is the subject of the complete response letter we received from the FDA;


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  •  the progress, timing or success of our product candidates, particularly Linjeta tm , and that of our research, development and clinical programs, including any resulting data analyses;
 
  •  the cost to develop an insulin pen for use with Linjeta tm and a formulation of Linjeta tm for use in insulin pumps;
 
  •  the costs of pre-commercialization activities, if any;
 
  •  the costs associated with qualifying and obtaining regulatory approval of suppliers of insulin and manufacturers of our product candidates;
 
  •  the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims;
 
  •  the emergence of competing technologies and products and other adverse market developments; and
 
  •  our ability to establish and maintain collaborations and the terms and success of the collaborations, including the timing and amount of payments that we might receive from potential strategic collaborators.
 
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through public or private equity offerings and debt financings, strategic collaborations and licensing arrangements. If we raise additional funds by issuing additional equity securities, our stockholders will experience dilution. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any debt financing or additional equity that we raise may contain terms, such as liquidation and other preferences, that are not favorable to us or our stockholders. If we raise additional funds through collaboration, strategic alliance and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies or product candidates, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.
 
Our short operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.
 
We commenced active operations in January 2004. Our operations to date have been limited to organizing and staffing our company, developing and securing our technology and undertaking preclinical studies and clinical trials of our product candidates. We have limited experience completing large-scale, pivotal clinical trials and we have not yet demonstrated our ability to obtain regulatory approvals, manufacture a commercial scale product, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history.
 
In addition, as a new business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. We may need to transition from a company with a research focus to a company capable of supporting commercial activities. We may not be successful in such a transition.
 
Risks Related to the Development and Commercialization of Our Product Candidates
 
We have depended heavily on the success of our most advanced product candidate, Linjeta tm .
 
We have invested a significant portion of our efforts and financial resources in the development of our most advanced product candidate, Linjeta tm . The FDA has concluded, however, that the results from our completed pivotal Phase 3 clinical trials of Linjeta tm are not sufficient to obtain marketing approval for Linjeta tm . If we are unable, or choose not to, complete the two new pivotal Phase 3 clinical trials of Linjeta tm required by the FDA, or if we experience significant delays in doing so, our business may be materially harmed.


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Our development of alternate formulations of Linjeta tm or other rapid-acting mealtime insulins or insulin analogs may not be successful; some formulations may have different regulatory requirements to obtain marketing approval from the FDA.
 
While we have significant experience with the technology we use to develop mealtime insulin formulations designed to be more rapid-acting than currently available products, we cannot guarantee that our program to advance alternate formulations of Linjeta tm or other rapid-acting insulins or insulin analogs will be successful. Some of these formulations appear to be less stable in accelerated testing than the Linjeta tm formulation submitted in our NDA, and we have clinical data suggesting improvements in injection site discomfort relative to Linjeta tm only with regard to two of the alternate formulations. We may be unable to develop a new formulation that is as tolerable and stable as is minimally acceptable to us, a potential strategic partner or the FDA. Furthermore, the regulatory requirements for any alternate formulation may not meet our expectations or may be different from those applicable to the formulation of Linjeta tm submitted in our NDA. For example, advancing any formulation based on an insulin analog may necessitate our conducting additional toxicology work or filing an investigational new drug application.
 
We may never reinitiate significant expenditures on our earlier stage product candidates.
 
We have suspended significant expenditures on the development of product candidates that are not related to a rapid-acting insulin or insulin analog. Until we determine our development, clinical and regulatory program for our rapid-acting insulin formulations and whether to advance our current formulation of Linjeta tm in additional pivotal Phase 3 clinical trials, we cannot guarantee that we will have sufficient resources to allocate to earlier stage product candidates or that the focus of our early stage product development program will not change.
 
The results of clinical trials do not ensure success in future clinical trials or commercial success.
 
We have completed and released the results of our two pivotal Phase 3 clinical trials of Linjeta tm . We have not completed the development of any products through commercialization. In October 2010, the FDA notified us that it would not approve our NDA for Linjeta tm unless and until we conduct two new pivotal Phase 3 clinical trials using the final commercial formulation of Linjeta tm , we address deficiencies with the CMC section of our NDA, and our primary third-party manufacturers adequately remediate facility inspection observations. The outcomes of preclinical testing and clinical trials may not be predictive of the success of later clinical trials. Furthermore, interim or preliminary results of a clinical trial do not necessarily predict final results. We cannot assure you that our additional clinical trials of Linjeta tm , if any, will ultimately be successful. New information regarding the safety, efficacy and tolerability of Linjeta tm may arise that may be less favorable than the data observed to date.
 
If we are not successful in commercializing any of our product candidates, or are significantly delayed in doing so, our business will be materially harmed. The commercial success of our product candidates will depend on several factors, including the following:
 
  •  successful completion of preclinical development and clinical trials;
 
  •  our ability to identify and enroll patients who meet clinical trial eligibility criteria;
 
  •  receipt of marketing approvals from the FDA and similar regulatory authorities outside the United States;
 
  •  establishing that, with regard to Linjeta tm or any rapid or long-acting insulin or insulin analog, the formulation is well-tolerated in chronic use;
 
  •  establishing commercial manufacturing capabilities through arrangements with third-party manufacturers;
 
  •  launching commercial sales of the products, whether alone or in collaboration with others;
 
  •  competition from other products; and
 
  •  continued acceptable safety and tolerability profiles of the products following approval.


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If our clinical trials are delayed or do not produce positive results, we may incur additional costs and ultimately be unable to commercialize our product candidates.
 
Before obtaining regulatory approval for the sale of our product candidates, we must conduct, at our own expense, extensive preclinical tests to demonstrate the safety of our product candidates in animals and clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Preclinical and clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more of our clinical trials of Linjeta tm or alternate rapid-acting insulin or insulin analog formulations can occur at any stage of testing. We may experience numerous unforeseen events during our clinical trials that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates, including:
 
  •  the number of patients required for our clinical trials may be larger than we anticipate, enrollment in our clinical trials may be slower than we currently anticipate, or participants may drop out of our clinical trials at a higher rate than we anticipate, any of which would result in significant delays;
 
  •  our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner;
 
  •  we might have to suspend or terminate our clinical trials if the participants are being exposed to unacceptable health risks;
 
  •  regulators or institutional review boards may require that we hold, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;
 
  •  the cost of our clinical trials may be greater than we anticipate;
 
  •  the supply or quality of our product candidates or other materials necessary to conduct our clinical trials may be insufficient or inadequate; and
 
  •  the effects of our product candidates may not be the desired effects, may include undesirable side effects or the product candidates may have other unexpected characteristics.
 
If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete our clinical trials or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:
 
  •  be delayed in obtaining marketing approval for our product candidates;
 
  •  not be able to obtain marketing approval;
 
  •  obtain approval for indications that are not as broad as intended; or
 
  •  have the product removed from the market after obtaining marketing approval.
 
Our product development costs will also increase if we experience delays in testing or approvals. We do not know whether any preclinical tests or clinical trials will begin as planned, will need to be restructured or will be completed on schedule, if at all. Significant preclinical or clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do and impair our ability to commercialize our products or product candidates and may harm our business and results of operations.
 
If our product candidates are found to cause undesirable side effects we may need to delay or abandon our development and commercialization efforts.
 
Any undesirable side effects that might be caused by our product candidates could interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications. In addition, if any of our product candidates receive marketing approval and


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we or others later identify undesirable side effects caused by the product, we could face one or more of the following:
 
  •  a change in the labeling statements or withdrawal of FDA or other regulatory approval of the product;
 
  •  a change in the way the product is administered; or
 
  •  the need to conduct additional clinical trials.
 
Any of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing the product, which in turn could delay or prevent us from generating significant revenues from its sale.
 
In our analysis of our completed pivotal Phase 3 clinical trials, we found that Linjeta tm was associated with injection site discomfort, although the prevalence of discomfort decreased during the course of the treatment. In addition, in an October 2009 tolerability trial of the liquid formulation of Linjeta tm , it was determined that some patients experienced more injection site discomfort with Linjeta tm than they did with Humalog ® .
 
The commercial success of any product candidates that we may develop, including Linjeta tm , will depend upon the degree of market acceptance by physicians, patients, healthcare payors and others in the medical community.
 
Any products that we bring to the market, including Linjeta tm , if they receive marketing approval, may not gain market acceptance by physicians, patients, healthcare payors and others in the medical community. If these products do not achieve an adequate level of acceptance, we may not generate significant product revenues and we may not become profitable. Physicians will not recommend our product candidates until clinical data or other factors demonstrate the safety and efficacy of our product candidates as compared to other treatments. Even if the clinical safety and efficacy of our product candidates is established, physicians may elect not to recommend these product candidates for a variety of reasons including the reimbursement policies of government and third-party payors, the effectiveness of our competitors in marketing their products and, in the case of Linjeta tm , the possibility that patients may experience more injection site discomfort than they experience with competing products.
 
The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including:
 
  •  the willingness and ability of patients and the healthcare community to adopt our products;
 
  •  the ability to manufacture our product candidates in sufficient quantities with acceptable quality and to offer our product candidates for sale at competitive prices;
 
  •  the perception of patients and the healthcare community, including third-party payors, regarding the safety, efficacy and benefits of our product candidates compared to those of competing products or therapies;
 
  •  the convenience and ease of administration of our product candidates relative to existing treatment methods;
 
  •  the label and promotional claims allowed by the FDA, such as, in the case of Linjeta tm , claims relating to glycemic control, hypoglycemia, weight gain, injection site discomfort, expiry dating and required handling conditions;
 
  •  the pricing and reimbursement of our product candidates relative to existing treatments; and
 
  •  marketing and distribution support for our product candidates.


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If we fail to enter into strategic collaborations for the commercialization of our product candidates or if our collaborations are unsuccessful, we may be required to establish our own sales, marketing, manufacturing and distribution capabilities which will be expensive, require additional capital we do not currently have, and could delay the commercialization of our product candidates and have a material and adverse effect on our business.
 
A broad base of physicians, including primary care physicians, internists and endocrinologists, treat patients with diabetes. A large sales force may be required to educate and support these physicians. Therefore, our current strategy for developing, manufacturing and commercializing our product candidates includes securing collaborations with leading pharmaceutical and biotechnology companies for the commercialization of our product candidates. To date, we have not entered into any collaborations with pharmaceutical or biotechnology companies. We face significant competition in seeking appropriate collaborators. In addition, collaboration agreements are complex and time-consuming to negotiate, document and implement. For all these reasons, it may be difficult for us to find third parties that are willing to enter into collaborations on economic terms that are favorable to us, or at all. Even if we do enter into any such collaboration, the collaboration may not be successful. The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. It is likely that our collaborators will have significant discretion in determining the efforts and resources that they will apply to these collaborations.
 
If we fail to enter into collaborations, or if our collaborations are unsuccessful, we may be required to establish our own direct sales, marketing, manufacturing and distribution capabilities. Establishing these capabilities can be time-consuming and expensive and we have little experience in doing so. Because of our size, we would be at a disadvantage to our potential competitors to the extent they collaborate with large pharmaceutical companies that have substantially more resources than we do. As a result, we would not initially be able to field a sales force as large as our competitors or provide the same degree of market research or marketing support. In addition, our competitors would have a greater ability to devote research resources toward expansion of the indications for their products. We cannot assure prospective investors that we will succeed in entering into acceptable collaborations, that any such collaboration will be successful or, if not, that we will successfully develop our own sales, marketing and distribution capabilities.
 
If we are unable to obtain adequate reimbursement from governments or third-party payors for any products that we may develop or if we are unable to obtain acceptable prices for those products, they may not be purchased or used and our revenues and prospects for profitability will suffer.
 
Our future revenues and profits will depend heavily upon the availability of adequate reimbursement for the use of our approved product candidates from governmental and other third-party payors, both in the United States and in other markets. Reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a product is:
 
  •  a covered benefit under its health plan;
 
  •  safe, effective and medically necessary;
 
  •  appropriate for the specific patient;
 
  •  cost-effective; and
 
  •  neither experimental nor investigational.
 
Obtaining reimbursement approval for a product from each government or other third-party payor is a time-consuming and costly process that could require us to provide supporting scientific, clinical and cost-effectiveness data for the use of our products to each payor. We may not be able to provide data sufficient to gain acceptance with respect to reimbursement. Even when a payor determines that a product is eligible for reimbursement, the payor may impose coverage limitations that preclude payment for some uses that are approved by the FDA or comparable authorities. In addition, eligibility for coverage does not imply that any product will be reimbursed in all cases or at a rate that allows us to make a profit or even cover our costs.


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Interim payments for new products, if applicable, may also not be sufficient to cover our costs and may not be made permanent.
 
We may be subject to pricing pressures and uncertainties regarding Medicare reimbursement and reform.
 
Reforms in Medicare added a prescription drug reimbursement benefit beginning in 2006 for all Medicare beneficiaries. Although we cannot predict the full effects on our business of the implementation of this legislation, it is possible that the new benefit, which will be managed by private health insurers, pharmacy benefit managers, and other managed care organizations, will result in decreased reimbursement for prescription drugs, which may further exacerbate industry-wide pressure to reduce the prices charged for prescription drugs. This could harm our ability to generate revenues.
 
Governments outside the United States tend to impose strict price controls, which may adversely affect our revenues, if any.
 
In some countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be adversely affected.
 
Legislation has been introduced in Congress that, if enacted, would permit more widespread re-importation of drugs from foreign countries into the United States, which may include re-importation from foreign countries where the drugs are sold at lower prices than in the United States. Such legislation, or similar regulatory changes, could decrease the price we receive for any approved products which, in turn, could adversely affect our operating results and our overall financial condition.
 
Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.
 
We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and will face an even greater risk if we commercially sell any products that we may develop. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
 
  •  decreased demand for any product candidates or products that we may develop;
 
  •  injury to our reputation;
 
  •  withdrawal of clinical trial participants;
 
  •  costs to defend the related litigation;
 
  •  substantial monetary awards to trial participants or patients;
 
  •  loss of revenue; and
 
  •  the inability to commercialize any products that we may develop.
 
We currently carry global liability insurance that we believe is sufficient to cover us from potential damages arising from clinical trials of Linjeta tm . We also carry local insurance policies per clinical trial of our product candidates. The amount of insurance that we currently hold may not be adequate to cover all liabilities that we may incur. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for any products. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost. If losses from product liability claims exceed our liability insurance coverage, we may ourselves incur substantial liabilities. If we are required to pay a product


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liability claim, we may not have sufficient financial resources to complete development or commercialization of any of our product candidates and, if so, our business and results of operations would be harmed.
 
We face substantial competition in the development of our product candidates which may result in others developing or commercializing products before or more successfully than we do.
 
We are engaged in segments of the pharmaceutical industry that are characterized by intense competition and rapidly evolving technology. Many large pharmaceutical and biotechnology companies, academic institutions, governmental agencies and other public and private research organizations are pursuing the development of novel drugs that target endocrine disorders. We face, and expect to continue to face, intense and increasing competition as new products enter the market and advanced technologies become available. There are several approved injectable rapid-acting mealtime insulin analogs currently on the market including Humalog ® , marketed by Eli Lilly and Company, NovoLog ® , marketed by Novo Nordisk A/S, and Apidra ® , marketed by Sanofi-Aventis. These rapid-acting insulin analogs provide improvement over regular forms of short-acting insulin, including faster subcutaneous absorption, an earlier and greater insulin peak and more rapid post-peak decrease. In addition, other development stage rapid-acting insulin formulations may be approved and compete with Linjeta tm . Halozyme Therapeutics, Inc. has conducted a Phase 1 and multiple Phase 2 clinical trials of Humulin ® R and Humalog ® in combination with a recombinant human hyaluronidase enzyme and has reported that in each case the combination yielded pharmacokinetics and glucodynamics that better mimicked physiologic mealtime insulin release and activity than Humulin ® R or Humalog ® alone. Novo Nordisk has reported that they have initiated clinical development of an ultra-fast-acting insulin analogue intended to provide faster onset of action than the currently available fast-acting insulin analogs.
 
Several companies are also developing alternative insulin systems for diabetes, including MannKind Corporation, which has an inhalable insulin product candidate for which an NDA was submitted in early 2009 with an upcoming PDUFA date of December 29, 2010. The approval and acceptance of an inhaled insulin such as MannKind’s product could reduce the overall market for injectable prandial insulin.
 
Treatment practices can also change with the introduction of new classes of therapy. Currently GLP-1 analogs such as exantide, marketed by Eli Lilly, and liraglutide, marketed by Novo Nordisk, are growing in usage and could delay the start of insulin usage in some patients therefore decreasing the size of the prandial insulin market.
 
While at this time there are no approved generic or biosimilar insulin analogs in the market in the United States or Europe, in other countries such as India there are multiple approved manufacturers of insulin analogs such has Humalog ® . Both Humalog ® and NovoLog ® have limited remaining patent protection in the United States and Europe. Biocon, an established biosimilar manufacturer, has entered into a collaboration with Pfizer to commercialize biosimilar versions of Humalog ® and NovoLog ® . The possible introduction of lower priced brands or substitutable generic versions of these products could negatively impact the revenue potential of Linjeta tm .
 
Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization. Our competitors may develop products that are more effective, safer, more convenient or less costly than any that we are developing or that would render our product candidates obsolete or non-competitive. Our competitors may also obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours.
 
Many of our potential competitors have:
 
  •  significantly greater financial, technical and human resources than we have and may be better equipped to discover, develop, manufacture and commercialize product candidates;
 
  •  more extensive experience in preclinical testing and clinical trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products;
 
  •  product candidates that have been approved or are in late-stage clinical development; or
 
  •  collaborative arrangements in our target markets with leading companies and research institutions.


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Our product candidates may be rendered obsolete by technological change.
 
The rapid rate of scientific discoveries and technological changes could result in one or more of our product candidates becoming obsolete or noncompetitive. For several decades, scientists have attempted to improve the bioavailability of injected formulations and to devise alternative non-invasive delivery systems for the delivery of drugs such as insulin. Our product candidates will compete against many products with similar indications. In addition to the currently marketed rapid-acting insulin analogs, our competitors are developing insulin formulations delivered by oral pills, pulmonary devices and oral spray devices. Our future success will depend not only on our ability to develop our product candidates, but also on our ability to maintain market acceptance against emerging industry developments. We cannot assure present or prospective stockholders that we will be able to do so.
 
Our business activities involve the storage and use of hazardous materials, which require compliance with environmental and occupational safety laws regulating the use of such materials. If we violate these laws, we could be subject to significant fines, liabilities or other adverse consequences.
 
Our research and development work and manufacturing processes involve the controlled storage and use of hazardous materials, including chemical and biological materials. Our operations also produce hazardous waste products. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials. Although we believe that our safety procedures for handling and disposing of such materials and waste products comply in all material respects with the standards prescribed by federal, state and local laws and regulations, the risk of accidental contamination or injury from hazardous materials cannot be completely eliminated. In the event of an accident or failure to comply with environmental laws, we could be held liable for any damages that may result, and any such liability could fall outside the coverage or exceed the limits of our insurance. In addition, we could be required to incur significant costs to comply with environmental laws and regulations in the future or pay substantial fines or penalties if we violate any of these laws or regulations. Finally, current or future environmental laws and regulations may impair our research, development or production efforts.
 
Risks Related to Our Dependence on Third Parties
 
Use of third parties to manufacture our product candidates may increase the risks that we will not have sufficient quantities of our product candidates or such quantities at an acceptable cost, or that our suppliers will not be able to manufacture our products in their final dosage form. In any such case, clinical development and commercialization of our product candidates could be delayed, prevented or impaired.
 
We do not currently own or operate manufacturing facilities for commercial production of our product candidates. We have limited experience in drug manufacturing and we lack the resources and the capabilities to manufacture any of our product candidates on a clinical or commercial scale. Our current strategy is to outsource all manufacturing of our product candidates and products to third parties. We also expect to rely upon third parties to produce materials required for the commercial production of our product candidates if we succeed in obtaining necessary regulatory approvals. We currently rely on two manufacturers, Hyaluron, Inc. and Wockhardt, Ltd., to manufacture Linjeta tm , but we do not have commercial supply agreements with these third parties.
 
Hyaluron, Inc. and Wockhardt, Ltd. have each recently undergone an inspection by the FDA in which deficiencies were identified and a warning letter from the FDA was issued. The FDA has required that these deficiencies be corrected prior to the approval or manufacture of Linjeta tm or the manufacture of our other product formulations for use in clinical trials. At this time, the ability of, and the length of time that may be required by Hyaluron, Inc. and Wockhardt, Ltd. to remediate the deficiencies identified by the FDA is uncertain. Failure by either Hyaluron, Inc. or Wockhardt, Ltd. to adequately and timely remediate the deficiencies identified by the FDA may delay the execution of our strategic plans, including the manufacturing of study drugs for use in clinical trials.


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Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates or products ourselves, including:
 
  •  reliance on the third party for regulatory compliance and quality assurance;
 
  •  the possible breach of the manufacturing agreement by the third party because of factors beyond our control; and
 
  •  the possible refusal by the third party to support our manufacturing programs, based on its own business priorities, at a time that is costly or inconvenient for us.
 
Our manufacturers may not be able to comply with current good manufacturing practice, or cGMP, regulations or other regulatory requirements or similar regulatory requirements outside the United States. Our manufacturers are subject to unannounced inspections by the FDA, state regulators and similar regulators outside the United States. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our product candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our product candidates.
 
Our product candidates and any products that we may develop may compete with other product candidates and products for access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP regulations and that are both capable of manufacturing for us and willing to do so. If the third parties that we engage to manufacture product for our clinical trials should cease to continue to do so for any reason, we likely would experience delays in advancing these trials while we identify and qualify replacement suppliers and we may be unable to obtain replacement supplies on terms that are favorable to us. In addition, if we are not able to obtain adequate supplies of our product candidates or the drug substances used to manufacture them, it will be more difficult for us to develop our product candidates and compete effectively.
 
Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our future profit margins and our ability to develop product candidates and commercialize any products that receive regulatory approval on a timely and competitive basis.
 
We rely on third parties to conduct our clinical trials and those third parties may not perform satisfactorily, including failing to meet established deadlines for the completion of such trials.
 
We do not independently conduct clinical trials of our product candidates. We rely on third parties, such as contract research organizations, clinical data management organizations, medical institutions and clinical investigators, to enroll qualified patients and conduct our clinical trials. Our reliance on these third parties for clinical development activities reduces our control over these activities. We are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as Good Clinical Practices, for conducting, recording, and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, regulatory approvals for our product candidates and will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates.


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If our suppliers, principally our sole insulin supplier, fail to deliver materials and provide services needed for the production of Linjeta tm or any alternative rapid-acting insulin or insulin analog in a timely and sufficient manner, or if they fail to comply with applicable regulations, clinical development or regulatory approval of our product candidates or commercialization of our products could be delayed, producing additional losses and depriving us of potential product revenue.
 
We need access to sufficient, reliable and affordable supplies of recombinant human insulin and other materials for which we rely on various suppliers. We also must rely on those suppliers to comply with relevant regulatory and other legal requirements, including the production of insulin in accordance with cGMP. We can make no assurances that our suppliers, particularly our insulin supplier, will comply with cGMP.
 
We have entered into an agreement with our existing single insulin supplier from which we obtain all of the insulin that we use for testing and manufacturing Linjeta tm or any alternative rapid-acting insulin formulation based on recombinant human insulin. Our agreement with this insulin supplier will terminate in December 2011. We are discussing the possibility of extending this supply agreement beyond 2011, depending on our strategic plans, but we cannot guarantee that this effort will be successful.
 
We believe that our current supplies of insulin, together with the quantities of insulin called for under our existing supply agreement, will be sufficient to allow us to complete, if we so choose, the two new pivotal Phase 3 clinical trials of Linjeta tm required by the FDA in order to receive approval to market Linjeta tm . We may seek to qualify other insulin suppliers to serve as additional or alternative suppliers if we are unable or choose not to enter into a new commercial supply agreement with our existing supplier. We do not anticipate being able to qualify a new insulin supplier prior to December 2011. Even if we do qualify a new supplier in a timely manner, the cost of switching or adding additional suppliers may be significant, and we cannot assure you that we will be able to enter into a commercial supply agreement with a new supplier on favorable terms. If we are unable to procure sufficient quantities of insulin from our current or any future supplier, if supply of recombinant human insulin and other materials otherwise becomes limited, or if our suppliers do not meet relevant regulatory requirements, and if we were unable to obtain these materials in sufficient amounts, in a timely manner and at reasonable prices, we could be delayed in the manufacturing and possible commercialization of Linjeta tm , which may have a material adverse effect on our business. We would incur substantial costs and manufacturing delays if our suppliers are unable to provide us with products or services approved by the FDA or other regulatory agencies.
 
Risks Related to Our Intellectual Property
 
If we are unable to protect our intellectual property rights, our competitors may develop and market similar or identical products that may reduce demand for our products, and we may be prevented from establishing collaborative relationships on favorable terms.
 
The following factors are important to our success:
 
  •  receiving patent protection for our product candidates;
 
  •  maintaining our trade secrets;
 
  •  not infringing on the proprietary rights of others; and
 
  •  preventing others from infringing our proprietary rights.
 
We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. We try to protect our proprietary position by filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. Because the patent position of pharmaceutical companies involves complex legal and factual questions, the issuance, scope and enforceability of patents cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. Thus, any patents that we own or license from others may not provide any protection against competitors.


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We have been granted one U.S. patent, one European patent, one Hong Kong patent, and one Australian patent. The European patent entered the national phase in all of the designated countries. In addition, we have several pending United States and corresponding foreign and international patent applications relating to our Linjeta tm and VIAtab tm technology and several pending U.S. and foreign patent applications relating to our technology for enhancing delivery of drugs. These pending patent applications, those we may file in the future, or those we may license from third parties, may not result in patents being issued. If patents do not issue with claims encompassing our products, our competitors may develop and market similar or identical products that compete with ours. Even if patents are issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Failure to obtain effective patent protection for our technology and products may reduce demand for our products and prevent us from establishing collaborative relationships on favorable terms.
 
The active and inactive ingredients in our Linjeta tm and VIAtab tm product candidates have been known and used for many years and, therefore, are no longer subject to patent protection. Accordingly, our granted U.S. and foreign patents and pending patent applications are directed to the particular formulations of these ingredients in our products, and their use. Although we believe our formulations and their use are patentable and provide a competitive advantage, even if issued, our patents may not prevent others from marketing formulations using the same active and inactive ingredients in similar but different formulations.
 
We also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. We try to protect this information by entering into confidentiality agreements with parties that have access to it, such as potential corporate partners, collaborators, employees and consultants. Any of these parties may breach the agreements and disclose our confidential information or our competitors may learn of the information in some other way. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed. If any trade secret, know-how or other technology not protected by a patent were to be disclosed to or independently developed by a competitor, our business and financial condition could be materially adversely affected.
 
The laws of many foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States.
 
We may become involved in lawsuits and administrative proceedings to protect, defend or enforce our patents that would be expensive and time-consuming.
 
In order to protect or enforce our patent rights, we may initiate patent litigation against third parties in the United States or in foreign countries. In addition, we may be subject to certain opposition proceedings conducted in patent and trademark offices challenging the validity of our patents and may become involved in future opposition proceedings challenging the patents of others. The defense of intellectual property rights, including patent rights, through lawsuits, interference or opposition proceedings, and other legal and administrative proceedings can be costly and can divert our technical and management personnel from their normal responsibilities. Such costs increase our operating losses and reduce our resources available for development activities. An adverse determination of any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.
 
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. For example, during the course of this kind of litigation and despite protective orders entered by the court, confidential information may be inadvertently disclosed in the form of documents or testimony in connection with discovery requests, depositions or trial testimony. This disclosure could materially adversely affect our business and financial results.


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Claims by other parties that we infringe or have misappropriated their proprietary technology may result in liability for damages, royalties, or other payments, or stop our development and commercialization efforts.
 
Competitors and other third parties may initiate patent litigation against us in the United States or in foreign countries based on existing patents or patents that may be granted in the future. Many of our competitors may have obtained patents covering products and processes generally related to our products and processes, and they may assert these patents against us. Moreover, there can be no assurance that these competitors have not sought or will not seek additional patents that may cover aspects of our technology. As a result, there is a greater likelihood of a patent dispute than would be expected if our competitors were pursuing unrelated technologies.
 
While we conduct patent searches to determine whether the technologies used in our products infringe patents held by third parties, numerous patent applications are currently pending and may be filed in the future for technologies generally related to our technologies, including many patent applications that remain confidential after filing. Due to these factors and the inherent uncertainty in conducting patent searches, there can be no guarantee that we will not violate third-party patent rights that we have not yet identified.
 
There may be U.S. and foreign patents issued to third parties that relate to aspects of our product candidates. There may also be patent applications filed by these or other parties in the United States and various foreign jurisdictions that relate to some aspects of our product candidates, which, if issued, could subject us to infringement actions. The owners or licensees of these and other patents may file one or more infringement actions against us. In addition, a competitor may claim misappropriation of a trade secret by an employee hired from that competitor. Any such infringement or misappropriation action could cause us to incur substantial costs defending the lawsuit and could distract our management from our business, even if the allegations of infringement or misappropriation are unwarranted. A need to defend multiple actions or claims could have a disproportionately greater impact. In addition, either in response to or in anticipation of any such infringement or misappropriation claim, we may enter into commercial agreements with the owners or licensees of these rights. The terms of these commercial agreements may include substantial payments, including substantial royalty payments on revenues received by us in connection with the commercialization of our products.
 
Payments under such agreements could increase our operating losses and reduce our resources available for development activities. Furthermore, a party making this type of claim could secure a judgment that requires us to pay substantial damages, which would increase our operating losses and reduce our resources available for development activities. A judgment could also include an injunction or other court order that could prevent us from making, using, selling, offering for sale or importing our products or prevent our customers from using our products. If a court determined or if we independently concluded that any of our products or manufacturing processes violated third-party proprietary rights, our clinical trials could be delayed and there can be no assurance that we would be able to reengineer the product or processes to avoid those rights, or to obtain a license under those rights on commercially reasonable terms, if at all.
 
If the FDA does not believe that our product candidates satisfy the requirements for the Section 505(b)(2) approval procedure, or if the requirements for Linjeta tm under Section 505(b)(2) are not as we expect, the approval pathway will take longer and cost more than anticipated and in either case may not be successful.
 
We believe Linjeta tm and our other rapid-acting insulin formulations using regular human insulin qualify for approval under Section 505(b)(2) of the FFDCA. Because we are developing new formulations of previously approved chemical entities, such as insulin, this may enable us to avoid having to submit certain types of data and studies that are required in full NDAs and instead submit an NDA under Section 505(b)(2). The FDA has not published any guidance that specifically addresses an NDA for an insulin product candidate under Section 505(b)(2). No other insulin product has yet been approved pursuant to an NDA under Section 505(b)(2). If the FDA determines that NDAs under Section 505(b)(2) are not appropriate and that full NDAs are required for our product candidates, we would have to conduct additional studies, provide additional


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data and information, and meet additional standards for approval. The time and financial resources required to obtain FDA approval for our product candidates could substantially and materially increase. This would require us to obtain substantially more funding than previously anticipated which could significantly dilute the ownership interests of our stockholders. Even with this investment, the prospect for FDA approval may be significantly lower. If the FDA requires full NDAs for our product candidates or requires more extensive testing and development for some other reason, our ability to compete with alternative products that arrive on the market more quickly than our product candidates would be adversely impacted.
 
Notwithstanding the approval of many products by the FDA under Section 505(b)(2) over the last few years, certain brand-name pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA’s interpretation of Section 505(b)(2) is successfully challenged, the FDA may be required to change its interpretation of Section 505(b)(2) which could delay or even prevent the FDA from approving any NDA that we submit under Section 505(b)(2). The pharmaceutical industry is highly competitive, and it is not uncommon for a manufacturer of an approved product to file a citizen petition with the FDA seeking to delay approval of, or impose additional approval requirements for, pending competing products. If successful, such petitions can significantly delay, or even prevent, the approval of the new product. However, even if the FDA ultimately denies such a petition, the FDA may substantially delay approval while it considers and responds to the petition.
 
Moreover, even if Linjeta tm or an alternate rapid-acting insulin or insulin analog formulation is approved under Section 505(b)(2), the approval may be subject to limitations on the indicated uses for which the product may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product.
 
Any product for which we obtain marketing approval could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our products, when and if any of them are approved.
 
Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA and other state and federal regulatory authorities. These requirements include, in the case of FDA, submissions of safety and other post-marketing information and reports, registration requirements, cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. In addition, if any of our product candidates are approved, our product labeling, advertising and promotion would be subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that may be made about prescription drug products. In particular, a drug may not be promoted in a misleading manner or for uses that are not approved by the FDA as reflected in the product’s approved labeling. The FDA and other state and federal entities actively enforce the laws and regulations prohibiting misleading promotion and the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability.
 
Discovery after approval of previously unknown problems with our products, manufacturers or manufacturing processes, or failure to comply with state or federal regulatory requirements, may result in actions such as:
 
  •  restrictions on such products’ manufacturers or manufacturing processes;
 
  •  restrictions on the marketing or distribution of a product;
 
  •  requirements that we conduct new studies, make labeling changes, and implement Risk Evaluation and Mitigation Strategies;
 
  •  warning letters;


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  •  withdrawal of the products from the market;
 
  •  refusal to approve pending applications or supplements to approved applications that we submit;
 
  •  recall of products;
 
  •  fines, restitution or disgorgement of profits or revenue;
 
  •  suspension or withdrawal of regulatory approvals;
 
  •  refusal to permit the import or export of our products;
 
  •  product embargo and/or seizure;
 
  •  injunctions; or
 
  •  imposition of civil or criminal penalties.
 
Changes in law, regulations, and policies legislation may preclude approval of our product under a 505(b)(2) or make it more difficult and costly for us to obtain regulatory approval of our product candidates and to produce, market and distribute our existing products.
 
On March 23, 2010, the President signed into law new legislation creating an abbreviated pathway for approval of biological products under the Public Health Service, or PHS Act, that are similar to previously approved biological products. This legislation also expanded the definition of biological product to include proteins such as insulin. The new law contains transitional provisions governing protein products such as insulin that, under certain circumstances, might permit companies to seek approval for their insulin products as biologics under the PHS Act and might require that Biodel’s product be approved under the PHS Act rather than in a 505(b)(2) NDA. We would be unlikely to pursue approval of our insulin product candidates if we were required to seek approval under the PHS Act rather than in a 505(b)(2) NDA.
 
In addition, the federal and state regulations, policies or guidance may change and new may be enacted that could prevent or delay regulatory approval of our product candidates or further restrict or regulate post-approval activities. It is impossible to predict whether additional legislative changes will be enacted, or FDA regulations, guidance or interpretations implemented or modified, or what the impact of such changes, if any, may be.
 
Failure to obtain regulatory approval in international jurisdictions would prevent us from marketing our products abroad.
 
We intend to have our products marketed outside the United States. In order to market our products in the European Union and many other jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy and governing, among other things, clinical trials and commercial sales and distribution of our products. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ from that required to obtain FDA approval. The regulatory approval processes outside the United States may include all of the risks associated with obtaining FDA approval, as well as additional risks. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. We may not obtain approvals from regulatory authorities outside the United States 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 regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market.


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Reports of side effects or safety concerns in related technology fields or in other companies’ clinical trials could delay or prevent us from obtaining regulatory approval or negatively impact public perception of our product candidates.
 
At present, there are a number of clinical trials being conducted by us and by other pharmaceutical companies involving insulin or insulin delivery systems. The major safety concern with patients taking insulin is the occurrence of hypoglycemic events. If we discover that our product is associated with a significantly increased frequency of hypoglycemic or other adverse events, or if other pharmaceutical companies announce that they observed frequent or significant adverse events in their trials involving insulin or insulin delivery systems, we could encounter delays in the commencement or completion of our clinical trials or difficulties in obtaining the approval of our product candidates. In addition, the public perception of our products might be adversely affected, which could harm our business and results of operations, even if the concern relates to another company’s product.
 
Risks Related to Employee Matters and Managing Growth
 
Our future success depends on our ability to retain our chief executive officer and other key executives and to attract, retain and motivate qualified personnel.
 
We are highly dependent on Dr. Errol B. De Souza, President and Chief Executive Officer, Gerard Michel, our Chief Financial Officer and Dr. Alan Krasner, our Chief Medical Officer. The loss of the services of any of these persons might impede the achievement of our research, development and commercialization objectives. Replacing key employees may be difficult and time-consuming because of the limited number of individuals in our industry with the skills and experiences required to develop, gain regulatory approval of and commercialize our product candidates successfully. We generally do not maintain key person life insurance to cover the loss of any of our employees.
 
Recruiting and retaining qualified scientific personnel, clinical personnel and sales and marketing personnel will also be critical to our success. We may not be able to attract and retain these personnel on acceptable terms, if at all, given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from other companies, universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.
 
We may expand our development, regulatory and sales and marketing capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.
 
If our development and commercialization plans for any of our product candidates are successful, we may experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of manufacturing, clinical trials management, and regulatory affairs. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems and continue to recruit and train additional qualified personnel. Due to our limited financial resources we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.
 
Risks Related to Our Common Stock
 
Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
 
Provisions in our corporate charter and bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of


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our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team.
 
Among others, these provisions:
 
  •  establish a classified board of directors such that not all members of the board are elected at one time;
 
  •  allow the authorized number of our directors to be changed only by resolution of our board of directors;
 
  •  limit the manner in which stockholders can remove directors from the board;
 
  •  establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors;
 
  •  require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written consent;
 
  •  limit who may call stockholder meetings;
 
  •  authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a stockholder rights plan or “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors; and
 
  •  require the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast to amend or repeal certain provisions of our charter or bylaws.
 
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.
 
If our stock price is volatile, purchasers of our common stock could incur substantial losses.
 
Our stock price has been and may continue to be volatile. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The market price for our common stock may be influenced by many factors, including:
 
  •  results of clinical trials of our product candidates or those of our competitors;
 
  •  regulatory or legal developments in the United States and other countries;
 
  •  variations in our financial results or those of companies that are perceived to be similar to us;
 
  •  developments or disputes concerning patents or other proprietary rights;
 
  •  the recruitment or departure of key personnel;
 
  •  changes in the structure of healthcare payment systems;
 
  •  market conditions in the pharmaceutical and biotechnology sectors and issuance of new or changed securities analysts’ reports or recommendations;
 
  •  general economic, industry and market conditions; and
 
  •  the other factors described in this “Risk Factors” section.


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Our outstanding warrants may be exercised in the future, which would increase the number of shares in the public market and result in dilution to our stockholders.
 
In August 2010 we sold to two institutional investors 2,398,200 shares of our common stock and warrants to purchase 2,398,200 shares of our common stock, resulting in gross proceeds to us, before deducting placement agents’ fees and offering expenses, of approximately $8.7 million. The warrants to purchase 2,398,200 shares of our common stock had an initial exercise price of $4.716, subject to re-pricing following our receipt of the complete response letter for Linjeta tm . On December 1, 2010, the exercise price of the warrants was re-set to become $1.56 per share. These warrants will expire on December 1, 2011.
 
We have never paid any cash dividends on our capital stock and we do not anticipate paying any cash dividends in the foreseeable future.
 
We have paid no cash dividends on our capital stock to date. We currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, we do not expect to pay any cash dividends in the foreseeable future, and payment of cash dividends, if any, will depend on our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. Furthermore, we may in the future become subject to contractual restrictions on, or prohibitions against, the payment of dividends. Capital appreciation, if any, of our common stock will be investors’ sole source of gain for the foreseeable future.
 
A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.
 
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. As of November 30, 2010, we had approximately 26,433,982 million shares of common stock outstanding. Of these, approximately 9 million shares are able to be sold in accordance with the SEC’s Rule 144 and the remainder are generally freely tradable without restriction under securities laws.
 
We incur substantial costs as a result of operating as a public company, and our management is required to devote substantial time to comply with public company regulations.
 
We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 as well as other federal and state laws. These requirements may place a strain on our people, systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal controls over financial reporting, significant resources and management oversight will be required. This may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
 
ITEM 1B.    UNRESOLVED STAFF COMMENTS
 
Not applicable.
 
ITEM 2.    PROPERTIES
 
We lease approximately 29,300 square feet of office space and laboratory facilities in Danbury, Connecticut from Mulvaney Properties LLC. Our corporate headquarters are located at 100 Saw Mill Road, Danbury, Connecticut, in approximately 19,500 square feet of rentable office space. The lease for this office space expires July 31, 2014, subject to our right to renew the lease under the same terms and conditions for an additional seven year term. Our laboratory facility is located at 6 and 8 Christopher Columbus Avenue, Danbury, Connecticut, in approximately 7,200 and 2,600 square feet of rentable laboratory and office space. The leases for our facilities at 6 and 8 Christopher Columbus expire in January 2013. We expect to renew these leases before they expire. Our


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laboratory facility is fully equipped to perform our current drug delivery and related research and development activities, as well as to manufacture on a limited basis our own product line in accordance with cGMP.
 
Mulvaney Properties LLC is controlled by a non-affiliated stockholder of ours.
 
ITEM 3.    LEGAL PROCEEDINGS
 
We currently are not involved in any legal proceedings.
 
ITEM 4.    REMOVED AND RESERVED
 
PART II-OTHER INFORMATION
 
ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
 
Since May 11, 2007, our common stock has traded on the NASDAQ Global Market under the symbol “BIOD.”
 
The following table sets forth the high and low sale prices per share for our common stock for each of the quarters in the period beginning October 1, 2009 through September 30, 2010, as reported on the NASDAQ Global Market:
 
                 
Quarter Ended
  High   Low
 
December 31, 2008
  $ 4.99     $ 1.62  
March 31, 2009
  $ 6.00     $ 3.29  
June 30, 2009
  $ 6.02     $ 3.64  
September 30, 2009
  $ 5.48     $ 4.46  
December 31, 2009
  $ 5.39     $ 3.29  
March 31, 2010
  $ 5.30     $ 3.22  
June 30, 2010
  $ 6.25     $ 3.74  
September 30, 2010
  $ 6.08     $ 3.25  
 
The closing price of our common stock, as reported by the NASDAQ Global Market, was $1.80 on December 9, 2010.
 
Holders
 
As of November 30, 2010, the number of holders of record of our common stock was 46.
 
Dividends
 
We have never paid or declared any cash dividends on our common stock. We currently intend to retain earnings, if any, to finance the growth and development of our business. Payment of future dividends, if any, will be at the discretion of our board of directors.
 
Equity Compensation Plan Information
 
Information relating to compensation plans under which our equity securities are authorized for issuance is set forth under “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in our definitive proxy statement for our 2011 Annual Meeting of Stockholders.
 
Issuer Purchases of Equity Securities
 
We did not make any purchases of our shares of common stock in the fourth quarter of fiscal 2010, nor did any affiliated purchaser or anyone acting on behalf of us or an affiliated purchaser.


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ITEM 6.    SELECTED FINANCIAL DATA
 
You should read the following selected financial data together with our financial statements and the related notes which are included elsewhere in this Annual Report and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Annual Report. We have derived the statement of operations data set forth below for the three-year period ended September 30, 2010 and the balance sheet data as of September 30, 2009 and 2010 set forth below from our audited financial statements which are included in this Annual Report. We have derived the statement of operations data set forth below for the years ended September 30, 2006, and 2007 and the balance sheet data as of September 30, 2006, 2007 and 2008 set forth below from our audited financial statements, which are not included in this Annual Report. Our audited financial statements include, in the opinion of our management, all adjustments, consisting of only normal recurring accruals, necessary for a fair presentation of those statements. Historical results for any prior or interim period are not necessarily indicative of results to be expected in any future period or for a full fiscal year.
 
                                         
    Year Ended September 30,  
    2006     2007     2008     2009     2010  
    (In thousands, except share and per share amounts)  
 
Statement of operations data:
                                       
Revenue
  $     $     $     $     $  
                                         
Operating expenses:
                                       
Research and development
    5,987       15,939       32,554       32,325       26,177  
General and administrative
    1,548       8,386       14,800       10,994       10,980  
                                         
Total operating expenses
    7,535       24,325       47,354       43,319       37,157  
Other (income) and expense:
                                       
Interest and other income
    (182 )     (1,902 )     (3,010 )     (386 )     (17 )
Interest expense
    78                          
Adjustment to fair value of common stock warrant liability
                            1,254  
Loss on settlement of debt
    627                          
                                         
Loss before tax provision (benefit)
    (8,058 )     (22,423 )     (44,344 )     (42,933 )     (38,394 )
Tax provision (benefit)
    10       125       (983 )     337       (104 )
                                         
Net loss
    (8,068 )     (22,548 )     (43,361 )     (43,270 )     (38,290 )
Charge for accretion of beneficial conversion rights
    (603 )                        
Deemed dividend — warrants
          (4,457 )                  
                                         
Net loss applicable to common stockholders
  $ (8,671 )   $ (27,005 )   $ (43,361 )   $ (43,270 )   $ (38,290 )
                                         
Net loss per share — basic and diluted
  $ (1.05 )   $ (1.76 )   $ (1.94 )   $ (1.82 )   $ (1.58 )
                                         
Weighted average shares outstanding — basic and diluted
    8,252,113       15,354,898       22,390,434       23,746,598       24,161,866  
                                         
 
                                         
    As of September 30,
    2006   2007   2008   2009   2010
    (In thousands)
 
Balance sheet data:
                                       
Cash, cash equivalents, and marketable securities
  $ 17,539     $ 80,022     $ 90,283     $ 54,640     $ 28,923  
Working capital (deficit)
    (15,307 )     75,244       84,377       46,787       25,178  
Total assets
    18,659       82,506       97,511       59,625       32,616  
Deficit accumulated during the development stage
    (12,828 )     (39,833 )     (83,194 )     (126,464 )     (164,754 )
Total stockholders’ equity
    16,348       77,223       88,487       50,538       24,060  


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ITEM 7    MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this Form 10-K. Some of the information in this discussion and analysis or set forth elsewhere in this Form 10-K, including our plans and strategies for our business, includes forward-looking statements which involve risks and uncertainties. Please review the “Forward-Looking Statements” and the “Risk Factors” sections of this Form 10-K for a discussion of important factors that could cause actual results to materially differ from those anticipated or implied by the forward-looking statements contained in the following discussion and analysis.
 
Overview
 
We are a specialty biopharmaceutical company focused on the development and commercialization of innovative treatments for diabetes that may be safer, more effective and more convenient for patients. We develop our product candidates by applying our proprietary formulation technologies to existing drugs in order to improve their therapeutic profiles. Our most advanced product candidate is Linjeta tm (formerly known as VIAject ® ). We have formulated Linjeta tm as a rapid-acting mealtime insulin for the treatment of patients with Type 1 and Type 2 diabetes. Earlier stage product candidates include follow-on and second generation rapid-acting mealtime insulins or insulin analogs, VIAtab tm , a sublingual tablet formulation of insulin, a line of basal insulins, and a stabilized formulation of glucagon.
 
Linjeta tm is our proprietary injectable formulation of recombinant human insulin designed to be absorbed into the blood faster than the currently marketed rapid-acting insulin analogs. We have recently completed two pivotal Phase 3 clinical trials of Linjeta tm , one in patients with Type 1 diabetes and the other in patients with Type 2 diabetes. In both clinical trials we compared Linjeta tm to Humulin ® R, a form of recombinant human insulin. Based upon our preclinical and clinical data, we believe Linjeta tm may produce a profile of insulin levels in the blood that approximates the natural first-phase insulin release following a meal that is normally seen in persons without diabetes following a meal.
 
In November 2010, we announced that the FDA issued a complete response letter requesting additional information regarding our NDA for Linjeta tm . The complete response letter stated that the FDA’s review cycle was complete and that the application could not be approved in its present form. The FDA requested that we conduct two new Phase 3 clinical trials using the final commercial formulation of Linjeta tm , one in patients with Type 1 diabetes and the other in patients with Type 2 diabetes, to establish efficacy and safety as related to hypoglycemia and toleration. The FDA also requested additional data related to stability and manufacturing of our final commercial formulation of Linjeta tm . In addition, the FDA indentified resolution of manufacturing issues related to recent site inspections at Hyaluron, Inc. and Wockhardt, Ltd. as a requisite for approval. We have contacted the FDA to formally request a meeting to discuss the complete response letter.
 
We are a development stage company. We were incorporated in December 2003 and commenced active operations in January 2004. To date, we have generated no revenues and have incurred significant losses. We have financed our operations and internal growth through our initial public offering in May 2007, a follow-on offering in February 2008, a registered direct offering in August 2010 and, prior to these public offerings, private placements of convertible preferred stock and other securities. We have devoted substantially all of our efforts to research and development activities, including clinical trials. Our net loss was $38.3 million for the year ended September 30, 2010. As of September 30, 2010, we had a deficit accumulated during the development stage of $164.8 million. The deficit accumulated during the development stage is attributable primarily to our research and development activities and non-cash charges for (1) accretion of beneficial conversion rights and (2) deemed dividend-warrants and share-based compensation. Research and development and general and administrative expenses, as a percentage of net loss applicable to common stockholders, represent approximately 71% and 29%, respectively, of the expenses that we have incurred since our inception. We expect to continue to generate significant losses as we continue to develop our product candidates.


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To date, we have not generated revenues and we expect to incur operating losses as we continue our efforts to seek FDA approval of Linjeta tm or advance follow-on and second generation rapid-acting mealtime insulins or insulin analogs. As of September 30, 2010, we had approximately $28.9 million in cash, cash equivalents and marketable securities compared to $54.6 million in cash and cash equivalents as of September 30, 2009. We believe that our existing cash, cash equivalents, restricted cash and marketable securities will be sufficient to fund our anticipated operating expenses and capital expenditures at least through the first quarter of fiscal year 2012. If the August 2010 warrants are exercised, we anticipate the cash runway to extend at least through the second quarter of fiscal year 2012.
 
We believe that future cash expenditures will be partially offset by raising additional capital from the capital markets, registered direct deals, proceeds derived from collaborations, including, but not limited to, upfront fees, research and development funding, milestone payments and royalties. We can give no assurances that such funding will, in fact, be realized in the time frames we expect, or at all. We may be required to secure alternative financing arrangements and/or defer or limit some or all of our research, development and/or clinical projects.
 
Financial Operations Overview
 
Revenues
 
To date, we have generated no revenues. We do not expect to begin generating any revenues unless any of our product candidates receive marketing approval or if we receive payments in connection with strategic collaborations that we may enter into for the commercialization of our product candidates.
 
Research and Development Expenses
 
Research and development expenses consist of the cost associated with our basic research activities, as well as the costs associated with our drug development efforts, conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings. Our research and development expenses consist of:
 
  •  external research and development expenses incurred under agreements with third-party contract research organizations and investigative sites, third-party manufacturing organizations and consultants;
 
  •  employee-related expenses, which include salaries and benefits for the personnel involved in our preclinical and clinical drug development and manufacturing activities; and
 
  •  facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment and laboratory and other supplies.
 
While we have reduced expenditures on our earlier stage product candidates, we expect to continue to incur operating losses for the next several years as we:
 
  •  conduct preclinical studies and Phase 1 clinical trials to determine whether one or more of our newer insulin formulations is likely to offer a combination of pharmacokinetic, stability and tolerability characteristics that is preferable to Linjeta tm ;
 
  •  determine our preferred development, clinical and regulatory program for a proprietary rapid-acting insulin or insulin analog formulation following our meeting with the FDA regarding Linjeta tm , and based on our analysis of the preclinical and Phase 1 clinical data for our alternate insulin formulations;
 
  •  conduct preclinical studies with earlier stage product candidates and make limited investments in order to advance proof-of-concept formulations; and
 
  •  purchase recombinant human insulin and other materials as required under existing contractual commitments.
 
We have used our employee and infrastructure resources across multiple research projects and our drug development program for Linjeta tm . To date, we have not tracked expenses related to our product development


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activities on a project or program basis. Accordingly, we cannot reasonably estimate the amount of research and development expenses that we incurred with respect to each of our clinical and preclinical product candidates. However, substantially all of our research and development expenses incurred to date are attributable to our Linjeta tm program.
 
The following table illustrates, for each period presented, our research and development costs by nature of the cost.
 
                                 
                      December 3,
 
                      2003
 
                      (Inception) to
 
    Year Ended September 30,     September 30,
 
    2008     2009     2010     2010  
    (In thousands)        
 
Research and development expenses:
                               
Preclinical expenses
  $ 4,230     $ 2,709     $ 2,746     $ 15,000  
Manufacturing expenses
    6,728       11,674       8,894       30,955  
Clinical/regulatory expenses
    21,596       17,942       14,537       70,273  
                                 
Total
  $ 32,554     $ 32,325     $ 26,177     $ 116,228  
                                 
 
The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, specific timing and estimated costs of the efforts that will be necessary to complete the remainder of the development of, or the period, if any, in which material net cash inflows may commence from our product candidates. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:
 
  •  our ability to respond to the complete response letter regarding our NDA for Linjeta tm in a timely manner and the possibility that information we provide in response to the letter may not be sufficient for the approval of Linjeta tm or another rapid-acting insulin or insulin analog by the FDA;
 
  •  our ability to secure approval by the FDA for our product candidates under Section 505(b)(2) of the FFDCA and the degree to which we are able to clarify with the FDA related regulatory requirements;
 
  •  our ability to conduct the additional pivotal clinical trials the FDA requested in the complete response letter or other tests or analyses required by the FDA to secure approval to commercialize Linjeta tm ;
 
  •  our ability to develop and commercialize formulations of Linjeta tm or other rapid-acting insulin or insulin analog formulations that may be associated with less injection site discomfort than the formulation that is the subject of the complete response letter we received from the FDA;
 
  •  the progress, timing or success of our product candidates, particularly Linjeta tm , and that of our research, development and clinical programs, including any resulting data analyses;
 
  •  the cost to develop an insulin pen for use with Linjeta tm and a formulation of Linjeta tm for use in insulin pumps;
 
  •  the costs of pre-commercialization activities, if any;
 
  •  the costs associated with qualifying and obtaining regulatory approval of suppliers of insulin and manufacturers of our product candidates;
 
  •  the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims;
 
  •  the emergence of competing technologies and products and other adverse market developments; and
 
  •  our ability to establish and maintain collaborations and the terms and success of the collaborations, including the timing and amount of payments that we might receive from potential strategic collaborators.


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A change in the outcome of any of these variables with respect to the development of Linjeta tm or our other product candidates could mean a significant change in the costs and timing associated with product development.
 
General and Administrative Expenses
 
General and administrative expenses consist primarily of salaries and related expenses for personnel, including share-based compensation expenses, in our executive, legal, accounting, finance and information technology functions. Other general and administrative expenses include facility-related costs not otherwise allocated to research and development expense, travel expenses, costs associated with industry conventions and professional fees, such as legal and accounting fees and consulting costs.
 
We anticipate that our general and administrative expenses will change as we focus our efforts on preclinical and Phase 1 studies. Over the longer term, however, these expenses could increase as we approach the commercial launch of Linjeta tm or our other product candidates.
 
Restricted Cash
 
Restricted cash as of September 30, 2010 consisted of $150 thousand held in a money market account with a bank to secure a credit card purchasing agreement utilized to facilitate employee travel and certain ordinary purchases. The restricted cash balance as of September 30, 2009 was $0.
 
Marketable Securities
 
In accordance with Accounting Standard Codification (ASC) Topic 320, Investments in Debt and Equity Securities issued by the Financial Accounting Standard Board (“FASB”) in May 1993, our marketable securities were classified as available-for-sale. In accordance with that standard, these securities are reported at market value with unrealized gains and losses shown as a component of accumulated other comprehensive income (loss). We regularly evaluate the performance of these investments individually for impairment, taking into consideration the investment, volatility and current returns. If a determination is made that a decline in fair value is other-than-temporary, the related securities are written down to their estimated fair value. As of September 30, 2009 and 2010, the Company had $0 and $6.0 of million marketable securities investments, respectively.
 
Pre-Launch Inventory
 
Inventory costs associated with products that have not yet received regulatory approval are capitalized if we believe there is probable future commercial use and future economic benefit. If the probability of future commercial use and future economic benefit cannot be reasonably determined, then costs associated with pre-launch inventory that has not yet received regulatory approval are expensed as research and development expense during the period the costs are incurred. For the year ended September 30, 2010, we expensed $4.5 million of costs associated with the purchase of recombinant human insulin, as research and development expense after it passed quality control inspection and transfer of title occurred. In November 2010, we announced that the FDA has issued a complete response letter requesting additional information regarding the company’s NDA for Linjeta tm . The complete response letter stated that the FDA’s review cycle was complete and that the application could not be approved in its present form. At this time, the Company will continue to expense pre-launch inventory as research and development. The pre-launch inventory treatment will be reevaluated if we complete Phase 3 clinical trials of Linjeta tm or an alternate product candidate for which the inventory is applicable and file a related NDA or NDA supplement for review by the FDA.
 
Warrant Liability
 
On August 24, 2010, we entered into definitive agreements to sell to two institutional investors 2,398,200 shares of our common stock and warrants to purchase an additional 2,398,200 shares of our common stock with an initial exercise price of $4.716 per share. Subsequently, on December 1, 2010, the exercise price of the warrants was re-set to $1.56 per share. These warrants are measured at fair value using


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an accepted valuation model which takes in account, as of the valuation date, factors including the current exercise price, the expected life of the warrant, the current price of the underlying stock and its expected volatility, expected dividends on the stock, the risk-free interest rate for the term of the warrant and the probability of a change of control. The liability is revalued at each reporting period and changes in fair value are recognized currently in the statements of operations under the caption “Adjustment to fair value of common stock warrant liability.” These warrants will expire on December 1, 2011, one year and 21 trading days after receiving the complete response letter from the FDA.
 
Comprehensive Loss
 
Comprehensive loss is comprised of net loss and changes in equity for unrealized holding gains (losses) on marketable securities during the period. For the years ended September 30, 2008, 2009 and 2010, the Company had $(43,423), $(43,208) and $(38,289) of comprehensive loss.
 
Interest Income
 
Interest income consists of interest earned on our cash and cash equivalents and marketable securities, resulting primarily from the $134.3 million in net proceeds received from our initial public offering in May 2007, follow-on offering in February 2008, and registered direct offering in August 2010. In November 2007, our board of directors approved investment policy guidelines, the primary objectives of which are the preservation of capital, the maintenance of liquidity and maintenance of appropriate fiduciary control — subject to our business objectives and tax situation.
 
Due to the uncertainty in the credit and financial markets, along with receiving a complete response letter from the FDA, we have maintained our investment strategy of primarily investing in certain marketable securities, which consist primarily of short-to-intermediate-term debt securities issued by the U.S. government, Treasury securities and U.S. government agencies. The focus on preserving cash and investing in stable securities generated lower returns during the year ended September 30, 2010. We intend to maintain this conservative strategy until the credit and financial markets improve and become more stable.
 
Exercise of Warrants
 
In March 2007, we offered the holders of warrants to purchase an aggregate of 149,125 shares of our Series B convertible preferred stock and an aggregate of 3,417,255 shares of our common stock with an exercise price of $5.56 per share the opportunity to exercise such warrants at an exercise price of $3.67, representing a 34% discount in the exercise price. Such holders exercised all of such warrants on a combination of cashless and cash exercise basis. We issued an aggregate of 2,636,907 shares of common stock and received aggregate cash proceeds of approximately $0.4 million in connection with such exercises.
 
As a result of the discounted exercise price, in the fiscal quarter ended March 31, 2007, we recorded a deemed dividend charge of approximately $4.5 million for the warrants that were so exercised.
 
As of September 30, 2010, we had the following warrants outstanding: (i) warrants to purchase 118,815 shares of our common stock with an exercise price of $1.41 and (ii) warrants to purchase 2,398,200 share of our common stock with an initial exercise price of $4.716 per share. Subsequently, on December 1, 2010, the exercise price of the warrants was re-set to $1.56 per share. These warrants will expire on December 1, 2011, one year and 21 trading days following our receipt of the FDA’s complete response letter for Linjeta tm .
 
Critical Accounting Policies and Significant Judgments and Estimates
 
Our management’s discussion and analysis of our financial condition and results of operations is based on our audited financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses during the reporting


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periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
While our significant accounting policies are more fully described in Note 2 to our financial statements appearing at the end of this Form 10-K, we believe that the following accounting policies, which we have discussed with our audit committee, are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations.
 
Preclinical Study and Clinical Trial Accruals
 
In preparing our financial statements, we must estimate accrued expenses pursuant to contracts with multiple research institutions, clinical research organizations and contract manufacturers that conduct and manage preclinical studies, clinical trials and manufacture product for these trials on our behalf. This process involves communicating with relevant personnel to identify services that have been performed on our behalf and estimating the level of services performed and the associated costs incurred for services when we have not yet been invoiced for or otherwise notified of the actual cost. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. The financial terms of these agreements vary and may result in uneven payment flows. To date, we have not adjusted our estimates at any balance sheet date in any material amount. Examples of preclinical study, clinical trial and manufacturing expenses include the following:
 
  •  fees paid to contract research organizations in connection with preclinical and toxicology studies and clinical trials;
 
  •  fees paid to investigative sites in connection with clinical trials;
 
  •  fees paid to contract manufacturers in connection with the production of clinical trial materials; and
 
  •  professional service fees.
 
Share-Based Compensation
 
In March 2010, our shareholders approved a new 2010 Stock Incentive Plan, or the 2010 Plan. Up to 5,400,000 shares of our common stock may be issued pursuant to awards granted under the 2010 Plan, plus shares of common stock underlying already outstanding awards under our prior plans. The contractual life of options granted under the 2010 Plan may not exceed seven years. The 2010 Plan uses a “fungible share” concept under which any awards that are not a full-value award will be counted against the share limit as one (1) share for each share of common stock and any award that is a full-value award will be counted against the share limit as 1.6 shares for each one share of common stock. We have not made any new awards under any prior equity plans after March 2, 2010 — the effective date the 2010 Plan was approved by our stockholders. We will continue to use the Black-Scholes pricing model to assist in the calculation of fair value. The expected life for these grants was calculated in accordance with the simplified method described in the Securities and Exchange Commission Staff Accounting Bulletin (SAB) Topic 14.D.2 in accordance with SAB No. 110. The simplified method was chosen due to our limited history. Until we have adequate history, we will continue to utilize the simplified method.
 
We recognize compensation costs related to share-based transactions, including employee stock options, in the financial statements based on fair value. The fair value of the stock underlying the options is a significant factor in determining credits or charges to operations appropriate for the share-based payments to both employees and non-employees.
 
We selected the Black-Scholes valuation model as the most appropriate valuation method for stock option grants to employees, members of our board of directors and non-employees. The fair value of these stock option grants is estimated as of their date of grant using the Black-Scholes valuation model.


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Because we lack sufficient company-specific historical and implied volatility information, we based our estimate of expected volatility on the median historical volatility of a group of publicly-traded companies that we believe are comparable to us based on the criteria set forth in Accounting Standards Codification (ASC) Topic 718-10-55-37(c) and SAB Topic 14.D, particularly line of business, stage of development, size and financial leverage. We will continue to consistently apply this process using the same companies or, if those companies become no longer comparable, other appropriately comparable companies until a sufficient amount of historical information regarding the volatility of our share price becomes available. However, we will regularly review these comparable companies, and may substitute more appropriate companies if facts and circumstances warrant a change. We use the average of (1) the weighted average vesting period and (2) the contractual life of the option, seven or eight years, as the estimated term of the option. The risk free rate of interest for periods within the contractual life of the stock option is based on the yield of a U.S. Treasury strip on the date the award is granted with a maturity equal to the expected term of the award. We estimate forfeitures based on actual forfeitures during our limited history. Additionally, we have assumed that dividends will not be paid.
 
For options granted to non-employees and non-directors, primarily consultants serving on our Scientific Advisory Board, we measure fair value of the equity instruments utilizing the Black-Scholes valuation model, if that value is more reliably measurable than the fair value of the consideration or service received. The fair value of these equity investments are periodically revalued as the options vest and are recognized as expense over the related period of service or the vesting period, whichever is longer. As of September 30, 2010, we issued to these non-employees options to purchase an aggregate of 377,111 shares of our common stock. Because we must revalue these options for accounting purposes each reporting period, the amount of the share-based compensation expense related to these non-employee options will increase or decrease, based on changes in the price of our common stock. For the years ended September 30, 2010, 2009 and 2008, the share-based compensation expense (income) related to these options was ($0.01) million, $0.1 million, and $0.2 million, respectively.
 
For the year ended September 30, 2010, the share-based compensation expense was $5.6 million, of which $2.0 million is reflected in research and development expenses and $3.6 million is reflected in general and administrative expenses. For the year ended September 30, 2009, the share-based compensation expense was $5.1 million, of which $1.7 million is reflected in research and development expenses and $3.4 million is reflected in general and administrative expenses. For the year ended September 30, 2008, the share-based compensation expense was $6.7 million, of which $1.6 million is reflected in research and development expenses and $5.1 million is reflected in general and administrative expenses.
 
Income Taxes
 
As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities.
 
At September 30, 2010, we recorded a 100% valuation allowance against our net deferred tax asset of approximately $50.0 million, as our management believes it is uncertain that it will be fully realized. If we determine in the future that we will be able to realize all or a portion of our net deferred tax asset, an adjustment to the deferred tax valuation allowance would increase net income in the period in which we make such a determination.
 
As of September 30, 2010, we had net operating loss carryforwards of approximately $114.7 million for U.S. federal and $132.1 million for state tax purposes. These loss carryforwards expire between 2024 and 2030. To the extent these net operating loss carryforwards are available, we intend to use them to reduce the corporate income tax liability associated with our operations. Section 382 of the U.S. Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that might be used to offset taxable income when a corporation has undergone significant changes in stock ownership. We have performed a preliminary Section 382 analysis in connection with the registered direct offering that we


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completed in August 2010. The sale of common stock in this offering created an additional ownership change. It was determined that we had an ownership change under Section 382. We believe that approximately $18.2 million of the $132.9 million federal losses will expire unused due to Section 382 limitations. The maximum annual limitation under Section 382 is approximately $9.4 million for the first five (5) years and then decreases to $4.3 million for the remaining fifteen (15) years. The limitation could be further restricted if ownership changes occur in future years. To the extent our use of net operating loss carryforwards is limited, future income could be subject to corporate income tax earlier than it would if we were able to use net operating loss carryforwards, which could result in decreased net income.
 
We also have federal and state research and development credit carryovers of approximately $2.8 million, which expire commencing in fiscal 2025.
 
Results of Operations
 
Year Ended September 30, 2010 Compared to Year Ended September 30, 2009
 
Revenue.   We did not recognize any revenue during the years ended September 30, 2010 or 2009.
 
Research and Development Expenses.
 
                                 
    Year Ended September 30,     Decrease  
    2009     2010     $     %  
    In thousands, except per share amounts  
 
Research and Development
  $ 32,325     $ 26,177     $ 6,148       19.0 %
                                 
Percentage of net loss
    74.7 %     68.4 %                
                                 
 
Research and development expenses were $26.2 million for the year ended September 30, 2010, a decrease of $6.1 million or 19.2%, from $32.3 million for the year ended September 30, 2009. This decrease was primarily attributable to reductions of $6.4 million in clinical expenses and $3.6 million in manufacturing and device development expenses. The savings in clinical expenses are directly related to conducting fewer studies during the fiscal year ended September 30, 2010. For example, our 18 month safety extension trials for patients who completed the pivotal Phase 3 clinical trials of Linjeta tm ended in February 2010. The savings in manufacturing and device development are the result of purchasing a reduced quantity of recombinant human insulin in the twelve months ended September 30, 2010 of $4.5 million, as compared to the $6.5 million of purchases made in the twelve months ended September 30, 2009. The decreases in clinical and manufacturing expenses were offset by increases of $1.9 million in regulatory expense attributable to professional and consulting fees associated with filing our NDA in December 2009 and our 120 day safety update in April 2010, $0.9 million in personnel and share-based compensation expenses, $0.4 million in expenses related to further develop our earlier staged products, and $0.7 million in professional fees, storage and other expenses. Research and development expenses for the year ended September 30, 2010 include $2.0 million in share-based compensation expense related to options granted to employees. Because we must revalue options granted to non-employees for accounting purposes each reporting period, the amount of the share-based compensation income for the year ended September 30, 2010 was $2 thousand.
 
We anticipate that our research and development expenses will decrease as we plan to conduct preclinical studies and Phase 1 clinical trials to study Linjeta tm follow-on and second generation rapid-acting mealtime insulins or insulin analogs in order to determine our preferred development, clinical and regulatory program for our rapid-acting insulin formulations. Over the longer term, however, we anticipate these expenses will increase as we advance a preferred formulation toward pivotal Phase 3 clinical trials.


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General and Administrative Expenses.
 
                                 
    Year Ended
       
    September 30,     Decrease  
    2009     2010     $     %  
    In thousands, except per share amounts  
 
General and Administrative
  $ 10,994     $ 10,980     $ 14       0.1 %
                                 
Percentage of net loss
    25.5 %     28.7 %                
                                 
 
General and administrative expenses were $11.0 million for the year ended September 30, 2010, a decrease of $14 thousand, or 0.1%, from $11.0 million for the year ended September 30, 2009. This decrease is attributable to a decrease in personnel and employee share-based compensation expenses of $1.0 million offset by an increase of $0.5 million in professional fees, $0.4 million in non-employee director share-based compensation expense and other expenses of $0.1 million. General and administrative expenses for the year ended September 30, 2010 include $3.6 million in stock-based compensation expense related to options granted to employees and non-employee directors. Because we must revalue options granted to non-employees for accounting purposes each reporting period, the amount of the stock-based compensation income for the year ended September 30, 2010 was $5 thousand.
 
We expect our general and administrative expenses to decrease over the next twelve months as we focus our efforts to conduct preclinical and Phase 1 clinical trials to study Linjeta tm follow-on and second generation rapid-acting mealtime insulins or insulin analogs. Over the longer term, however, we anticipate these expenses will increase as we advance a preferred formulation toward pivotal Phase 3 clinical trials.
 
Interest and Other Income.
 
                                 
    Year Ended
       
    September 30,     Decrease  
    2009     2010     $     %  
    In thousands, except per share amounts  
 
Interest and Other Income
  $ 386     $ 17     $ 369       95.6 %
                                 
Percentage of net loss
    0.9 %     0.04 %                
                                 
 
Interest and other income decreased to $0.02 million for the year ended September 30, 2010 from $0.4 million for the year ended September 30, 2009. The decrease was due to a lower cash balance and shifting our investments primarily into treasury securities. The focus on preserving cash and investing in stable securities generated lower returns during the year ended September 30, 2010.
 
Interest Expense.   For the years ended September 30, 2010 and 2009, we had no interest expense.
 
Adjustments to Fair Value of Common Stock Warrant Liability.
 
                                 
    Year Ended
       
    September 30,     Increase  
    2009     2010     $     %  
    In thousands, except per share amounts  
 
Adjustments to fair value of common stock warrant liability
  $     $ 1,254     $ 1,254       100 %
                                 
Percentage of net loss
    %     3.3 %                
                                 
 
Adjustments to fair value of common stock warrant liability increased to $1.3 million for the year ended September 30, 2010 from $0 for the year ended September 30, 2009. The September 30, 2010 charge represents an increase in fair value of our warrant liability determined by the Monte Carlo simulation method. The Monte Carlo simulation is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of our and our peer group’s future expected stock prices and minimizes standard error. These warrants will be revalued each reporting period.


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Net Loss and Net Loss per Share.
 
                                 
    Year Ended
       
    September 30,     Decrease  
    2009     2010     $     %  
    In thousands, except per share amounts  
 
Net loss
  $ (43,270 )   $ (38,290 )   $ 4,980       11.5 %
                                 
Net loss per share
  $ (1.82 )   $ (1.58 )                
                                 
 
Net loss was $38.3 million, or $(1.58) per share, for the year ended September 30, 2010 compared to $43.3 million, or $(1.82) per share, for the year ended September 30, 2009. The decrease in net loss was primarily due to reduced clinical and manufacturing expenses as noted above. We expect our losses to continue as we plan to conduct preclinical and Phase 1 clinical trials of several rapid-acting insulin and insulin analog formulations prior to advancing a preferred rapid-acting formulation by conducting Phase 2 or Phase 3 clinical trials.
 
Year Ended September 30, 2009 Compared to Year Ended September 30, 2008
 
Revenue.   We did not recognize any revenue during the years ended September 30, 2009 or 2008.
 
Research and Development Expenses.
 
                                 
    Year Ended
       
    September 30,     Decrease  
    2008     2009     $     %  
    In thousands, except per share amounts  
 
Research and Development
  $ 32,554     $ 32,325     $ 229       0.7 %
                                 
Percentage of net loss
    75.1 %     74.7 %                
                                 
                                 
 
Research and development expenses were $32.3 million for the year ended September 30, 2009, a decrease of $0.2 million, or 0.7%, from $32.6 million for the year ended September 30, 2008. This decrease was primarily attributable to a $5.8 million decrease in research and development costs related to our pivotal Phase 3 clinical trials for Linjeta tm and a decrease of $1.5 million in the costs of manufacturing clinical supplies. These decreases were offset by an increase of $5.8 million for the purchase of recombinant human insulin during the fiscal year in order to build commercial supply as per existing contractual commitments and an increase of $0.9 million in professional fees for the preparation of the filing of our planned NDA. Research and development expenses for the year ended September 30, 2009 include $1.6 million in share-based compensation expense related to options granted to employees and $0.1 million in share-based compensation expense related to options granted to non-employees.
 
General and Administrative Expenses.
 
                                 
    Year Ended
       
    September 30,     Decrease  
    2008     2009     $     %  
    In thousands, except per share amounts  
 
General and Administrative
  $ 14,800     $ 10,994     $ 3,806       25.7 %
                                 
Percentage of net loss
    33.1 %     25.5 %                
                                 
                                 
 
General and administrative expenses were $11.0 million for the year ended September 30, 2009, a decrease of $3.8 million, or 25.7%, from $14.8 million for the year ended September 30, 2008. This decrease is attributable to the following items: a decrease of $1.6 million in share-based compensation charges for the non-employee directors due to a change in vesting policy from immediate vesting to vesting pro rata over one year; a decrease of $0.6 million in professional fees, a decrease of $0.5 million in personnel expenses and a


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decrease of $0.6 million in travel expenses were due to a one-time event that occurred in 2008. General and administrative expenses for the year ended September 30, 2009 include $3.4 million in share-based compensation expense related to options granted to employees. Because we must revalue options granted to non-employees for accounting purposes each reporting period, the amount of the share-based compensation income for the year ended September 30, 2009 was $13 thousand.
 
Interest and Other Income.
 
                                 
    Year Ended
       
    September 30,     Decrease  
    2008     2009     $     %  
    In thousands, except per share amounts  
 
Interest and Other Income
  $ 3,010     $ 386     $ 2,624       87.2 %
                                 
Percentage of net loss
    6.8 %     0.9 %                
                                 
 
Interest and other income decreased to $0.4 million for the year ended September 30, 2009 from $3.0 million for the year ended September 30, 2008. The decrease was due to lower cash balance and shifting our investments primarily into treasury securities. The focus on preserving cash and investing in stable securities generated lower returns during the year ended September 30, 2009.
 
Interest Expense.   For the years ended September 30, 2009 and 2008, we had no interest expense.
 
Net Loss and Net Loss per Share.
 
                                 
    Year Ended
       
    September 30,     Decrease  
    2008     2009     $     %  
    In thousands, except per share amounts  
 
Net loss
  $ (43,361 )   $ (43,270 )   $ 91       0.2 %
                                 
Net loss per share
  $ (1.94 )   $ (1.82 )                
                                 
 
Net loss was $43.3 million, or $(1.82) per share, for the year ended September 30, 2009 compared to $43.4 million, or $(1.94) per share, for the year ended September 30, 2008. The decrease in net loss was primarily attributable to the decreased expenses described above.
 
Liquidity and Capital Resources
 
Sources of Liquidity and Cash Flows
 
As a result of our significant research and development expenditures and the lack of any approved products or other sources of revenue, we have not been profitable and have generated significant operating losses since we were incorporated in 2003. We initially funded our research and development operations through proceeds from our Series A convertible preferred stock financing in 2005 and our mezzanine and Series B convertible preferred stock financings in 2006. Through December 31, 2006, we had received aggregate gross proceeds of $26.6 million from these sales. We received an aggregate of $134.3 million from our initial public offering in May 2007, our follow-on offering in February 2008 and our registered direct offering in August 2010.
 
At September 30, 2010, we had cash, cash equivalents, and marketable securities, totaling approximately $28.9 million. We have invested our excess funds primarily in managed money funds with one major financial institution. All highly liquid investments with an original maturity of less than three months at the date of purchase are categorized as cash equivalents. We plan to continue to invest our cash and cash equivalents in accordance with our approved investment policy guidelines, which set forth our policy to hold investment securities to maturity.
 
Net cash used in operating activities was $34.4 million for the year ended September 30, 2010, $35.3 million for the year ended September 30, 2009 and $34.9 million for the year ended September 30,


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2008. Net cash used in operating activities for the year ended September 30, 2010 primarily reflects the net loss for the period, offset in part by share-based compensation, depreciation and amortization expenses, adjustment to fair value of common stock warrant liability, decrease in income tax receivable, income tax payable and accrued expenses and an increase in accounts payable. Net cash used in operations for the years ended September 30, 2009 and 2008 primarily reflects the net loss for the period, offset in part by depreciation and amortization, share-based compensation and changes in income tax receivable, prepaid expenses, accrued expenses, accounts payable and income tax payable.
 
Net cash provided by (used in) investing activities was ($6.3) million for the year ended September 30, 2010, $25.0 million for the year ended September 30, 2009 and ($28.4) million for the year ended September 30, 2008. Net cash used in investing activities for the year ended September 30, 2010 primarily reflects purchase of marketable securities and the purchase of property and equipment. Net cash provided by investing activities for the year ended September 30, 2009 primarily reflects the sale of marketable securities offset by the purchase of property and equipment. Net cash used in investing activities for the year ended September 30, 2008 primarily reflects the purchases of marketable securities, property and equipment and leasehold improvement costs.
 
Net cash provided by financing activities was $9.0 million for the year ended September 30, 2010, $0.2 million for the year ended September 30, 2009 and $48.0 million for the year ended September 30, 2008. Net cash provided by financing activities for the year ended September 30, 2010 primarily reflects the proceeds from the sale of our securities in our registered direct offering in August 2010 and through our employee stock purchase plan. Net cash provided by financing activities in 2009 primarily reflects proceeds from sale of stock through our employee stock purchase plan. Net cash provided by financing activities in 2008 primarily reflects proceeds from our follow-on public offering.
 
In July 2008, we entered into a supply agreement with N.V. Organon, which will terminate in December 2011, to purchase specified minimum quantities of recombinant human insulin. Our minimum purchase requirements for the next five consecutive quarters could total as much as $6.7 million, depending on our regulatory plans for Linjeta tm .
 
On August 24, 2010, we sold to two institutional investors an aggregate of 2,398,200 units that were immediately separated and we issued 2,398,200 shares of our common stock and warrants to purchase an additional 2,398,200 shares of our common stock at an exercise price of $4.716. The financing resulted in gross proceeds of $9.4 million. Subsequently, on December 1, 2010, the exercise price of the warrants was re-set to $1.56 per share.
 
On February 12, 2008, we completed a follow-on public offering of 3,260,000 shares of our common stock at a price to the public of $15.50 per share and received net proceeds from this offering, after deducting after deducting underwriting discounts and commissions and offering expenses, of $46.8 million. Certain of our stockholders sold 550,000 shares in the offering. We did not receive any proceeds from the sale of shares from the selling stockholders.
 
Funding Requirements
 
We believe that our existing cash and cash equivalents will be sufficient to fund our anticipated operating expenses and capital expenditures at least through the first quarter of fiscal year 2012. If the August 2010 warrants are exercised, we anticipate the cash runway to extend at least through the second quarter of fiscal year 2012. We have based this estimate upon assumptions that may prove to be wrong and we could use our available capital resources sooner than we currently expect. Our existing capital resources are not sufficient to complete our clinical development program for Linjeta tm . Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, and to the extent that we may or may not enter into collaborations with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current anticipated clinical trials.


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Our future capital requirements will depend on many factors, including:
 
  •  our ability to respond to the complete response letter regarding our NDA for Linjeta tm in a timely manner and the possibility that information we provide in response to the letter may not be sufficient for the approval of Linjeta tm or another rapid-acting insulin or insulin analog by the FDA;
 
  •  our ability to secure approval by the FDA for our product candidates under Section 505(b)(2) of the FFDCA and the degree to which we are able to clarify with the FDA related regulatory requirements;
 
  •  our ability to conduct the additional pivotal clinical trials the FDA requested in the complete response letter or other tests or analyses required by the FDA to secure approval to commercialize Linjeta tm ;
 
  •  our ability to develop and commercialize formulations of Linjeta tm or other rapid-acting insulin or insulin analog formulations that may be associated with less injection site discomfort than the formulation that is the subject of the complete response letter we received from the FDA;
 
  •  the progress, timing or success of our product candidates, particularly Linjeta tm , and that of our research, development and clinical programs, including any resulting data analyses;
 
  •  the cost to develop an insulin pen for use with Linjeta tm and a formulation of Linjeta tm for use in insulin pumps;
 
  •  the costs of pre-commercialization activities, if any;
 
  •  the costs associated with qualifying and obtaining regulatory approval of suppliers of insulin and manufacturers of our product candidates;
 
  •  the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims;
 
  •  the emergence of competing technologies and products and other adverse market developments; and
 
  •  our ability to establish and maintain collaborations and the terms and success of the collaborations, including the timing and amount of payments that we might receive from potential strategic collaborators; and
 
  •  our ability to accurately estimate anticipated operating losses, future revenues, capital requirements and our needs for additional financing.
 
We do not anticipate generating product revenue for the next few years. In the absence of additional funding, we expect our continuing operating losses to result in increases in our cash used in operations over the next several years. To the extent our capital resources are insufficient to meet our future capital requirements, we will need to finance our future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. We do not currently have any commitments for future external funding.
 
Management may seek to meet all or some of our operating cash flow requirements through financing activities, such as private placements of our common stock, preferred stock offerings and offerings of debt and convertible debt instruments as well as through merger or acquisition opportunities. In January 2010, we filed a shelf registration statement (File No. 333-153167) with the Securities and Exchange Commission pursuant to which we registered an indeterminate number of shares of common stock, preferred stock, debt securities and an indeterminate number of warrants and units with an aggregate initial offering price of up to $100,000,000.
 
On August 24, 2010, we sold to two institutional investors an aggregate of 2,398,200 units that were immediately separated and we issued 2,398,200 shares of our common stock and warrants to purchase an additional 2,398,200 shares of our common stock at an initial exercise price of $4.716. The financing resulted in gross proceeds of $9.4 million. Subsequently, on December 1, 2010, the exercise price of the warrants was re-set to $1.56 per share.
 
We may receive additional proceeds from the exercise of warrants in connection with the securities purchase agreement and related documents we entered into in August 2010. The exercise will be dependent


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upon whether the market price or our common stock exceeds the current exercise price of $1.56 per share of common stock and the investors choose to exercise.
 
Additional equity or debt financing or corporate collaboration and licensing arrangements may not be available on acceptable terms, if at all. If adequate funds are not available, we may be required to reduce general and administrative expenses and delay, reduce the scope of or eliminate some or all of our research and development programs, which could possibly include a reduction in personnel. We would also reduce our planned commercialization efforts or obtain funds through arrangements with collaborators or others that may require us to relinquish rights to certain drug candidates that we might otherwise seek to develop or commercialize independently or enter into corporate collaborations at a later stage of development. In addition, any future equity funding will dilute the ownership of our equity investors.
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements.
 
Contractual Obligations
 
The following table summarizes our significant contractual obligations and commercial commitments as of September 30, 2010 (in thousands):
 
                                         
          Less Than
                More Than
 
    Total     1 Year     1-3 Years     3-5 Years     5 Years  
 
Operating lease obligations
  $ 2,347     $ 635     $ 1,712     $     $  
Purchase commitments
    6,740       4,155       2,585              
                                         
Total fixed contractual obligations
  $ 9,087     $ 4,790     $ 4,297     $     $  
                                         
 
Adopted Accounting Pronouncements
 
Subsequent Events
 
In February 2010, we adopted the updated authoritative guidance regarding the reporting of subsequent events, removing the requirement for an issuer to disclose a date through which subsequent events have been evaluated. The guidance was effective upon issuance in February 2010 and was adopted as of our Report on Form-10-Q for the three months ended March, 31, 2010 as filed with the SEC on May 7, 2010. The adoption of this guidance did not have a material impact on our financial statements.
 
Fair Value Measurement
 
Effective October 1, 2009, we adopted the provisions of ASU 2009-5 Fair Value and Disclosures (Topic 820) Measuring Liabilities at Fair Value (“ASU 2009-5”). ASU 2009-5 provides amendments to Subtopic 820-10, Fair Value Measurements and Disclosures-Overall, for the fair value measurement of liabilities. ASU 2009-5 clarifies that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value. The adoption of this accounting pronouncement did not have a material effect on our financial statements.
 
Participating Securities
 
In June 2008 the FASB issued ASC 260-10-55 Earnings Per Share — Overall (formerly Financial Statement Position Emerging Issues Task Force 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities) (“ASC 260-10-55”). ASC 260-10-55 provides that securities and unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. ASC 260-10-55 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. Upon adoption, a company is required to


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retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform to the provisions of ASC 260-10-55.
 
Warrant Liability — Given that the warrant holders will participate fully on any dividends or dividend equivalents, we determined that the warrants are participating securities and therefore are subject to ASC 260-10-55. These securities were excluded from the EPS calculation since their inclusion would be anti-dilutive.
 
Share-based Compensation — Given that the holders of Restricted Stock Unit awards (“RSUs”) will only receive dividends or dividend equivalents on RSUs that have vested prior to the Company declaring dividends as well as forfeiting their rights to receive dividends or dividend equivalents on any unvested portion, we determined that the RSUs are non-participating securities and therefore are not subject to ASC 260-10-55.
 
Recent Accounting Pronouncements
 
In January 2010, the FASB issued authoritative guidance that requires new disclosures and clarifies certain existing disclosure requirements about fair value measurements. The new guidance requires a reporting entity to disclose significant transfers in and out of Level 1 and Level 2 fair value measurements, to describe the reasons for the transfers and to present separately information about purchases, sales, issuances and settlements for fair value measurements using significant unobservable inputs. The guidance is effective on a prospective basis for periods beginning after December 15, 2010. We anticipate that the adoption of this guidance will not have a material impact on our financial statements in future periods.
 
ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Our exposure to market risk is limited to our cash, cash equivalents and marketable securities. We invest in high-quality financial instruments, as permitted by the terms of our investment policy guidelines. Currently, our investments are primarily limited to highly liquid money market investments. A portion of our investments may be subject to interest rate risk and could fall in value if interest rates were to increase. The effective duration of our portfolio is currently less than one year, which we believe limits interest rate and credit risk. We do not hedge interest rate exposure.
 
Pursuant to our supply agreement with N.V. Organon, our purchases of insulin are denominated in Euros. Most of our other transactions are denominated in United States dollars and do not present a material exposure to fluctuations in currency exchange rates.
 
ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Refer to page F-1.
 
ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
 
Not applicable.
 
ITEM 9A.    CONTROLS AND PROCEDURES
 
Management’s Evaluation of Disclosure Controls and Procedures
 
We are required to maintain disclosure controls and procedures designed to ensure that material information related to us is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or


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submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
 
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2010 and, based on this evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
 
Management’s Annual Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
 
  •  pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
 
  •  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
 
  •  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2010. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
 
Based on our assessment, management concluded that, as of September 30, 2010, our internal control over financial reporting is effective based on those criteria.
 
Our independent registered public accountants have issued an audit report on our assessment of our internal control over financial reporting. This report appears below.
 
Report of Independent Registered Public Accounting Firm
 
Board of Directors and Stockholders
Biodel Inc.
Danbury, Connecticut
 
We have audited Biodel Inc.’s (a development stage company) internal control over financial reporting as of September 30, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Biodel Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying


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“Item 9A, Controls and Procedures, Management’s Annual Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, Biodel Inc. maintained, in all material respects, effective internal control over financial reporting as of September 30, 2010, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of Biodel Inc. as of September 30, 2010 and 2009, and the related statements of operations, stockholders’ equity, cash flows and comprehensive loss for each of the three years in the period ended September 30, 2010 and for the period from December 3, 2003 (inception) to September 30, 2010 and our report dated December 14, 2010 expressed an unqualified opinion thereon.
 
/s/  BDO USA, LLP
 
New York, New York
December 14, 2010
 
Changes in Internal Control over Financial Reporting
 
No change in our internal control over financial reporting occurred during the fiscal quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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PART III
 
Certain information required by Part III is omitted from this Annual Report on Form 10-K because we will file a definitive proxy statement within 120 days after the end of our fiscal year for our 2010 annual meeting of stockholders, or proxy statement, and the information included in the proxy statement is incorporated herein by reference.
 
ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
Certain information required by this Item is contained under the heading “Executive Officers of the Registrant” in Part I of this Annual Report on Form 10-K. Other information required by this Item will appear under the headings “Election of Directors”, “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance” in our proxy statement, which sections are incorporated herein by reference.
 
We have adopted a written code of business conduct and ethics that applies to our principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions. Our code of business conduct and ethics, which also applies to our directors and all of our officers and employees, can be found on our website, which is located at www.biodel.com . We intend to disclose any amendments to, or waivers from, our code of business conduct and ethics that are required to be publicly disclosed pursuant to rules of the Securities and Exchange Commission and the NASDAQ Global Market by filing such amendment or waiver with the Securities and Exchange Commission and by posting it on our website.
 
ITEM 11.    EXECUTIVE COMPENSATION
 
The information required by this Item will appear under the heading “Executive Compensation” including “Compensation Discussion and Analysis”, “Director Compensation”, “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” in our proxy statement, which sections are incorporated herein by reference.
 
ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
The information required by this Item will appear under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance under Equity Compensation Plans” in our proxy statement, which sections are incorporated herein by reference.
 
ITEM 13.    CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
The information required by this Item will appear under the headings “Certain Relationships and Related Transactions” and “Corporate Governance” in our proxy statement, which sections are incorporated herein by reference.
 
ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
The information required by this Item will appear under the heading “Auditors’ Fees” in our proxy statement, which section is incorporated herein by reference.
 
PART IV
 
ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(1) Financial Statements: See Index to Financial Statements and Schedules.
 
(2) Financial Statement Schedules: Not applicable.
 
(3) Exhibits: The Exhibit Index annexed to this report is incorporated by reference.


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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
BIODEL INC.
 
  By: 
/s/   Errol De Souza
Dr. Errol De Souza
President and Chief Executive Officer
Date: December 14, 2010
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
             
Signature
 
Title
 
Date
 
         
/s/   Errol De Souza

Errol De Souza
  President and Chief Executive Officer (Principal Executive Officer), Director   December 14, 2010
         
/s/   Gerard Michel

Gerard Michel
  Chief Financial Officer, Vice President, Corporate Development and Treasurer (Principal Financial and Accounting Officer)   December 14, 2010
         
/s/   Donald Casey

Donald Casey
  Director   December 14, 2010
         
/s/   Barry Ginsberg

Barry Ginsberg
  Director   December 14, 2010
         
/s/   Ira W. Lieberman

Ira W. Lieberman
  Director   December 14, 2010
         
/s/   Daniel Lorber

Daniel Lorber
  Director   December 14, 2010
         
/s/   Brian J.G. Pereira

Brian J.G. Pereira
  Director   December 14, 2010
         
/s/   Solomon S. Steiner

Solomon S. Steiner
  Director   December 14, 2010
         
/s/   Arthur Urciuoli

Arthur Urciuoli
  Director   December 14, 2010


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Exhibits Index
 
         
Exhibit
   
Number
 
Description of Document
 
  3 .1   Registrant’s Second Amended and Restated Certificate of Incorporation (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
  3 .2   Registrant’s Amended and Restated Bylaws (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
  4 .1   Specimen Common Stock Certificate (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
  4 .2   Form of Warrant issued to Scott Weisman and McGinn Smith Holdings LLC to Purchase Shares of Series A convertible preferred stock (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
  4 .3   Form of Warrant to Purchase Shares of Common stock (Incorporated by reference to exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on August 25, 2010).
  4 .4   Form of Subscription and Rights Agreement by and among the Registrant and the holders of the Series A convertible preferred stock (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
  4 .5   Amended and Restated Registration Rights Agreement, dated September 19, 2006, by and among the Registrant and other parties named therein (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
  10 .1   2010 Stock Incentive Plan (Incorporated by reference to the exhibits to the Registrant’s Quarterly Report on Form 10-Q filed on May 7, 2010).
  10 .2   2010 Incentive Stock Option Agreement (Incorporated by reference to the exhibits to the Registrant’s Quarterly Report on Form 10-Q filed on May 7, 2010).
  10 .3   2010 Non Statutory Stock Option Agreement (Incorporated by reference to the exhibits to the Registrant’s Quarterly Report on Form 10-Q filed on May 7, 2010).
  10 .4   2010 Restricted Stock Unit Agreement (Incorporated by reference to the exhibits to the Registrant’s Quarterly Report on Form 10-Q filed on May 7, 2010).
  10 .5   Form of Indemnity Agreement entered into between the Registrant and its directors and certain of its executive officers (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
  10 .6   Amended and Restated 2004 Stock Incentive Plan (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
  10 .7   2005 Employee Stock Purchase Plan (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
  10 .8   2005 Non-Employee Directors’ Stock Option Plan (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
  10 .9   Employment Agreement, dated March 26, 2010, between the Registrant and Solomon S. Steiner (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on April 1, 2010).
  10 .10   Employment Agreement, dated March 26, 2010, between the Registrant and Errol B. De Souza (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on April 1, 2010).
  10 .11   Letter agreement, dated October 1, 2010, between the Registrant. and Errol B. De Souza (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on October 6, 2010).
  10 .12   Amended and Restated Consulting Agreement entered into on November 13, 2007, effective June 5, 2007, between the Registrant and Dr. Andreas Pfützner (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on November 14, 2007).
  10 .13†   Manufacturing Agreement, dated December 20, 2005 between the Registrant and Cardinal Health — PTS, LLC (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
  10 .14   Change of Control Agreement entered into between the Registrant and certain of its executive officers (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).


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Exhibit
   
Number
 
Description of Document
 
  10 .15   Executive Severance Agreement entered into between the Registrant and certain of its executive officers (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
  10 .16   Lease Agreement, dated February 2, 2004, between the Registrant and Mulvaney Properties, LLC and amendment thereto dated September 29, 2006 (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
  10 .17   Commercial Lease, dated July 23, 2007, by and between the Registrant and Mulvaney Properties LLC. (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on July 27, 2007).
  10 .18   Lease Amendment, dated October 1, 2007, between the Registrant and Mulvaney Properties LLC (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on October 4, 2007).
  10 .19   Amendment to Lease Agreement, dated February 2, 2004, as amended, by and between the Registrant and Mulvaney Properties LLC. (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on July 27, 2007).
  10 .20   Offer Letter, dated November 12, 2007, by and between the Registrant and Gerard J. Michel. (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on November 14, 2007).
  10 .21   Form of Incentive Stock Option Agreement for 2004 Amended and Restated Stock Incentive Plan. (Incorporated by reference to the Registrant’s Annual Report on Form 10-K filed on December 21, 2007).
  10 .22   Form of Option Agreement for 2005 Non-Employee Directors’ Stock Option Plan. (Incorporated by reference to the Registrant’s Annual Report on Form 10-K filed on December 21, 2007).
  10 .23   Base salaries of Executive Officers of the Registrant.
  10 .24   Summary of the Registrant’s Non-Employee Director Compensation.
  10 .25†   Supply Agreement, dated July 7, 2008, between the Registrant and N.V. Organon (Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on August 11, 2008).
  10 .26*   Letter Agreement, dated November 12, 2009, between the Registrant and N.V. Organon, amending the Supply Agreement, dated July 7, 2008, between the parties. (Incorporated by reference to Registrant’s Annual Report on Form 10-K filed on December 14, 2009).
  21 .1   Subsidiaries of the Registrant.
  23 .1   Consent of BDO USA, LLP, Independent Registered Public Accounting Firm.
  24 .1   Powers of Attorney (included on signature page).
  31 .01   Chief Executive Officer — Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31 .02   Chief Financial Officer — Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32 .01   Chief Executive Officer and Chief Financial Officer — Certification pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
Confidential treatment granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
 
* Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities and Exchange Commission.

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BIODEL INC.
 
INDEX TO FINANCIAL STATEMENTS
         
    Page
 
    F-2  
    F-3  
    F-4  
    F-5  
Statements of comprehensive loss
    F-6  
    F-7  
    F-8  


F-1


Table of Contents

 
Report of Independent Registered Public Accounting Firm
 
Board of Directors and Stockholders
Biodel Inc.
Danbury, Connecticut
 
We have audited the accompanying balance sheets of Biodel Inc. (a development stage company) as of September 30, 2010 and 2009 and the related statements of operations, stockholders’ equity, cash flows and comprehensive loss for each of the three years in the period ended September 30, 2010 and for the period from December 3, 2003 (inception) to September 30, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Biodel Inc. at September 30, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2010 , and for the period from December 3, 2003 (inception) to September 30, 2010, in conformity with accounting principles generally accepted in the United States.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Biodel Inc.’s internal control over financial reporting as of September 30, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated December 14, 2010 expressed an unqualified opinion thereon.
 
/s/  BDO USA, LLP
 
New York, New York
December 14, 2010


F-2


Table of Contents

Biodel Inc.
(A Development Stage Company)
 
Balance Sheets
(In thousands, except share and per share amounts)
 
                 
    September 30,  
    2009     2010  
 
ASSETS
Current:
               
Cash and cash equivalents
  $ 54,640     $ 22,922  
Restricted cash
          150  
Marketable securities, available for sale
          6,001  
Taxes receivable
    752       116  
Other receivable
          11  
Prepaid and other assets
    482       365  
                 
Total current assets
    55,874       29,565  
Property and equipment, net
    3,695       2,998  
Intellectual property, net
    56       53  
                 
Total assets
  $ 59,625     $ 32,616  
                 
Current:
               
Accounts payable
  $ 1,007     $ 1,989  
Accrued expenses:
               
Clinical trial expenses
    5,647       1,362  
Payroll and related
    1,117       357  
Accounting and legal fees
    325       300  
Severance
    183        
Other
    643       334  
Income taxes payable
    165       45  
                 
Total current liabilities
    9,087       4,387  
                 
Common stock warrant liability
          4,169  
Commitments
               
Stockholders’ equity:
               
Preferred stock, $.01 par value; 50,000,000 shares authorized, none outstanding
           
Common stock, $.01 par value; 100,000,000 shares authorized; 23,803,672 and 26,399,764 issued and outstanding
    238       264  
Additional paid-in capital
    176,764       188,549  
Accumulated other comprehensive loss
          1  
Deficit accumulated during the development stage
    (126,464 )     (164,754 )
                 
Total stockholders’ equity
    50,538       24,060  
                 
Total liabilities and stockholders’ equity
  $ 59,625     $ 32,616  
                 
 
See accompanying notes to financial statements.


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Table of Contents

Biodel Inc.
(A Development Stage Company)
 
Statements of Operations
(In thousands, except share and per share amounts)
 
                                 
                      December 3,
 
                      2003
 
                      (Inception) to
 
    Year Ended September 30,     September 30,
 
    2008     2009     2010     2010  
 
Revenue
  $     $     $     $  
                                 
Operating expenses:
                               
Research and development
    32,554       32,325       26,177       116,228  
General and administrative
    14,800       10,994       10,980       47,625  
                                 
Total operating expenses
    47,354       43,319       37,157       163,853  
Other (income) and expense:
                               
Interest and other income
    (3,010 )     (386 )     (17 )     (5,506 )
Interest expense
                      78  
Adjustments to fair value of common stock warrant liability
                1,254       1,254  
Loss on settlement of debt
                      627  
                                 
Loss before tax provision (benefit)
    (44,344 )     (42,933 )     (38,394 )     (160,306 )
Tax provision (benefit)
    (983 )     337       (104 )     (612 )
                                 
Net loss
    (43,361 )     (43,270 )     (38,290 )     (159,694 )
Charge for accretion of beneficial conversion rights
                      (603 )
Deemed dividend — warrants
                      (4,457 )
                                 
Net loss applicable to common stockholders
  $ (43,361 )   $ (43,270 )   $ (38,290 )   $  (164,754 )
                                 
Net loss per share — basic and diluted
  $ (1.94 )   $ (1.82 )   $ (1.58 )        
                                 
Weighted average shares outstanding — basic and diluted
    22,390,434       23,746,598       24,161,866          
                                 
 
See accompanying notes to financial statements.


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Table of Contents

Biodel Inc.
(A Development Stage Company)
 
Statements of Stockholders’ Equity
(In thousands, except share and per share amounts)
 
                                                                                 
                            Series B
                Deficit
       
                Series A Preferred
    Preferred
          Accumulated
    Accumulated
       
    Common Stock
    stock
    stock
    Additional
    Other
    During the
    Total
 
    $01 Par Value     $.01 Par Value     $.01 Par Value     Paid in
    Comprehensive
    Development
    Stockholders’
 
    Shares     Amount     Shares     Amount     Shares     Amount     Capital     Income (loss)     Stage     Equity  
 
Shares issued to employees
    732,504     $ 7           $           $     $ (7 )   $       $     $  
January 2004 Proceeds from sale of common stock
    4,581,240       46                               1,308                     1,354  
Net loss
                                                      (774 )     (774 )
                                                                                 
Balance, September 30, 2004
    5,313,744       53                               1,301             (774 )     580  
Additional stockholder contributions
                                        514                     514  
Share-based compensation
                                        353                     353  
Shares issued to employees and directors for services
    42,656       1                               60                     61  
July 2005 Private placement — Sale of Series A preferred stock, net of issuance costs of $379
                569,000       6                   2,460                     2,466  
Founder’s compensation contributed to capital
                                        63                     63  
Net loss
                                                    (3,383 )     (3,383 )
                                                                                 
Balance, September 30, 2005
    5,356,400       54       569,000       6                   4,751             (4,157 )     654  
Share-based compensation
                                        1,132                     1,132  
July 2006 Private placement — Sale of Series B preferred stock, net of issuance costs of $1,795
                            5,380,711       54       19,351                     19,405  
July 2006 — Series B preferred stock units issued July 2006 to settle debt
                            817,468       8       3,194                     3,202  
Shares issued to employees and directors for services
    4,030                                     23                     23  
Accretion of fair value of beneficial conversion charge
                                        603               (603 )      
Net loss
                                                    (8,068 )     (8,068 )
                                                                                 
Balance, September 30, 2006
    5,360,430       54       569,000       6       6,198,179       62       29,054             (12,828 )     16,348  
May 2007 Proceeds from sale of common stock
    5,750,000       58                               78,697                     78,755  
Conversion of preferred stock on May 16, 2007
    6,407,008       64       (569,000 )     (6 )     (6,198,179 )     (62 )     4                      
Share-based compensation
                                        4,224                     4,224  
Shares issued to employees, non-employees and directors for services
    2,949                                     16                     16  
Stock options exercised
    3,542                                     5                     5  
March 2007 Warrants exercised
    2,636,907       26                               397                     423  
Deemed dividend — warrants
                                        4,457               (4,457 )      
Net loss
                                                      (22,548 )     (22,548 )
                                                                                 
Balance, September 30, 2007
    20,160,836       202                               116,854             (39,833 )     77,223  
Proceeds from sale of common stock
    3,260,000       32                               46,785                     46,817  
Issuance of restricted stock
    9,714                                     172                     172  
Share-based compensation
                                        6,503                     6,503  
Stock options exercised
    174,410       1                               901                     902  
Warrants exercised
    79,210       1                               111                     112  
Net unrealized (loss) on Marketable Securities
                                              (62 )           (62 )
Proceeds from sale of stock — ESPP
    14,388       1                               180                     181  
Net loss
                                                      (43,361 )     (43,361 )
                                                                                 
Balance, September 30, 2008
    23,698,558     $ 237           $           $     $ 171,506     $ (62 )   $ (83,194 )   $ 88,487  
                                                                                 
Balance, September 30, 2008
    23,698,558     $ 237           $           $     $ 171,506     $ (62 )   $ (83,194 )   $ 88,487  
Share-based compensation
                                                    5,064                       5,064  
Stock options exercised
    17,661                                     25                   25  
Net unrealized gain on Marketable Securities
                                              62             62  
Proceeds from sale of stock — ESPP
    87,453       1                               169                   170  
Net loss
                                                                    (43,270 )     (43,270 )
                                                                                 
Balance, September 30, 2009
    23,803,672     $ 238           $           $     $ 176,764     $     $ (126,464 )   $ 50,538  
Registered direct offering
    2,398,200       24                               8,688                   8,712  
Initial value of warrants issued in a registered direct offering
                                        (2,915 )                 (2,915 )
Share-based compensation
                                        5,621                   5,621  
Stock options exercised
    32,320                                     68                   68  
Net unrealized gain on Marketable Securities
                                                1             1  
Proceeds from sale of stock — ESPP
    165,572       2                               323                   325  
Net loss
                                                    (38,290 )     (38,290 )
                                                                                 
Balance, September 30, 2010
    26,399,764     $ 264           $           $     $ 188,549     $ 1     $ (164,754 )   $ 24,060  
                                                                                 
 
See accompanying notes to financial statements.


F-5


Table of Contents

Biodel Inc.
(A Development Stage Company)
 
Statements of Comprehensive Loss
(In thousands)
 
                         
    Year Ended September 30,  
    2008     2009     2010  
 
Net loss
  $ (43,361 )   $ (43,270 )   $ (38,290 )
Unrealized holding gains (losses) arising during the period
    (62 )     62       1  
                         
Comprehensive loss
  $ (43,423 )   $ (43,208 )   $ (38,289 )
                         


F-6


Table of Contents

Biodel Inc.
(A Development Stage Company)
 
Statements of Cash Flows
(In thousands, except share and per share amounts)
 
                                 
                      December 3,
 
                      2003
 
                      (Inception) to
 
    Year Ended September 30,     September 30,
 
    2008     2009     2010     2010  
 
Cash flows from operating activities:
                               
Net loss
  $ (43,361 )   $ (43,270 )   $ (38,290 )   $ (159,694 )
Adjustments to reconcile net loss to net cash used in operating activities:
                               
Depreciation and amortization
    567       877       991       3,140  
Founder’s compensation contributed to capital
                      271  
Share-based compensation for employees and directors
    6,434       4,970       5,628       20,832  
Share-based compensation for non-employees
    241       94       (7 )     2,318  
Loss on settlement of debt
                      627  
Write-off of capitalized patent expense
    208                   208  
Write-off of loan to related party
                      41  
Adjustment to fair value of common stock warrant liability
                1,254       1,254  
(Increase) decrease in:
                               
Prepaid expenses and other assets
    (745 )     768       117       (365 )
Income taxes receivable
    (1,988 )     1,236       636       (116 )
Other receivable
                (11 )     (11 )
Increase (decrease) in:
                               
Accounts payable
    (1,374 )     194       982       1,989  
Income tax payable
    917       (847 )     (120 )     45  
Accrued expenses and other liabilities
    4,198       715       (5,561 )     2,572  
                                 
Total adjustments
    8,458       8,007       3,909       32,805  
                                 
Net cash used in operating activities
    (34,903 )     (35,263 )     (34,381 )     (126,889 )
                                 
Cash flows from investing activities:
                               
Purchase of property and equipment
    (2,769 )     (637 )     (292 )     (6,101 )
Purchase of marketable securities
    (25,614 )           (6,000 )     (31,614 )
Sale of marketable securities
          25,614             25,614  
Capitalized intellectual properties
    (17 )                 (298 )
Loan to related party
                      (41 )
                                 
Net cash provided by (used in) investing activities
    (28,400 )     24,977       (6,292 )     (12,440 )
                                 
Cash flows from financing activities:
                               
Restricted cash
                (150 )     (150 )
Options exercised
    902       25       68       1,000  
Warrants exercised
    112                   535  
Deferred public offering costs
                      (1,458 )
Stockholder contribution
                      1,660  
Net proceeds from sale of Series A preferred stock
                      2,466  
Net proceeds from employee stock purchase plan
    181       170       325       676  
Net proceeds from sale of common stock
    46,817             8,712       135,742  
Proceeds from bridge financing
                      2,575  
Net proceeds from sale of Series B preferred stock
                      19,205  
                                 
Net cash provided by financing activities
    48,012       194       8,955       162,251  
                                 
Net increase (decrease) in cash and cash equivalents
    (15,291 )     (10,091 )     (31,718 )     22,922  
Cash and cash equivalents, beginning of period
    80,022       64,731       54,640        
Cash and cash equivalents, end of period
  $ 64,731     $ 54,640     $ 22,922     $ 22,922  
                                 
Cash paid for interest and income taxes was:
                               
Interest
  $     $     $     $ 9  
Income taxes
    88       111       60       306  
Non-cash financing and investing activities:
                               
Warrants issued in connection with registered direct offering
  $     $     $ 2,915     $ 2,915  
Settlement of debt with Series B preferred stock
                      3,202  
Accrued expenses settled with Series B preferred stock
                      150  
Deemed dividend — warrants
                      4,457  
Accretion of fair value of beneficial charge on preferred stock
                      603  
Conversion of convertible preferred stock to common stock
                      68  
 
See accompanying notes to financial statements.


F-7


Table of Contents

Biodel Inc.
(A Development Stage Company)
 
Notes to Financial Statement
(In thousands, except share and per share amounts)
 
1.   Business and Basis of Presentation
 
Business
 
Biodel Inc. (“Biodel” or the “Company”, and formerly Global Positioning Group Ltd.) is a development stage specialty pharmaceutical company located in Danbury, Connecticut. The Company was incorporated in the State of Delaware on December 3, 2003 and commenced operations in January 2004. The Company is focused on the development and commercialization of innovative treatments for diabetes. The Company develops product candidates by applying its proprietary formulation technologies to existing drugs in order to improve their therapeutic profiles. The Company’s most advanced product is Linjeta tm (formerly known as VIAject ® ). The Company has formulated Linjeta tm as a rapid-acting mealtime insulin for the treatment of patients with Type 1 and Type 2 diabetes. Earlier stage product candidates include follow-on and second generation rapid-acting mealtime insulin or insulin analogs, VIAtab tm , a sublingual tablet formulation of insulin, a line of basal insulins and a stabilized formulation of glucagon.
 
Basis of Presentation
 
The Company is in the development stage as its primary activities since incorporation have been establishing its facilities, recruiting personnel, conducting research and development, business development, business and financial planning and raising capital.
 
On April 12, 2007, the Company effected a 0.7085 for one (0.7085:1) reverse stock split (see Note 13). All references in these financial statements and accompanying notes to units of common stock or per share amounts are reflective of the reverse split for all periods reported.
 
2.   Summary of Significant Accounting Policies
 
Research and Development Costs
 
The Company is in the business of research and development and, therefore, research and development costs include, but are not limited to, salaries and benefits, lab supplies, preclinical fees, clinical trial and related clinical manufacturing costs, allocated overhead costs and professional service providers. Research and development costs are expensed when incurred. Research and development costs aggregated $32,554, $32,325, and $26,177 for the years ended September 30, 2008, 2009 and 2010, respectively.
 
Use of Estimates
 
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates and assumptions including, but not limited to, accruals, income taxes payable, and deferred tax assets. Actual results may differ from those estimates.
 
Cash and Cash Equivalents
 
The Company considers currency on hand, demand deposits and all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash and cash equivalents. At September 30, 2010, cash and cash equivalents of $22,922 are primarily held in a U.S. treasury denominated money market account.


F-8


Table of Contents

Biodel Inc.
(A Development Stage Company)
 
Notes to Financial Statement — (Continued)
(In thousands, except share and per share amounts)
 
Restricted Cash
 
Restricted cash as of September 30, 2010 consisted of a $150 money market account held with a bank to secure a credit card purchasing agreement utilized to facilitate employee travel and certain ordinary purchases. The restricted balance as of September 30, 2009 was $0.
 
Marketable securities
 
The Company’s marketable securities were classified as available-for-sale and were reported at market value with unrealized gains and losses shown as a component of accumulated other comprehensive income (loss). The Company regularly evaluates the performance of these investments individually for impairment, taking into consideration the investment, volatility and current returns. If a determination is made that a decline in fair value is other-than-temporary, the related investments are written down to its estimated fair value. At September 30, 2009 and 2010, marketable securities total $0 and $6,001, respectively. Due to the short-term need for funds and uncertainty in the credit and financial markets, the Company modified its investment strategy and primarily invested in money market accounts comprised of treasury securities.
 
Fair Value of Financial Instruments
 
The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, accounts payable, and accrued expenses approximate their fair values due to their short term maturities.
 
Pre-Launch Inventory
 
Inventory costs associated with products that have not yet received regulatory approval are capitalized if the Company believes there is probable future commercial use and future economic benefit. If the probability of future commercial use and future economic benefit cannot be reasonably determined, then costs associated with pre-launch inventory that has not yet received regulatory approval are expensed as research and development expense during the period the costs are incurred. For the year ended September 30, 2010, the Company expensed $4.5 million of costs associated with the purchase of recombinant human insulin, as research and development expense after it passed quality control inspection by the Company and transfer of title occurred. In November 2010, the Company announced that the U.S. Food and Drug Administration (“FDA”) issued a complete response letter requesting additional information regarding its New Drug Application (“NDA”) for Linjeta tm . The complete response letter stated that the FDA’s review cycle was complete and that the application could not be approved in its present form. At this time, the Company will continue to expense pre-launch inventory as research and development. The pre-launch inventory treatment will be reevaluated if the Company completes Phase 3 clinical trials of Linjeta tm or if an alternate product candidate for which the inventory is applicable and files a related NDA or NDA supplement for review by the FDA (see Note 8)
 
Intellectual Property
 
Intangible assets consist primarily of capitalized costs associated with Linjeta tm patents and the purchase of two domain addresses. They are amortized using the straight-line method over twenty years. If the Company determines that a patent will not result in future revenues, the cost related to such patent will be expensed in full on the date of that determination. Intellectual property amortization expense for the years ended September 30, 2008, 2009 and 2010 was $13, $3 and $3, respectively.


F-9


Table of Contents

Biodel Inc.
(A Development Stage Company)
 
Notes to Financial Statement — (Continued)
(In thousands, except share and per share amounts)
 
Property and Equipment
 
Property and equipment are stated at cost, net of accumulated depreciation or amortization. Major improvements are capitalized, while maintenance and repairs are expensed in the period the cost is incurred. Property and equipment are depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized using the straight-line method over their estimated useful lives, or the remaining term of the lease, whichever is shorter. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are removed from the accounts and resulting gains or losses are included in other income (expense) in the statement of operations. Estimated useful lives for each asset category are as follows: Furniture and fixtures — 7 years, Leasehold improvements — estimated useful life or remaining term of lease, whichever is shorter, Laboratory equipment — 7 years, Manufacturing equipment — 5 years, Device development— 5 years, Facility equipment— 3 years and 7 years, Computer equipment — 5 years and Computer software — 3 years.
 
Impairment of Long-Lived Assets
 
Whenever events or changes in circumstances indicate that the carrying amounts of a long-lived asset may not be recoverable, the Company reviews these assets for impairment and determines whether adjustments are needed to carrying values. There were no adjustments to the carrying value of long-lived assets at September 30, 2009 and 2010.
 
Warrant Liability
 
The Company applies the provisions of FSP 150-5, Issuers Accounting under FASB Statement No. 150 for Freestanding Warrants and other Similar Instruments on Shares that are Redeemable or ASC 480 Distinguishing Liabilities from Equities (“ASC 480”). Pursuant to FASB SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, a freestanding financial instrument (other than outstanding share) that, at inception, embodies an obligation to repurchase the issuer’s shares and “requires or may require” the obligation to be settled by transferring assets, qualifies as a liability (if the obligation is conditional, the number of conditions is irrelevant). The Company issued warrants in August 2010 and recorded an amount of $2,915 for the initial fair value of the warrant liability. As of September 30, 2010, the Company recorded a charge of $1,254 to reflect the increase in the estimated fair value of the warrants determined by the Monte Carlo simulation method. The Monte Carlo simulation is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of future expected stock prices of the Company and its peer group and minimizes standard error. These warrants will be revalued each reporting period and any increase or decrease will be recorded to the statement of operations under the caption of “Adjustment to fair value of common stock warrant liability.” (See Note 10).
 
Comprehensive Income (Loss)
 
Comprehensive Loss is comprised of net loss and changes in equity for unrealized holding gains (losses) on marketable securities during the period. For the years ended September 30, 2008, 2009 and 2010, the Company had $(43,423), $(43,208) and $(38,289) of comprehensive loss.
 
Income Taxes
 
The Company uses the asset and liability method of accounting for deferred income taxes. The provision for income taxes includes income taxes currently payable and those deferred as a result of temporary differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is


F-10


Table of Contents

Biodel Inc.
(A Development Stage Company)
 
Notes to Financial Statement — (Continued)
(In thousands, except share and per share amounts)
 
provided to reduce deferred tax assets to the amount of future tax benefit when it is more likely than not that some portion of the deferred tax assets will not be realized. Projected future taxable income and ongoing tax planning strategies are considered and evaluated when assessing the need for a valuation allowance. Any increase or decrease in a valuation allowance could have a material adverse or beneficial impact on the Company’s income tax provision and net income or loss in the period which the determination is made.
 
The Company adopted the provisions of Accounting Standards Codification (ASC) Topic 740, Income Taxes, with respect to uncertain tax positions (substantially incorporating the Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, or FIN 48) effective October 1, 2007. These provisions clarify the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. Recognition thresholds and measurement attributes were prescribed for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Guidance was also provided on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transition. The adoption had no resulting effect on the Company’s financial statements. See Note 9 for additional information.
 
Concentration of Risks and Uncertainties
 
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents and marketable securities. The Company deposits excess cash with major financial institutions in the United States. Balances may exceed the amount of insurance provided on such deposits. The Company believes that its investment policy guideline for its excess cash maintains safety and liquidity through its policies on credit requirements, diversification and investment maturity.
 
The Company has experienced significant operating losses since inception. At September 30, 2010, the Company had a deficit accumulated during the development stage of $164,754. The Company has generated no revenue to date. The Company has funded its operations to date principally from the sale of securities. The Company expects to incur substantial additional operating losses for the next several years and will need to obtain additional financing in order to complete the clinical development of Linjeta tm or another rapid-acting insulin or insulin analog, launch and commercialize the product if it receives regulatory approval, and continue research and development programs. There can be no assurance that such financing will be available or will be at terms acceptable to the Company.
 
The Company is currently developing its first product candidates and has no products that have received regulatory approval. Any products developed by the Company will require approval from the U.S. Food and Drug Administration (“FDA”) or foreign regulatory agencies prior to commercial sales. There can be no assurance that the Company’s products will receive the necessary approvals. If the Company is denied such approvals or such approvals are delayed, it would have a material adverse effect on the Company’s future operating results.
 
To achieve profitable operations, the Company must successfully develop, test, manufacture and market products, as well as secure the necessary regulatory approvals. There can be no assurance that any such products can be developed successfully or manufactured at an acceptable cost and with appropriate performance characteristics, or that such products will be successfully marketed. These factors would have a material adverse effect on the Company’s future financial results.
 
Share-Based Compensation
 
In March 2010, the shareholders of the Company approved a new 2010 Stock Incentive Plan (the “2010 Plan”). Up to 5,400,000 shares of the Company’s common stock may be issued pursuant to awards granted


F-11


Table of Contents

Biodel Inc.
(A Development Stage Company)
 
Notes to Financial Statement — (Continued)
(In thousands, except share and per share amounts)
 
under the 2010 Plan, plus shares of common stock underlying already outstanding awards under the Company’s prior plans. The contractual life of options granted under the 2010 Plan may not exceed seven years. The 2010 Plan uses a “fungible share” concept under which any awards that are not a full-value award will be counted against the share limit as one (1) share for each share of common stock and any award that is a full-value award will be counted against the share limit as 1.6 shares for each one share of common stock. The Company has not made any new awards under any prior equity plans after March 2, 2010 — the effective date the 2010 Plan was approved by the Company’s stockholders. The Company will continue to use the Black-Scholes pricing model to assist in the calculation of fair value. The expected life for grants was calculated in accordance with the simplified method described in the Securities and Exchange Commission Staff Accounting Bulletin (SAB) Topic 14.D.2 in accordance with SAB No. 110. The simplified method was chosen due to limited Company history. Until the Company has adequate history, it will continue to utilize the simplified method.
 
The Company recognizes share-based compensation arising from compensatory share-based transactions using the fair value at the grant date of the award. Determining the fair value of share-based awards at the grant date requires judgment. The Company uses an option-pricing model (the Black-Scholes valuation model) to assist in the calculation of fair value. Due to its limited history, the Company uses the “calculated value method” which relies on comparable company historical volatility and uses the average of (1) the weighted average vesting period and (2) the contractual life of the option, or seven or eight years, as the estimated term of the option. The Company bases its estimates of expected volatility on the median historical volatility of a group of publicly traded companies that it believes are comparable to the Company based on the line of business, stage of development, size and financial leverage.
 
The risk-free rate of interest for periods within the contractual life of the stock option award is based on the yield of U.S. Treasury strips on the date the award is granted with a maturity equal to the expected term of the award. The Company estimates forfeitures based on actual forfeitures during its limited history. Additionally, the Company has assumed that dividends will not be paid.
 
For stock options granted to non-employees, the Company measures fair value of the equity instruments utilizing the Black-Scholes valuation model, if that value is more reliably measurable than the fair value of the consideration or service received. The fair value of these instruments is periodically revalued as the options vest, and is recognized as expense over the related period of service or vesting period, whichever is longer. The total cost expensed for options granted to non-employees for the years ended September 30, 2008, 2009 and 2010 was $241, $94, and $(7) respectively.
 
The Company expenses ratably over the vesting period the cost of the stock options granted to employees and directors. The total compensation cost for the years ended September 30, 2008, 2009 and 2010 was $6,434, $4,970, and $5,628 respectively. At September 30, 2010, the total compensation cost related to non-vested options not yet recognized was $7,585, which will be recognized over the next three years assuming the employees complete their service period for vesting of the options. The Black-Scholes valuation model assumptions are as follows and were determined as discussed above:
 
                         
    Year Ended September 30,  
    2008     2009     2010  
 
Expected life (in years)
    5.25       5.25       2.72 - 5.25  
Expected volatility
    57 - 60%       59 - 68%       64 - 77%  
Expected dividend yield
    0%       0%       0%  
Risk-free interest rate
    2.36% - 4.42%       1.00% - 3.19%       0.77 - 2.69%  
Weighted-average grant date fair value
  $ 13.92     $ 2.69     $ 4.09  
                         


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Table of Contents

Biodel Inc.
(A Development Stage Company)
 
Notes to Financial Statement — (Continued)
(In thousands, except share and per share amounts)
 
Subsequent Events
 
In February 2010, the Company adopted the updated authoritative guidance regarding the reporting of subsequent events, removing the requirement for an issuer to disclose a date through which subsequent events have been evaluated. The guidance was effective upon issuance in February 2010 and was adopted as of the Company’s Report on Form 10-Q for the three months ended March, 31, 2010 as filed with the SEC on May 7, 2010. The adoption of this guidance did not have a material impact on the Company’s financial statements.
 
Fair Value Measurement
 
Effective October 1, 2009, the Company adopted the provisions of ASU 2009-5 Fair Value and Disclosures (Topic 820) Measuring Liabilities at Fair Value (“ASU 2009-5”). ASU 2009-5 provides amendments to Subtopic 820-10, Fair Value Measurements and Disclosures-Overall, for the fair value measurement of liabilities. ASU 2009-5 clarifies that in circumstances in which a quoted price in an active market for the identical liability is not available; a reporting entity is required to measure fair value. The adoption of this accounting pronouncement did not have a material effect on the Company’s financial statements.
 
Participating Securities
 
In June 2008 the Financial Accounting Standards Board (“FASB”) issued ASC 260-10-55 Earnings Per Share — Overall (formerly Financial Statement Position Emerging Issues Task Force 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities) (“ASC 260-10-55”). ASC 260-10-55 provides that securities and unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.
 
Warrant Liability — Given that the warrant holders will participate fully on any dividends or dividend equivalents, the Company determined that the warrants are participating securities and therefore are subject to ASC 260-10-55. These securities were excluded from the per share calculation for the year ended September 30, 2010 since their inclusion would be anti-dilutive.
 
Share-based Compensation — Given that the holders of Restricted Stock Unit awards (“RSUs”) will only receive dividends or dividend equivalents on RSUs that have vested prior to the Company declaring dividends as well as forfeiting their rights to receive dividends or dividend equivalents on any unvested portion, the Company determined that the RSUs are non-participating securities and therefore are not subject to ASC 260-10-55.
 
Codification Standard
 
During the fourth quarter of 2009, the Company adopted the FASB Accounting Standards Update (“ASU”) No. 2009-01, “Amendments based on Statement of Financial Accounting Standards No. 168 — The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (the “Codification”). The Codification became the single source of authoritative GAAP in the United States, and other than rules and interpretive releases issued by the United States Securities and Exchange Commission. The Codification reorganized GAAP into a topical format that eliminates the previous GAAP hierarchy and instead established two levels of guidance — authoritative and non-authoritative. All non-grandfathered, non-Securities and Exchange Commission accounting literature that was not included in the Codification became non-authoritative. The adoption of the Codification did not change previous GAAP, but rather simplified user access to all authoritative literature related to a particular accounting topic in one place. Accordingly, the adoption had no impact on the Company’s consolidated financial position and results of


F-13


Table of Contents

Biodel Inc.
(A Development Stage Company)
 
Notes to Financial Statement — (Continued)
(In thousands, except share and per share amounts)
 
operations. All prior references to previous GAAP in the Company’s consolidated financial statements were updated for the new references under the Codification.
 
Recent Accounting Pronouncements
 
In January 2010, the FASB issued authoritative guidance that requires new disclosures and clarifies certain existing disclosure requirements about fair value measurements. The new guidance requires a reporting entity to disclose significant transfers in and out of Level 1 and Level 2 fair value measurements, to describe the reasons for the transfers and to present separately information about purchases, sales, issuances and settlements for fair value measurements using significant unobservable inputs. The guidance is effective on a prospective basis for periods beginning after December 15, 2010. The Company anticipates that the adoption of this guidance will not have a material impact on its financial statements in future periods.
 
3.   Marketable Securities
 
The Company classifies marketable securities as available — for- sale. The Company determines the appropriate classification of debt and equity securities at the time of purchase and re-evaluates such designation as of each balance sheet date.
 
The Company invests in certain marketable securities, which consist primarily of short-to-intermediate-term debt securities issued by the U.S. government, U.S. government agencies and municipalities and investment grade corporate securities. The Company only invests in marketable securities with active secondary or resale markets to ensure portfolio liquidity and the ability to readily convert investments into cash to fund current operations, or satisfy other cash requirements as needed. Due to the nature of the Company as a development stage company and its funding needs at times being uncertain, the Company has classified all marketable securities as available-for-sale. The unrealized gains and losses on these securities are included in accumulated other comprehensive income as a separate component of stockholders’ equity. The specific-identification method is used to determine the cost of a security sold or the amount reclassified from accumulated other comprehensive income into earnings.
 
Marketable securities classified as available for sale are measured at fair value based on quoted market prices. The amortized cost, gross unrealized gains and losses and fair value of investment securities at September 30, 2010 are summarized below. As of September 30, 2009, the Company had no marketable security investments.
 
                                 
    September 30, 2010  
    Amortized
    Gross Unrealized     Fair
 
    Cost     Gains     Losses     Value  
 
Short term marketable securities
                               
US government agency securities
  $ 6,000     $ 1     $     $ 6,001  
                                 
Total
  $ 6,000     $ 1     $     $ 6,001  
                                 
 
4.   Fair Value Measurement
 
ASC Topic 820 (“ASC 820”, originally issued as SFAS No. 157, Fair Value Measurements) 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, ASC 820 does not require any new fair value measurements. The fair value framework requires the


F-14


Table of Contents

Biodel Inc.
(A Development Stage Company)
 
Notes to Financial Statement — (Continued)
(In thousands, except share and per share amounts)
 
categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. The three levels of inputs used are as follows:
 
Level 1 — Quoted prices in active markets for identical assets or liabilities.
 
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
 
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
 
As of September 30, 2010, the Company had assets and liabilities that fell under the scope of ASC 820. The fair values of the marketable securities were based on quoted market prices. The fair value of the warrant liability was determined by the Monte Carlo simulation method. The Monte Carlo simulation is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of future expected stock prices of the Company and its peer group and minimizes standard error. Accordingly, the Company’s fair value measurements of the Company’s marketable securities are classified as a Level 1 input and the warrant liability as a Level 3 input.
 
The fair value of the Company’s financial assets and liabilities carried at fair value and measured on a recurring basis are as follows:
 
                                 
                Significant
       
          Quoted Prices in
    Other
    Significant
 
    Fair Value at
    Active Markets for
    Observable
    Unobservable
 
    September 30,
    Identical Assets
    Market Inputs
    Inputs
 
Description
  2010     (Level 1)     (Level 2)     (Level 3)  
 
Assets:
                               
Cash and cash equivalents
  $ 22,922     $ 22,922     $     $  
Restricted cash
    150       150              
Marketable securities:
                               
US government agency securities (short-term securities)
    6,001       6,001              
                                 
Subtotal
    29,073       29,073              
Liabilities:
                               
Common stock warrant liability
    (4,169 )                 (4,169 )
                                 
Subtotal
    (4,169 )                 (4,169 )
Total
  $ 24,904     $ 29,073     $     $ (4,169 )