Acusphere, Inc (ACUS) - Description of business

Overview

We are a specialty pharmaceutical company that develops new drugs and improved formulations of existing drugs using our proprietary porous microparticle technology. We are focused on developing proprietary drugs that can offer significant benefits over existing drugs, including improved safety and efficacy, increased patient compliance, greater ease of use, expanded indications or reduced cost. Our lead product candidate Imagify™ (perflubutane polymer microspheres for delivery in an injectable suspension, formerly known as AI-700) is a cardiovascular drug in Phase 3 clinical development for the detection of coronary artery disease, the leading cause of death in the United States. We also have demonstrated that our technology has the potential to improve the formulation of hydrophobic drugs and asthma drugs.

Our proprietary technology enables us to control the size and porosity of particles, including nanoparticles and microparticles, in a versatile manner, so that we can customize the particles to address the delivery needs of a variety of drugs. We have initially applied this technology in our research and development efforts in the following areas:

·        Imagify , Intravenous Delivery of Gas for Ultrasound Contrast.   We specifically designed Imagify to assess myocardial perfusion, or blood flow in the heart muscle, a sensitive marker for coronary artery disease, or CAD. Imagify is a cardiovascular drug that enables cardiac stress ultrasound to obtain information on myocardial perfusion, or blood flow in the heart muscle. Currently, there is no drug approved by the U.S. Food and Drug Administration, or FDA, to assess myocardial perfusion using ultrasound. Imagify is in Phase 3 clinical development.

·        Hydrophobic Drug Delivery System ™ , HDDS.   Hydrophobic drugs, which are drugs that do not dissolve well in water, are often difficult to formulate, especially for intravenous delivery. We have demonstrated that our HDDS technology improves the dissolution rate of a variety of hydrophobic drugs. We have completed a Phase 1 clinical trial for AI-850, which is a product candidate that, utilizing our HDDS technology, is designed to improve the dissolution rate of a leading cancer drug.

·        Pulmonary Drug Delivery System ™ , PDDS.   Most asthma drugs delivered via inhalation are immediate release formulations that must be inhaled multiple times per day, reducing patient compliance. We have demonstrated that our PDDS technology has the potential to provide sustained release drug administration in the lung and can be targeted to deliver the drug to the upper or lower region of the lungs. We have completed a Phase 1 study for AI-128 that, utilizing our PDDS technology, demonstrated sustained release of an FDA-approved asthma drug.

Our Porous Microparticle Technology

Microparticles are useful in the delivery of a wide range of drugs. The suitability of microparticles for use in drug delivery depends on a variety of characteristics, including size and porosity. Our technology enables us to control the size and porosity of microparticles and nanoparticles in a versatile manner so that we can customize the particles to address the delivery needs of a variety of drugs. We are focused on creating porous particles that are smaller than red blood cells. Microparticles, or the drugs embedded within these microparticles, when measured at less than one micron in size, are referred to as nanoparticles. These microparticles and nanoparticles can be used to deliver gases or to deliver drugs to patients through various routes of delivery. Small microparticles are important for delivering drugs intravenously so that they can pass safely through the body’s smallest blood vessels, for increasing the surface area of a drug so that it will dissolve more rapidly, and for delivering drugs via inhalation. Porosity is important for a variety of applications, including entrapping gases in microparticles, controlling the release rate of the drug from a microparticle, and targeting inhaled drugs to specific regions of the lung.

We have developed proprietary spray drying equipment and pore forming processes that enable us to produce these porous microparticles in a versatile manner.

Using our proprietary technology:

·        We have produced small, porous microparticles containing gas, which are analogous in structure to honeycombs. Using these microparticles, we are developing Imagify, a cardiovascular drug for detection of coronary artery disease through the assessment of myocardial perfusion.

·        We have produced small microparticles with tiny pores throughout, which are analogous in structure to sponges. Using these microparticles, we are developing our HDDS technology, which may enable improved dissolution of hydrophobic drugs in water.

·        We have produced small microparticles with large pores throughout, which are analogous in structure to whiffle balls. These microparticles are developed using our PDDS technology, which may enable improved delivery of drugs via the pulmonary route.

Our Strategy

In the last thirty years, a large worldwide market has emerged based on technologies that improve the delivery of established drugs in novel, cost-effective ways by providing significant benefits, such as improved safety and efficacy, increased patient compliance, greater ease of use, expanded indications or reduced cost. Drug delivery technologies can improve the commercial prospects for existing drugs by introducing new formulations that offer new delivery methods that may be patented and thereby protected. Traditionally, drug delivery companies have earned royalties by applying their delivery technologies to create new formulations of existing drugs owned by others. Recently, some companies have begun developing new drugs by using their proprietary drug delivery technologies in combination with off-patent drugs. These companies are often referred to as specialty pharmaceutical companies.

Our goal is to become a leading specialty pharmaceutical company that develops and commercializes new drugs and improved formulations of existing drugs using our porous microparticle technology. Our strategy to accomplish that goal includes the following:

Advance Development of Our Lead Product Candidate, Imagify.    We have completed patient enrollment in our Phase 3 clinical trial program for our lead product candidate, Imagify, a cardiovascular drug for the detection of coronary artery disease. Data from this program is intended to be used to seek approval for Imagify in the United States, Europe and other markets. We expect to announce data from our RAMP-2 clinical trial in the second quarter of 2007.

Focus on Proprietary Product Opportunities.    We intend to focus on proprietary product opportunities, where we own broad patent rights to the products. Due to our ownership interest in these product candidates and technology, we believe we would be able to negotiate corporate collaborations from a stronger position than service-oriented companies that develop drug delivery technologies for patented drugs owned by pharmaceutical or biotechnology companies. We may retain the sales and marketing rights to our proprietary products in specialty markets that we can readily address. For instance, our lead product candidate, Imagify, will initially be used by a subset of cardiologists, called echocardiologists, who are generally hospital-based. We believe echocardiologists can be reached by a relatively small sales force of approximately 60 to 100 people in the United States. Therefore, we believe Imagify may be an attractive candidate for us to market and sell directly in the United States. In Europe, we intend to market Imagify through Nycomed Danmark ApS (Nycomed) a company with which we entered into a strategic collaboration in 2004. We intend to pursue other strategic partnering opportunities to market and sell Imagify outside of the United States and Europe. We may also in-license products or technologies which we believe are complementary or synergistic with our internally-developed product candidates or technologies.

Apply Our Proprietary Technology for New Drug Delivery Systems.    We believe that our porous microparticle technology can be applied to a wide variety of marketed as well as development stage drugs, including patented and off-patent drugs. Many patented drugs owned by large pharmaceutical companies are hydrophobic or delivered by inhalation. These drugs could benefit from our HDDS or PDDS technologies. We plan to develop drugs with this technology on our own or in collaboration with others and to seek collaborations with companies that have patented drugs that could benefit from the most compelling capabilities of our technologies. By focusing on drugs where the advantages of our technologies are most compelling, we believe we will be in an attractive position when negotiating the terms of these collaborations.

Focus on Large Markets Where Our Product Candidates Can Address Significant Unmet Clinical Needs.    We are focused on developing proprietary drugs for large markets within cardiology, oncology and asthma where we believe our porous microparticle technology can provide compelling clinical advantages over current approaches. For example, we believe our lead product candidate, Imagify, will provide a convenient and cost effective alternative for the detection of coronary artery disease with respect to this initially targeted indication. We believe the potential market opportunity for Imagify is over $ 2.0  billion in the United States and even larger worldwide.

Product Development Programs

Our proprietary porous microparticle technology has been used to create product candidates that may address large unmet clinical needs within cardiology, oncology and asthma.

Imagify, Intravenous Delivery of Gas for Ultrasound Contrast

Broad Applications for Ultrasound Contrast.    We have developed an intravenous delivery system for gas that has the potential to expand the usefulness of ultrasound in the detection of coronary artery disease. Ultrasound is one of the least expensive and most frequently used imaging techniques that permit physicians to view the inside of the body. However, ultrasound is the only frequently used imaging technique without a commercially significant contrast agent. As a result, the clarity of ultrasound is often inadequate for a definitive assessment of some medical conditions. A contrast agent that could provide more detail and clarity and thereby improve the diagnostic image produced could expand the usefulness of ultrasound. Gases are attractive contrast agents for ultrasound because they reflect ultrasound waves more efficiently than blood or body tissues, enabling their detection by the ultrasound machine. Gas injected intravenously can potentially act as a tracer of abnormal blood flow, which is associated with many life-threatening diseases such as coronary artery disease. However, gas rapidly dissolves in blood thereby losing its effectiveness. As a result, microparticles that can entrap the gas and be administered intravenously are necessary in order to develop an ultrasound contrast agent with broad applications.

Coronary Artery Disease Market.    According to the American Heart Association, or AHA, approximately 16.0  million people in the United States suffer from coronary artery disease, the leading cause of death in the United States. Coronary artery disease is characterized by the accumulation of plaque, which narrows coronary arteries and reduces blood flow in the heart muscle. The AHA projects that in 2006 , over $150 billion will be spent on direct medical expenses for coronary artery disease in the United States. Early detection of coronary artery disease can reduce treatment costs, increase patient survival and improve quality of life.

The definitive method for the detection of coronary artery disease is coronary angiography, an expensive and invasive procedure impractical for use as a routine screening tool. Two of the most common methods for coronary artery disease screening are nuclear stress imaging and cardiac stress ultrasound. We estimate that approximately 10.4  million of these screening procedures were performed collectively in the United States in 2006 . We believe that a contrast agent that enables the assessment of blood flow in the

heart muscle, or myocardial perfusion, with ultrasound could replace many of these screening procedures. We believe that an ultrasound contrast agent capable of myocardial perfusion assessment could be priced at $200 or higher per procedure, including both rest and stress evaluations. Assuming all of these procedures were performed using ultrasound with an effective contrast agent at this price, we estimate the potential U.S. ultrasound contrast market for the cardiac indication of Imagify to be over $ 2.0  billion.

Current Practice for Coronary Artery Disease Screening.    Nuclear stress tests assess myocardial perfusion, or blood flow in the heart muscle. Nuclear stress tests involve the intravenous injection of a radioactive compound, followed by scans of the heart using a special camera while the patient is at rest and under stressed conditions. These tests may take up to five hours to complete, the results are not available immediately as post-processing is required, do not provide real-time results, cost approximately $800 per procedure, and due to significant capital equipment costs and complex regulatory requirements associated with the use of radioactive materials, are not available in many hospital or physician office settings. We estimate that approximately 7.6 million nuclear stress tests were conducted in the United States in 2006 .

The current cardiac ultrasound performed using stress assesses the motion of the heart wall. Advanced coronary artery disease typically results in abnormal blood flow in the heart muscle, which in turn causes abnormal wall motion that can be detected by the ultrasound machine used in cardiac ultrasound. Although myocardial perfusion information from nuclear stress tests provides the most direct information about blood flow in the heart muscle, cardiac stress ultrasound provides dynamic, real-time information about regional heart function. This additional information, along with the greater availability of ultrasound over nuclear equipment, results in the use of cardiac stress ultrasound as a screening method in many hospital and physician office settings. Cardiac ultrasound involves the use of high-frequency sound waves that are bounced off of the heart wall while the patient is at rest and under stressed conditions. We estimate that approximately 2.8  million cardiac stress ultrasound procedures were conducted in the United States in 2006. However, cardiac stress ultrasound is often inadequate for a definitive assessment of coronary artery disease. For instance, the motion of the heart wall can be difficult to see under certain conditions, particularly in obese patients. In addition, the detection of defects in myocardial perfusion using cardiac stress ultrasound is not possible without use of a contrast agent.

There is no ultrasound contrast agent approved by the FDA for use in cardiac ultrasound for myocardial perfusion imaging. Ultrasound contrast agents have been approved by the FDA for use in cardiac ultrasound without stress for left ventricular opacification, or LVO, and endocardial border delineation, or EBD, in patients with suboptimal images. LVO is image enhancement of blood volume in the left ventricular chamber of the heart. EBD is image enhancement of the borders of the ventricular chambers.

Our Solution, Imagify, a Synthetic Polymer Microparticle.    Using our porous microparticle technology, we specifically designed Imagify for myocardial perfusion assessment. Currently in Phase 3 clinical trials, Imagify is a cardiovascular drug that is being developed to enable cardiac stress ultrasound to provide information on myocardial perfusion in addition to wall motion. Based on the results of our Phase 2 clinical trials, we believe that Imagify-enhanced cardiac stress ultrasound has the potential to provide information comparable to the nuclear stress tests, while retaining the inherent advantages of ultrasound.

We believe we have overcome many of the limitations of other ultrasound contrast agents by developing an intravenous gas delivery system made from a synthetic polymer. All of the ultrasound contrast agents currently approved by FDA for LVO and EBD in patients with suboptimal images deliver gas intravenously in fragile systems made from natural materials. When exposed to the power of the ultrasound beam during the imaging procedure, these natural materials are so fragile they often rupture and release the gas into the blood, where it dissolves, thereafter rendering these contrast agents ineffective. Moreover, some ultrasound contrast agents encapsulate nitrogen, which dissolves quickly in water. Such contrast agents have a very short duration of enhancement because the nitrogen is quickly pushed out of

the microbubble and displaced with water. Ultrasound contrast agents made from natural materials or containing nitrogen have only been approved by FDA for LVO and EBD in patients with suboptimal images and we believe they are difficult to use in myocardial perfusion imaging, which is more technically demanding. Unlike the natural materials used in FDA-approved ultrasound contrast agents, the synthetic polymers used in Imagify do not break during the imaging procedure. In addition, perfluorocarbon gases are less soluble in water and therefore have the propensity to stay inside the microparticle. As a result, we can deliver a higher concentration of gas to the myocardium over a longer period of time, thereby enabling Imagify to target the broader application of myocardial perfusion assessment. Imagify is a dry powder consisting of small, porous microspheres filled with a perfluorocarbon gas. These microspheres are made of a synthetic biodegradable polymer, called poly (D, L-lactide co-glycolide), or PLGA, that has been used in other drug delivery systems approved by FDA. The composition and structure of the microspheres, which also contain a phospholipid, and the properties of the perfluorocarbon gas slow the rate at which the gas dissolves and prevents the microspheres from being quickly broken down inside the body. These microspheres are suspended in sterile water and injected into the body by intravenous injection. Imagify was designed to be used with commercially available ultrasound equipment and established imaging techniques.

Potential Benefits of Imagify-Enhanced Cardiac Stress Ultrasound vs. Nuclear Stress Tests

Imagify-enhanced cardiac stress ultrasound has the potential to significantly reduce the time, cost and resources needed in the assessment of myocardial perfusion.

·        Less Expensive.    We estimate that the cost of performing an ultrasound imaging procedure using our Imagify contrast agent will be approximately $400 per procedure, representing costs of $200 for the contrast agent and $200 for administering the procedure. Nuclear stress tests typically cost approximately $800 per procedure. Nuclear stress tests are relatively more expensive because the equipment is large and costly and patient throughput is low. Ultrasound equipment is much smaller and generally half the cost of nuclear equipment used for the detection of coronary artery disease.

·        Less Time Consuming.   Nuclear stress tests may take up to five hours, while cardiac stress ultrasound procedures typically take less than one hour.

·        Greater Availability.   Due to the technical complexity, high cost and the regulatory requirements associated with the use of radioactive materials, nuclear stress tests are not available in all hospitals, cardiology practices and emergency departments. In the United States, ultrasound equipment is widely available in all of these settings.

·        More Information.   Imagify-enhanced cardiac stress ultrasound has the potential to provide information on both myocardial perfusion and wall motion, whereas nuclear stress tests typically provide good information on myocardial perfusion, but little information on wall motion. Imagify-enhanced cardiac stress ultrasound has the potential to provide this information immediately whereas images from nuclear stress tests require post-processing and analysis.

·        No Radioactivity.   Imagify is made from a synthetic polymer that does not require special licensing, has the potential of at least a two-year shelf life, and is convenient to use and store. Nuclear stress tests use radioactive materials that create additional costs due to preparation, storage and disposal requirements.

·        Expanded Opportunity for Cardiologists.   We believe that many cardiologists will prefer Imagify-enhanced cardiac stress ultrasound over nuclear stress tests because it may allow them to remain in closer contact with their patients. To assess myocardial perfusion with nuclear stress tests, many patients are referred by cardiologists to the radiology department, which is usually a different profit and care center within the hospital.

Potential Benefits of Imagify-Enhanced Cardiac Stress Ultrasound vs. Cardiac Stress Ultrasound without Contrast

Imagify-enhanced cardiac stress ultrasound has the potential to provide broader information for heart evaluation.

·        More Information.   Imagify-enhanced cardiac stress ultrasound has the potential to provide information on both myocardial perfusion and wall motion, whereas cardiac stress ultrasound without contrast provides information only on wall motion.

·        Potential for Increased Sensitivity with Perfusion.   Cardiologists seek to identify coronary artery disease early in the disease progression in order to minimize the risk of heart attack. In early coronary artery disease, the coronary artery is only partially blocked, so there may be little or no wall motion abnormality, but there could be a perfusion abnormality. The potential for increased sensitivity has contributed to the popularity of nuclear stress tests. We estimate that in 2006, approximately 7.6 million nuclear stress tests were performed compared to 2.8 million stress cardiac ultrasounds. We believe that an ultrasound contrast agent capable of myocardial perfusion imaging would enable cardiac stress ultrasound to compete more effectively with nuclear stress testing.

Clinical Results.    Prior to commencing our Phase 3 clinical program, we enrolled over 200 human subjects in our Phase 1 and Phase 2 clinical trials for Imagify. Our Phase 1 clinical trials evaluated the safety and feasibility of myocardial perfusion imaging with Imagify. Our Phase 2 clinical trials evaluated the preliminary safety and efficacy of Imagify-enhanced cardiac ultrasound imaging. In our Phase 2 clinical trials, efficacy was measured by comparing the results obtained from myocardial perfusion assessment using Imagify-enhanced cardiac ultrasound with those obtained using nuclear stress tests. Our Phase 1 and Phase 2 clinical trials were conducted in the U.S. under an Investigational New Drug Application, or IND. The results of our Phase 2 trials are summarized below. We have filed these results and our protocols for our Phase 3 trials with the FDA. We completed the pilot phase of our Phase 3 clinical program in 2005. We are intentionally blinded to efficacy data from our ongoing Phase 3 pivotal trial.

The “20” Trial.    Our objectives in our first Phase 2 clinical trial, the “20” trial, were to evaluate the safety of Imagify in subjects with known coronary artery disease as well as in healthy subjects and to determine the optimal imaging procedures for myocardial perfusion assessment using Imagify-enhanced cardiac ultrasound. The study included 53 subjects, was conducted by echocardiologists and utilized a variety of commercially available equipment platforms. Subjects enrolled in the “20” trial received a single injection of Imagify at a variety of doses and were imaged under resting conditions only. The primary efficacy endpoint was agreement between Imagify-enhanced cardiac ultrasound and nuclear stress tests. Agreement was defined as the percentage of subjects who received the same diagnosis using Imagify-enhanced cardiac ultrasound as with nuclear stress. At the optimal imaging conditions identified during the trial, we met the primary endpoint of this trial.

The “21” Trial.    Our objectives in our second Phase 2 clinical trial, the “21” trial, were to evaluate the safety and diagnostic efficacy of Imagify in patients with suspected or confirmed coronary artery disease as well as in healthy subjects. The study included 122 subjects, was conducted by echocardiologists and utilized a variety of commercially available ultrasound equipment platforms and imaging techniques. A variety of doses of Imagify were evaluated in the trial. Patients enrolled in the “21” trial received two injections of Imagify, one under resting conditions and the other under stressed conditions. All patients received a nuclear stress test and either an Imagify-enhanced cardiac stress ultrasound or a cardiac stress ultrasound without contrast. The primary efficacy analysis was based on the ability of independent echocardiologists, blinded to all other information, to detect myocardial defects when comparing cardiac ultrasound images to nuclear stress. In the “21” trial we met the primary efficacy endpoints, which were sensitivity, or the ability to detect the presence of disease, and specificity, or the ability to determine the absence of disease.

Efficacy Data.    Comparison of Imagify-enhanced cardiac stress ultrasound and nuclear stress for subjects in our Phase 2 trials indicated the following:

·        Imagify-enhanced cardiac stress  ultrasound versus cardiac stress  ultrasound without contrast.   Cardiac stress ultrasound with both low and high doses of Imagify resulted in a greater than 30% increase in sensitivity compared to cardiac stress ultrasound without contrast, and demonstrated a higher level of agreement with nuclear stress tests versus cardiac stress ultrasound without contrast.

·        Imagify-enhanced cardiac stress  ultrasound versus the nuclear stress test.   Cardiac stress ultrasound with both low and high doses of Imagify agreed with nuclear stress tests in more than three-quarters of all patients.

·        Imagify-enhanced cardiac stress ultrasound versus coronary angiography.   Nuclear imaging does not always result in a correct diagnosis of coronary artery disease. The generally agreed gold standard for the diagnosis of coronary artery disease is coronary angiography. In a retrospective exploratory analysis of those patients that underwent coronary angiography, Imagify-enhanced cardiac stress ultrasound had the same sensitivity as nuclear stress tests when compared to coronary angiography.

The Phase 3 Program: Detection of Coronary Artery Disease in Patients Being Evaluated for Ischemic Heart Disease.    Our Phase 3 program for Imagify commenced in 2003 under a U.S. Investigational New Drug application and in compliance with applicable European regulatory requirements. The Phase 3 clinical plan provides for a two-part program consisting of a pilot phase, or the pilot study, under which investigators and blinded readers were qualified and trained, and two independent multi-center pivotal trials. These two pivotal trials, previously referred to as the “32” and “33” trials, have been re-named RAMP-1 and RAMP-2, respectively. “RAMP” stands for Real-time Assessment of Myocardial Perfusion with echocardiography. Clinical investigators were qualified in the pilot phase on a rolling basis. The pilot phase was completed in 2005, after which more than 20 clinical investigators were qualified to enroll patients in the pivotal studies. Clinical investigators in the Phase 3 pivotal studies are located at clinical sites in North America, Europe and Australia. Data from the Phase 3 pivotal studies are intended for submission to U.S., European, and potentially other regulatory authorities.

The Pivotal Trials.    The Phase 3 pivotal studies are designed to demonstrate that Imagify-enhanced cardiac stress ultrasound is non-inferior, or equivalent, to nuclear stress testing. Clinical sites that participated in these studies were primarily in the U.S. and Europe. All patients enrolled in these studies received an Imagify-enhanced cardiac stress ultrasound. Most of these patients also received a nuclear stress test. The Imagify-enhanced cardiac stress ultrasound images and the nuclear stress images resulting from these studies are forwarded by the clinical sites to an independent clinical research organization where all information about the patients, other than what is shown by the images themselves, is removed. Because all such patient information is removed from the images, evaluators of the images are referred to as “blinded readers”. Images produced by Imagify-enhanced cardiac stress ultrasound are evaluated by echocardiologists, who we refer to as “ultrasound blinded readers”. Images produced by nuclear stress tests are evaluated by nuclear cardiologists, who we refer to as “nuclear blinded readers”.

A truth standard defines which patients have disease and which patients are normal, and serves as the basis for quantifying the performance of the ultrasound blinded readers and the performance of the nuclear blinded readers. Non-inferiority is determined by comparing the performance of the ultrasound blinded read relative to the nuclear blinded read.

Non-inferiority of Imagify-enhanced cardiac stress ultrasound relative to nuclear stress tests is evaluated in three ways, which are the primary endpoints of the pivotal trials. First, non-inferiority is evaluated in all patients. We define “accuracy” as a measure of the percentage of patients in which the test is correct relative to the truth standard. Next, non-inferiority is evaluated in two different subsets of patients, those with disease and those without disease. We define “sensitivity” as a measure of the

effectiveness of the test in assessing the presence of disease in the patients who have been shown by the truth standard as having coronary artery disease and “s pecificity” as a measure of the effectiveness of the test in assessing the absence of disease in the patients who have been shown by the truth standard to be free of coronary artery disease.

The criteria for success for each primary endpoint is for two of the three ultrasound blinded readers to be non-inferior to the nuclear blinded reader. In the RAMP-1 study there was one nuclear blinded reader. In the RAMP-2 study there are three nuclear blinded readers.

During the pivotal trials, we intentionally have no access to efficacy data. We do not publicly disclose results from a pivotal trial until after the trial is closed, quality control checks are completed, the database is locked, the data are revealed to us and we have had an opportunity to review and understand the data, including data regarding clinical outcomes and safety results. A total of 777 patients with known or suspected coronary artery disease have been enrolled in the Phase 3 pivotal trials.

RAMP-1 Trial.    320 patients were enrolled in the RAMP-1 clinical trial. Patients eligible for this trial had, in accordance with current clinical practice, been referred for a nuclear stress test. All RAMP-1 patients received an Imagify-enhanced cardiac stress ultrasound as well as a nuclear stress test. The truth standard in this trial was angiography, clinical outcome or clinical outcome with the unblinded evaluation of the nuclear stress test. The truth standard was angiography in 42% of patients.

In June 2006 we announced preliminary results of the RAMP-1 study. The accuracy and specificity results exceeded the criteria for success.  Three of three echo blinded readers had statistically non-inferior accuracy to the nuclear blinded reader, whose accuracy was 70% (all p value <0.005).  Two of three ultrasound blinded readers had statistically superior specificity to the nuclear blinded reader, whose specificity was 63% (p value for both with respect to non-inferiority <0.001). The sensitivity results missed the criteria for success of the trial with one of three ultrasound blinded readers having statistical non-inferior sensitivity (p=0.002) to the nuclear blinded reader’s sensitivity of 78%. Based upon our review of the safety data from this trial, we believe Imagify was well tolerated. Greater than 99% of the images acquired from patients enrolled in the trial were evaluable.

RAMP-2 Trial.    In June 2006 we completed the enrollment of 457 patients in this trial. Patients eligible for this trial had been referred for a coronary angiogram. All patients enrolled in this clinical trial received an Imagify-enhanced cardiac stress ultrasound. Approximately 420 patients also received a nuclear stress test for purposes of evaluation against the primary endpoints of this study. The truth standard for all patients in this study is coronary angiography. As dictated by the trial design, all patients in this trial were evaluated for up to 30 days following the Imagify-enhanced cardiac stress ultrasound study. Once all images have been read, and all patient data from the follow-up period and angiography data are collected, an independent third-party clinical research organization, on our behalf, will conduct quality control checks. These checks, which can take up to 90 days, are designed to ensure that all of the required information has been fully gathered and filed before locking the database. At that time, the data may be unblinded and made available to us for analysis.

In October 2006, we completed an initiative designed to train all of the ultrasound blinded readers in the RAMP-2 trial to increase their sensitivity while maintaining high accuracy. We continue to train the ultrasound blinded readers in an effort to assure that gains in sensitivity do not lower specificity below targeted levels. Based upon our findings from this training, we intend to have each of the RAMP-2 ultrasound blinded readers evaluate all images for the primary efficacy analysis of the RAMP-2 trial. We and the blinded readers remain blinded to all of the RAMP-2 efficacy data until all the blinded reads are completed and the trial results are available. Although this training and each of the other differences referred to above are intended to increase the likelihood of success for the RAMP-2 trial, we cannot assure you that the RAMP-2 results will meet or exceed the clinical endpoints. We currently expect that the results from RAMP-2 will be publicly available in the second quarter of 2007, and that the NDA

submission will occur in the fourth quarter of 2007. No additional patients are expected to be enrolled in the RAMP-2 study.

Trial Design and Purpose.    We believe that Imagify-enhanced cardiac stress ultrasound has the potential to significantly reduce the time, cost and resources needed in the assessment of myocardial perfusion, compared to nuclear stress testing. Myocardial perfusion is blood flow to the heart muscle, a sensitive marker for coronary artery disease. There is no ultrasound contrast agent approved by FDA for use in cardiac stress ultrasound or myocardial perfusion imaging. Based upon the endpoints described above, our RAMP-1 and RAMP-2 trials are designed to demonstrate non-inferiority of Imagify-enhanced cardiac stress ultrasound relative to nuclear stress testing. In April 2005, based in part upon feedback from FDA, we revised the statistical analysis plan on which we base our patient enrollment estimates for the Imagify Phase 3 clinical trials. Since that time we have continued discussions with FDA regarding trial design and our statistical analysis plan. As a result of our ongoing discussions with FDA, we may make further revisions. These discussions could lead to delays in the public announcement of the results from our RAMP-2 clinical trial and affect whether Imagify is approved for the indication that we are seeking, the timing of such approval or whether Imagify is approved at all.

The discussion of the timing of the RAMP-2 blinded reads, RAMP-2 data release and NDA submission for Imagify reflect our current assumptions, based on our knowledge and experience and the guidance of our advisors. We cannot assure you that these timelines will be met, nor can we assure you that our estimates and assumptions will not change based upon ongoing regulatory feedback or that, when RAMP-2 results are unblinded to us, that such results will successfully achieve results that meet or exceed the clinical endpoints or that FDA will accept and approve our NDA once submitted.

Safety Data.    During our Imagify clinical studies we have intentionally sought to identify and evaluate all AEs. Any change in how the patient feels after injection of Imagify is considered an AE, which are recorded in these studies whether or not attributable to Imagify. The adverse experiences observed in our trials have been typically mild in intensity and of short duration. The vast majority of people exposed to Imagify are cardiac patients who are undergoing a stress study and have a pre-study history of chest pain. Cardiac stress ultrasound procedures require stressing the heart through exercise or pharmacologically induced stress. For purposes of control and consistency of data between studies, pharmacologically induced stress was used with all patients enrolled in the pivotal study.

Many of the types of AEs observed in our clinical studies have been consistent with the types associated with the pharmacological stressor. While certain of these AEs appear to be attributable to causes other than Imagify and some to Imagify, the attribution of many of these events is not definitive. We enrolled 393 subjections in the Phase 1, Phase 2 and pilot studies. In these studies, the most prevalent adverse events, or AEs, were headache, facial flushing and nausea. In these studies, one of the observed AEs was characterized as a serious adverse event, or SAE, which definition includes any AE that results in patient remaining in the hospital overnight for observation. There was no residual effect from this event. We enrolled 320 patients in the RAMP-1 clinical trial. Patients eligible for this trial had, in accordance with current clinical practice, been referred for a nuclear stress test. The majority of AE’s reported in RAMP-1 were mild in intensity, transient, and resolved without residual effects. The most common AEs reported were headache, chest pain, nausea, flushing and dizziness and the majority of these AEs occurred following the administration of the dipyridamole pharmacologic stress agent prior to stress imaging. SAEs and dose discontinuation was experienced in four and five of 320 patients, respectively. All SAEs were non-life threatening, transient, and resolved without residual effects.

The safety of our clinical studies is monitored by an independent third party advisor and all AEs are reported to investigators, institutional review boards and regulatory agencies on a periodic basis. We intend to continue to study the safety profile of Imagify. While we do not comment on data from ongoing clinical trials, based upon observations to date, we believe that Imagify is generally well tolerated.

However, there can be no assurance that we will not experience other AEs in our clinical trials or that regulatory authorities will conclude that Imagify is safe for approval and broader use.

Additional Clinical Trials to Strengthen Imagify’s Market Position.    As a part of our ongoing clinical program for Imagify, we will continue investigating the performance of Imagify in a range of circumstances that may be encountered beyond of the scope of the RAMP-1 and RAMP-2 studies. One such trial, named ACCESS (Acquiring Consensus for Contrast Echocardiography System Settings), is designed to determine the appropriate equipment settings for Imagify on a variety of ultrasound hardware platforms. In March 2007, we completed ACCESS trial enrollment at 39 patients. Additionally, with RAMP-1 and RAMP-2 focused on the diagnostic value of Imagify, which is the ability to detect the presence or absence of disease at a fixed point in time, we also anticipate evaluating the prognostic value of Imagify, which is the ability to predict future cardiovascular events, or outcomes through a trial called PACE (Prognostic Assessment of Contrast Echocardiography). No new administration of Imagify will be required for PACE, as we will conduct follow-up analysis on patients from the RAMP-1 and RAMP-2 trials and expect results from this trial in 2008.

Future Indications.    Since Imagify circulates in the blood and acts as a tracer of blood flow, we believe it has the potential to assist in the assessment of a wide variety of diseases in addition to coronary artery disease. Abnormal blood flow is associated with a variety of life threatening diseases including various forms of cancer, renal artery stenosis and deep vein thrombosis. These diseases often cannot be adequately assessed with ultrasound imaging without contrast, and as a result radiologists currently detect these diseases with more expensive imaging techniques, such as computerized tomography, angiography, nuclear medicine and venography. Ultrasound imaging using Imagify may offer a cost-effective alternative to these expensive techniques.

Our Hydrophobic Drug Delivery System, or HDDS™

Broad Applications for the Delivery of Hydrophobic Drugs.    We have developed a proprietary formulation technology called HDDS that converts drugs that do not dissolve well in water, or hydrophobic drugs, into microparticles or nanoparticles of the drugs embedded in small microparticles, such that the drugs can rapidly dissolve in water. Formulation of hydrophobic drugs is often challenging. Since the human body is primarily composed of water, hydrophobic drugs do not dissolve well in the body, which can limit the effectiveness of these drugs. Many promising drugs never make it to market because they are difficult to dissolve. Drug programs are often abandoned after significant investment because suitable formulations for these insoluble drugs are elusive. Many hydrophobic drugs that do make it to market have less than ideal formulations. Developing intravenous formulations of hydrophobic drugs is particularly challenging. Intravenous formulations of drugs can open new markets for drugs like antibiotics that could often be initially prescribed in a hospital setting. In addition, intravenous formulations can expand the market for the oral dosage formulation because physicians typically prefer to discharge patients on the oral formulation of the intravenous formulation administered to the patient in the hospital.

Market for Hydrophobic Drug Delivery.    We believe that FDA-approved hydrophobic pharmaceuticals generated $100 billion in revenues in 2005 and that other potential drugs have not achieved FDA approval due to issues associated with effectively dissolving these drug candidates.

Current Practice.    Many hydrophobic drugs are comprised of particles that are relatively large and therefore have a limited surface area available for interaction with water. These hydrophobic drugs are often formulated in less than ideal ways in order to make them dissolve. It is possible to increase the dissolution rate of some hydrophobic drugs by increasing their aggregate surface area. To accomplish this, many pharmaceutical companies use a process called micronization, which entails grinding hydrophobic drugs into smaller microparticles. However, the drug particles produced by micronization are often still not small enough to adequately improve dissolution, or to be administered intravenously. Alternatively, oils

like Cremophor® are used to dissolve the drugs. However, these oils are often not well tolerated and can require prolonged infusion rather than rapid injections to minimize potential side effects. In addition, some hydrophobic drugs can be formulated into soft gelatin capsules, but these are only suitable for oral administration and encapsulate only a small volume of drug, requiring the administration of many capsules. Sometimes development of these drugs must be terminated because no suitable formulation can be found.

Our Solution: Rapidly Dissolving Sponge-Like Particles.    We have demonstrated that our HDDS technology improves the dissolution rate of a variety of hydrophobic drugs. HDDS has achieved up to 30-fold increases in the dissolution rate of a variety of hydrophobic drugs. HDDS has produced drug formulations that are well-tolerated in pre-clinical studies and we believe would be suitable for all routes of administration, without resorting to the use of unsafe or unproven additives to formulate the drug.

HDDS Proof of Concept.    We have demonstrated in multiple laboratory tests, and in one Phase 1 human safety study, that our HDDS technology has the potential to improve the dissolution rate of a variety of hydrophobic drugs, including anti-inflammatories, taxanes, calcium channel blockers and anti-fungals. Such initial testing resulted in patent coverage with respect to over 150 potential reformulations of hydrophobic drugs in a variety of therapeutic areas.

Our Phase 1 human safety study utilizing our HDDS technology was conducted with AI-850, one of our initial HDDS-based product candidates. AI-850 is a readily dissolving formulation of the hydrophobic drug, paclitaxel, the active ingredient in the cancer drug, Taxol®. To dissolve paclitaxel, Taxol contains Cremophor, which is believed to cause severe hypersensitivity reactions, including an extreme allergic reaction called anaphylaxis. Therefore, Taxol is typically administered using pre-medications and by long infusions to patients with cancer. By putting paclitaxel into our sponge-like microparticles, we have created a paclitaxel formulation that is free of Cremophor. Our Phase 1 human safety study of AI-850 was completed during 2004. The primary goal of the Phase 1 study was to provide human proof-of-concept that our HDDS technology is capable of intravenously delivering hydrophobic drugs without the need for co-solvents that are inconvenient to administer and are associated with undesirable side effects. The primary objective of this trial was to determine the maximum tolerated dose, or MTD, of AI-850. In the dose escalation study, 22 patients with solid tumors (taxane naïve patients and patients who previously had received taxane therapy) were treated with AI-850 without standard taxane pre-medications in doses up to 250 mg/m 2. Infusions of AI-850 were delivered in less than 30 minutes at all doses, which is significantly shorter that the three-hour infusion typically required by Taxol. The MTD of AI-850 for patients with extensive prior taxane therapy was 205 mg/m2, which is higher than the Taxol dose of 175 mg/m2 typically used to treat taxane naïve patients with metastatic breast cancer. It is our current plan to seek strategic collaborators for AI-850 before commencing additional clinical testing of this product candidate.

HDDS Development Status and Potential Product Candidates.    In recent years, although our efforts to develop HDDS product candidates have been limited by our prioritization of Imagify Phase 3 clinical trials, we have continued development. During this time, we have conducted discussions with potential partners regarding product candidates and have performed feasibility studies. We will continue to seek opportunities to work with other companies on improving their patented hydrophobic drugs and product candidates and we will evaluate the feasibility of developing, on our own or in collaboration with others, improved formulations of off-patent hydrophobic drugs. We anticipate greater emphasis on HDDS product development in 2007 than 2006.

Our Pulmonary Drug Delivery System, or PDDS™

Broad Applications for Sustained Release in the Lung.    A sustained release delivery system for drugs delivered locally to the lung would be desirable for the treatment of respiratory disease. Relative to systemic drug delivery by the oral or injectable routes, local delivery of respiratory drugs by the pulmonary

route allows smaller doses of the drug and minimizes systemic toxicity because the drug can be delivered directly to the site of the disease. Moreover, sustained release of respiratory drugs may offer significant clinical benefit to millions of respiratory patients, including a growing percentage of pediatric patients, by allowing them to take treatments for such diseases as asthma less frequently, and to receive more prolonged and steadier relief. We believe sustained delivery of drugs to the lung also offers the potential for improved safety, by moderating the drug peaks and troughs of immediate release drugs, which can cause added toxicity or reduced efficacy. Our initial development efforts have focused on developing sustained release formulations of asthma drugs.

Market for Pulmonary Drug Delivery.    The worldwide asthma therapeutics market is estimated at over $12.0 billion in 2005. We believe the delivery of long-acting drugs to the lungs represents a significant medical opportunity.

Current Practice.    Current pulmonary delivery systems are not ideal, delivering inaccurate doses, requiring frequent dosing and losing significant amounts of drug in the delivery process. Most asthma drugs delivered by inhalation are immediate release formulations that must be inhaled multiple times per day, which discourages patient compliance. When patients forget to take their medicine during the day, they may experience complications which may result in increased emergency room visits and hospitalizations. In a recent study, two thirds of all asthma patients did not take their medications as directed. In addition, immediate release formulations often deliver drug levels that peak and trough, causing undesirable toxicity or inadequate efficacy.

Our Solution: Slowly Dissolving Microparticles.    By controlling particle size, particle porosity and thus density, and particle composition, and therefore the aerodynamic properties of a particle, our PDDS technology controls where drug particles go in the lung and how quickly they release their drug. This tight control of release rate, and targeting within the lungs, may enable our PDDS technology to address many of the hurdles of sustained release pulmonary delivery.

PDDS Proof of Concept.    We have demonstrated using several molecules in multiple laboratory tests, and using one molecule in a European Phase 1 clinical trial, that our PDDS technology has the potential to improve the delivery of asthma drugs.

Our European Phase 1 clinical trial utilizing our PDDS technology was conducted with AI-128, our initial PDDS-based product candidate. AI-128 is a sustained release, dry powder formulation of a widely used asthma drug. We believe that AI-128 is the first human demonstration of sustained release drug administration in the lung. With once-a-day dosing, we believe AI-128 would be more convenient for the patient, reducing non-compliance related complications and costs. By controlling the release rate of the drug to the lung, AI-128 offers the potential for improved safety. Slowing drug release in the lung offers the potential for a lower peak concentration of drug in the systemic circulation. Our European Phase 1 clinical trial with AI-128 was conducted in accordance with applicable local regulatory requirements. In this trial, we demonstrated that approximately 80% of inhaled AI-128 was delivered to the intended target, the upper lung. The microparticles remained in the lung for up to 24 hours, the period of time that we believe is required for once-daily dosing, and that the drug was released from the microparticles in the lung over a 12 to 24-hour period.

PDDS Development Status and Potential Product Candidates.    In recent years, our efforts to develop PDDS product candidates have been limited by our prioritization of Imagify Phase 3 clinical trials. We believe our PDDS technology may enable improved formulations of other locally acting asthma drugs as well as allow drugs that must be delivered into the bloodstream for systemic therapy to be administered by inhalation through the lung. We have demonstrated in pre-clinical studies that we can create sustained release, dry-powder reformulations of drugs currently used to treat respiratory disease. We believe that one or more of such reformulations could have many of the benefits AI-128 potentially offers. Moreover, many large molecule drugs, such as proteins, cannot be delivered orally because they are destroyed by

enzymes in the gastrointestinal system. As a result, they often must be injected subcutaneously or intramuscularly several times per week in order to get an adequate amount of the drug into the body’s general circulation. Since the lung does not contain these destructive enzymes, systemic delivery of these drugs via the pulmonary route could be more convenient and require less dosing. We plan to seek both proprietary and collaborative opportunities for these drug formulations.

Research and Development

Over the past three fiscal years, we have made material expenditures on research and development. In the fiscal years ended December 31, 2004, 2005, and 2006, research and development expenses were approximately $26.0 million, $42.2 million and $52.4 million, respectively.

Our Proprietary Microparticle Technology

Microparticles are useful in the delivery of a wide range of drugs. Suitability of microparticles for use in pharmaceuticals depends on a variety of factors, including size and porosity. Smaller microparticles have a broader range of utility, such as intravenous and pulmonary delivery applications. Depending on the targeted site and desired route of delivery, drug delivery technologies utilize microparticles of various sizes. Our porous microparticle technology enables us to produce very small microparticles that are smaller than a red blood cell and with a wide range of porosities.

Microparticle Size

Large microparticles are microparticles over 100 microns in size. Large microparticles are used to deliver drugs through relatively large orifices, like the mouth (oral delivery). Large microparticles have been used in the delivery of both immediate and controlled release oral drug formulations. However, these particles cannot be delivered by injection, because they are too large to fit through a needle. In addition, they are unsuitable for delivery via the pulmonary route, because larger particles tend to get caught in the back of the throat when inhaled. For these reasons, the use of large microparticles is generally limited to oral administration.

Medium microparticles are microparticles between 10 and 100 microns in size. These particles are small enough to fit through a needle, and therefore are suitable for injection subcutaneously, which is under the skin, or intramuscularly, which is into the muscle. These microparticles have been used primarily to deliver drugs, which cannot be delivered orally because they are destroyed in the gastrointestinal system. However, medium microparticles cannot be injected intravenously because they are too large to fit through the body’s smallest blood vessels, or capillaries, and like large microparticles, are unsuitable for delivery via the pulmonary route.

Small microparticles are microparticles smaller than 10 microns, which is approximately the size of a human red blood cell. Small microparticles include nanoparticles, which are particles smaller than 1 micron. Small microparticles are small enough to pass through the capillaries for intravenous delivery; are small enough to be readily inhaled for pulmonary delivery; and have more total surface area per unit of weight relative to larger microparticles, making them a particularly efficient method for delivering hydrophobic drugs. Intravenous delivery is desirable in a hospital setting to ensure that the drug is fully bioavailable, or that the entire drug dose is absorbed by the body. Intravenous delivery is also used for drugs that must be injected but with a dose too high for intramuscular or subcutaneous delivery. Drugs are also administered intravenously, or directly into the blood, to act as tracers of blood flow, since abnormal blood flow is associated with many life threatening diseases. Therefore, small particles have many potential applications, including use as ultrasound contrast agents, as delivery systems for hydrophobic drugs, and as delivery vehicles for asthma drugs.

Microparticle Porosity

The ability to vary the porosity of microparticles on a consistent basis can be critical to the successful use of microparticles in pharmaceutical products. For instance, in ultrasound contrast imaging, we believe it is advantageous to use microparticles that are highly porous on the inside but with limited porosity in the shell. Porosity on the inside of microparticles enables them to contain more of the active ingredient, which is gas, than particles that are dense. Limiting porosity in the shell prevents gas leakage and enables the retention of the gas inside the particle. Furthermore, pores can facilitate absorption of water into a microparticle, which is useful in getting hydrophobic drugs to dissolve more quickly, and useful for controlling the release of a drug from a sustained release system. Finally, in drug delivery to the lung, it is advantageous to use microparticles of various porosities, which controls density, because the size and density of the microparticles dictates where in the lung they will be delivered.

Microparticle Production Using Spray Drying

We believe the use of small, porous microparticles has not reached its full potential in the delivery of drugs. We believe that current manufacturing processes for creating small microparticles have low yields, have not been adapted for use with encapsulating materials like synthetic polymers, have low encapsulation efficiency and are difficult to combine with other technologies, such as coating technologies. We believe that the use of porosity to improve drug formulations has been underutilized because an efficient process for creating porous microparticles at commercial scale did not exist. Our porous microparticle technology was designed to address the limitations of existing manufacturing processes.

Spray drying is a production technique widely used in the pharmaceutical industry because it is a single-step, continuous process. However, standard spray drying:

·        Produces solid microparticles rather than the porous microparticles, which are required for ultrasound contrast imaging and may be beneficial for hydrophobic and pulmonary drug delivery.

·        Does not completely remove moisture from the microparticles, contributing to low yields and making standard spray drying uneconomic for the production of drugs made from expensive raw materials.

·        Results in relatively high levels of residual solvents , which can be problematic for the stability and safety of the drug.

·        Often operates at high temperatures , making it difficult to use with drugs that are unstable at higher temperatures.

·        Is not well-suited to sterile, or aseptic, processing , which is required for most intravenously administered drugs and is beneficial for pulmonary-delivered drugs.

Our proprietary porous microparticle technology platform consists of two key components—a multi-chamber spray dryer and pore-forming agents.

Our Patented Spray Dryers

We believe we have overcome the limitations of standard spray drying in producing small microparticles and nanoparticles through patented equipment innovations that:

·        Remove nearly all residual solvents such as moisture from the microparticles because our patented spray dryer increases the length of time the microparticles are dried.

·        Can be operated at low or high temperatures , due to increasing the drying time used for microparticles produced at lower temperatures, and reducing the drying time for microparticles produced at higher temperatures.

·        Are well suited to aseptic processing by using steam sterilization techniques and a positive pressure system, thereby minimizing the contaminants pulled into the spray dryer from the surrounding environment.

We have improved the drying capability of standard spray dryers by adding additional drying chambers through which the microparticles travel. The additional drying chamber consists of a large, narrow coil through which the particles can be dried at multiple temperatures and at high linear gas velocities. As a result, our spray dryers allow high throughput drying, higher yield and lower residual solvent than conventional spray dryers do. The additional drying chamber allows the microparticles to remain in the drying phase for a longer period of time, thereby increasing the amount of moisture and residual solvents that are removed during the drying phase. This innovation, which is the subject of six of our issued patents, improves yield by reducing the amount of microparticles that cling to the surfaces of the spray dryer due to inefficient drying. Accordingly, we believe that this technology is appropriate for the encapsulation of drugs using expensive raw materials. This innovation enables us to increase the drying time and lower the drying temperature for drugs. Accordingly, we believe this technology is appropriate for the encapsulation of drugs, like proteins, which are unstable at higher temperatures.

In order to produce microparticles and nanoparticles to be used in drugs delivered intravenously, the particles must be produced aseptically. We have improved standard spray dryers by making them suitable for aseptic processing. Our spray dryers operate under positive pressure, minimizing the risk of pulling contaminants into the process from the surrounding environment. In addition, our spray dryers are composed of stainless steel and Teflon components to mitigate against shedding into the product during processing, and can be sterilized using steam sterilization techniques.

We have made these improvements to standard spray drying processes and equipment without altering the fundamental advantages of standard spray drying. Like standard spray dryers, our spray dryers enable a single-step, continuous process that is efficient in encapsulating up to 100% of the active ingredient, and can be used with either synthetic or natural materials.

Our Patented Pore-Forming Agents

We have developed a patented process technology for creating porous microparticles. To create pores in our microparticles we add pore-forming agents to the solution before we put it through the spray dryer. These pore-forming agents create bubbles, similar to the bubbles in carbonated beverages. These bubbles are formed while the solution is being converted into a microparticle in the spray dryer. The bubbles create pores in the microparticle and the pore-forming agents are removed during the drying process. We can vary the number and size of the pores by varying the amount of pore-forming agents we add to the process. In this way we can design microparticles that are porous or sponge-like.

Reimbursement

We intend to focus on obtaining coverage and reimbursement from Medicare, Medicaid and private insurers for our product candidates. Although there can be no assurance that we will be successful in obtaining third-party reimbursement, we believe we will be successful in obtaining this reimbursement for our lead product candidate, Imagify.

Effective January 2001, the Centers for Medicare and Medicaid Services, formerly known as the Health Care Financing Administration, implemented a reimbursement code that provides reimbursement for the use of injectable contrast material in echocardiography in a physician’s office and hospital outpatient setting. Currently, the reimbursed rate for each of the three ultrasound contrast agents FDA-approved for use in LVO and EBD in patients with suboptimal images is over $100 per vial. Although private insurers make their own decisions on reimbursement, they typically follow the lead of the Centers for Medicare and Medicaid Services, which manage reimbursement for Medicare and Medicaid.

We plan to apply for a new reimbursement code at a higher rate. We believe ultrasound imaging using Imagify for myocardial perfusion assessment, which involves dosing of patients for a resting ultrasound study followed by a second dose for a cardiac ultrasound stress study, will provide at least the same clinical information as nuclear stress tests (which also requires dosing for a rest study followed by dosing for a stress study), but at much lower total study cost, due in part to higher capital equipment costs, longer procedure times and radioactive material handling issues associated with nuclear stress tests. Given these expected cost advantages, we believe that Imagify will ultimately obtain adequate reimbursement in this era of managed care, where the federal government and private insurers are striving to lower the total cost of delivering state-of-the-art healthcare. Further, in the treatment of hospital inpatients, who are usually subject to a fixed total reimbursement based solely on their diagnosis and not on the test used, we expect that hospital staffs will be encouraged to use the much lower cost Imagify-enhanced cardiac stress ultrasound, if and when it is approved by FDA, rather than the more expensive nuclear stress test. Our efforts to obtain a higher reimbursement rate can begin prior to our product’s approval and will probably require about two years for completion. The current reimbursement codes cover hospital outpatient and physician offices, which are the locations where almost all cardiac ultrasounds are performed. In the period immediately following the potential launch of our product, we believe that the current reimbursement rates for ultrasound contrast agents should enable us to sell our product at attractive margins.

Manufacturing

Prior to filing an NDA for Imagify, we must demonstrate that we can successfully and repeatedly manufacture Imagify in compliance with current good manufacturing practices, or cGMPs, enforced by the FDA and overseas regulatory agencies in the manufacturing facility that we intend to use to produce Imagify at commercial launch.

In July 2004, we entered into a lease agreement for 58,000 square feet of commercial manufacturing space in Tewksbury, Massachusetts. In late 2005, we substantially completed the build-out of this facility and commenced start-up activities relating to the manufacturing equipment installed at the site. In early 2006 we completed commissioning of the manufacturing equipment and utilities within the facility, in mid-2006 we produced full commercial scale development batches of Imagify in this facility and in late 2006 we substantially completed all Installation Qualification, or IQ, and Operational Qualification, or OQ, requirements relating to the equipment and utilities initially needed for this facility. Remaining steps to qualification of the manufacturing facility include; aseptic validation, process qualification and completion of product stability testing. All such qualification activities need to be completed under cGMPs. Data from the production of Imagify under cGMPs is intended to be part of our NDA submission of Imagify. Based upon our current plans, we expect to complete this qualification phase in time to support a NDA submission in the fourth quarter of 2007.

Although the manufacturing facility is built-out and equipped and IQ’s and OQ’s are substantially complete, considerable work and testing remain to be completed before this facility is qualified. We cannot assure you that we will not encounter complications in the qualification of operations in this facility, which complications could add additional costs or delay our submission of a NDA for Imagify.

We believe that our existing facilities, subject to the successful qualification of the commercial manufacturing facility in Tewksbury, Massachusetts, are adequate to meet our current and initial commercial requirements and that suitable additional space will be available as needed. In support of our efforts to qualify our commercial manufacturing facility for Imagify, in February 2006, we and Nycomed agreed to amend the 2004 strategic collaboration agreement resulting in commitment by Nycomed to accelerate $1.8 million in payments to us in order to fund certain activities associated with the qualification of our manufacturing facility. During 2006 we received the full $1.8 million in payments from Nycomed.

Patents and Proprietary Rights

Our success depends in part on our ability to obtain patents, to protect trade secrets, to operate without infringing the proprietary rights of others and to prevent others from infringing our proprietary rights. Our policy is to seek to protect our proprietary position by, among other methods, filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business.

Our patents include internally developed patents as well as patents acquired from third parties. As of March 2007, we owned 31 issued U.S. patents, one allowed U.S. patent and 20 U.S. patent applications. We charge all patent-related expenses to operations as incurred. Six of our issued U.S. patents are directed to aspects of the spray drying method for manufacturing microparticles. Four issued U.S. patents and eight U.S. patent applications are related to various aspects of our porous microparticle delivery technology. Five issued U.S. patents relate to aspects delivery of hydrophobic drugs, including AI-850. We also own a number of pending international and foreign patent applications corresponding to these U.S. patents and applications.

U.S. Patent Number		Issue Date		Expiration Date		Subject (Title)
5,425,366		20Jun95		20Jun12		Ultrasonic Contrast Agents, Process for Their Preparation and Their Use as a Diagnostic and Therapeutic Agent
5,611,344		18Mar97		05Mar16		Microencapsulated Flurorinated Gases for Use As Imaging Agents
5,837,221		17Nov98		29Jul16		Polymer-Lipid Microencapsulated Gases for Use as Imaging Agents
5,853,698		29Dec98		05Mar16		Method for Making Porous Microparticles by Spray Drying
6,045,777		04Apr00		30Jun17		Method for Enhancing The Echogenicity And Decreasing The Attenuation pf Microencapsulated Gases
6,068,857		30May00		25Aug14		New Microparticles Containing Active Ingredients, Agents Containing These Microparticles, Their Use for Ultrasound-Controlled Release
6,071,496		06Jun00		06Jun17		Ultrasonic Contrast Agents, Process for Their Preparation and Their Use as a Diagnostic and Therapeutic Agent
6,132,699		17Oct00		05Mar16		Ultrasound Contract Agents Produced By Spray Drying
6,177,062		23Jan01		06Jun17		Ultrasonic Contrast Agents, Process for Their Preparation and Their Use as a Diagnostic and Therapeutic Agent
6,223,455		01May01		03May19		Spray Drying Apparatus And Methods of Use
6,284,280		04Sep01		25Aug14		New Microparticles Containing Active Ingredients, Agents Containing These Microparticles, Their Use for Ultrasound-Controlled Release
6,306,366		22Oct01		10Feb15		Microparticles That Contain Gas, Media That Contain The Latter, Their Use in Ultrasound Diagnosis, As Well As Process For The Product
6,308,434		30Oct01		03May19		Spray Drying Apparatus And Methods of Use
6,383,470		07May02		12Nov13		Microparticle Preparations Made of Biodegradable Copolymers
6,395,300		28May02		04Nov19		Porous Drug Matrices And Methods For Manufacture Thereof
6,423,345		23Jul02		22Feb19		Matrices Formed of Polymer And Hydrophobic Compounds For Use In Drug Delivery
6,560,897		13May03		26Jun19		Spray Drying Apparatus And Methods of Use
6,589,557		08Jul03		04Nov19		Porous Celecoxib Matrices And Methods Of Manufacture Thereof
6,610,317		26Aug03		25May20		Porous Paclitaxel Matrices And Methods Of Manufacture Thereof
6,645,528		11Nov03		25Nov19		Porous Drug Matrices And Methods For Manufacture Thereof
6,652,782		25Nov03		23May20		Multi-Stage Method For Producing Gas-Filled Microcapsules
6,689,390		10Feb04		22Feb19		Matrices Formed of Polymer And Hydrophobic Compounds For Use in Drug Delivery
6,730,322		04May04		22Feb19		Matrices Formed of Polymer And Hydrophobic Compounds For Use in Drug Delivery
6,800,297		05Oct04		04Nov19		Porous Cox-2 Inhibitor Matrices and Methods of Manufacture Thereof
6,872,180		29Mar05		28Mar23		Device and Process for Quantifying Bodies by Means of Ultrasound
6,918,991		19Jul05		19Dec22		Methods and Apparatus for Making Particles Using Spray Dryer and In-Line Jet Mill

U.S. Patent Number		Issue Date		Expiration Date		Subject (Title)
6,921,458		26Jul05		19Dec22		Methods and Apparatus for Making Particles Using Spray Dryer and In-Line Jet Mill
6,932,983		23Aug05		09Jul21		Porous Drug Matrices And Methods For Manufacture Thereof
6,962,006		08Nov05		29Apr23		Methods and Apparatus for Making Particles Using Spray Dryer and In-Line Jet Mill
7,052,719		30May06		03Oct21		Matrices Formed of Polymer And Hydrophobic Compounds For Use in Drug Delivery
7,160,557		09Jan07		22Feb19		Matrices Formed of Polymer And Hydrophobic Compounds For Use in Drug Delivery

In June 2006, pursuant to a non-exclusive license agreement with GE Healthcare, or GE, a division of General Electric Company, we licensed GE’s ultrasound contrast agent patents and patent applications, as well as any patents that GE acquires in the field of ultrasound contrast agents within 12 months of the agreement. In consideration of the non-exclusive license of these patents, we agreed to pay GE $10.0 million prior to commercial approval of Imagify, of which $5.0 million was paid in June 2006 and $5.0 million is due in June 2007. In addition, we agreed to pay GE $5.0 million upon the commercial approval (defined as the first to occur of the approval of a New Drug Application in the United States or the approval of a Marketing Authorization Application in Europe) of Imagify and $5.0 million upon the one year anniversary of such commercial approval.

Also in June 2006, pursuant to a non-exclusive license agreement with Bracco International BV, or Bracco, we licensed Bracco’s ultrasound-related patents and patent applications in the field of ultrasound diagnostic imaging. In consideration of the non-exclusive license of these patents, we agreed to pay Bracco up to a total of Euros 3.0 million (approximately $4.0 million), of which Euros 0.5 million (approximately $0.6 million) was paid in June 2006. An additional Euros 2.5 million (approximately $3.3 million) is payable upon our achievement of certain defined regulatory milestones. We also agreed to pay a royalty on future Imagify revenue, up to a maximum royalty amount of Euros 10.0 million (approximately $13.2 million), less a portion of the above-referenced milestone payments.

In May 2005, pursuant to a Patent Transfer Agreement with Schering, we acquired from Schering rights, title and interest in nine patent families, including U.S. and international ultrasound related patents, and licenses to two other patent families. In consideration of the transfer and assignment of these patents, we agreed to pay Schering a total of $7.0 million of which $1.0 million was paid in May 2005, $3.0 million was paid in May 2006, and $3.0 million is due in May 2007.

Our planned and potential products should be protected from unauthorized use by third parties to the extent that they are covered by valid and enforceable patents or are effectively maintained as trade secrets. Patents owned by or licensed to us may not afford protection against competition, and our pending patent applications now or hereafter filed by or licensed to us may not result in patents being issued. In addition, the laws of some foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States.

The patent positions of companies like ours involve complex legal and factual questions and, therefore, their enforceability cannot be predicted with certainty. Our patent applications may not issue as patents. Our issued patents and those that may issue in the future, or those licensed to us, may be challenged, invalidated or circumvented, and the rights granted thereunder may not provide us proprietary protection or competitive advantages against competitors with similar technology. Furthermore, our competitors may independently develop similar technologies or duplicate any technology developed by us. Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any of our products can be commercialized, any related patent may expire or remain in force for only a short period following commercialization. Patent expiration could

adversely affect our ability to protect future product development and, consequently, our operating results and financial position.

Because patent applications in the United States and many foreign jurisdictions are typically held in secret and not published until eighteen months after filing, we cannot be certain that we were the first to file for protection of the inventions set forth in these patent applications. Because publications of discoveries in the scientific literature often lag behind actual discoveries, we cannot be certain that we were the first to make the inventions claimed in each of our issued or pending patent applications.

Our planned or potential products may be covered by third-party patents or other intellectual property rights, in which case we may need to obtain a license or sublicense to these rights to continue developing or marketing these products. Although from time to time we receive correspondence from and have discussions with third-parties concerning the patent position of such third-parties, as of the date of this report we have not received correspondence from any third-party alleging infringement. Any required licenses or sublicenses may not be available to us on acceptable terms, if at all. If we do not obtain any required licenses or sublicense, we could encounter delays in product introductions while we attempt to design around these patents, or could find that the development, manufacture or sale of products requiring these licenses is foreclosed.

We know of 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. In particular, we are aware of U.S. and foreign patents owned by third parties, including potential competitors that arguably cover aspects of our Imagify contrast agent. Based on advice from our patent counsel, we believe that these claims are not infringed and/or invalid. Absent a license or other business arrangement, there is a significant possibility that one or more of these third parties will use litigation to assert their patents in the United States or Europe.

The owners or licensees of these and other patents may file one or more infringement actions against us. 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. The defense of multiple 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. These payments 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.

Litigation may be necessary to defend against or assert claims of infringement, to enforce patents issued to us, to protect trade secrets or know-how owned by us, or to determine the scope and validity of the proprietary rights of others. In addition, interference proceedings declared by the U.S. Patent and Trademark Office may be necessary to determine the priority of inventions with respect to our patent applications. Litigation or interference proceedings could result in substantial costs to and diversion of effort by us, and could have a material adverse effect on our business, financial condition and results of operations. These efforts by us may not be successful.

We may rely, in some circumstances, on trade secrets to protect our technology. However, trade secrets are difficult to protect. We seek to protect our proprietary technology and processes, in part, by

confidentiality agreements with our employees and contractors. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently discovered by competitors. To the extent that our employees, consultants or contractors use intellectual property owned by others in their work for us, disputes may also arise as to the rights in related or resulting know-how and inventions.

Government Regulation

U.S. Regulatory Approval

FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries regulate and impose substantial requirements upon the research, development, pre-clinical and clinical testing, manufacture, distribution, record keeping, reporting, storage, approval, advertising, promotion, sale and export of pharmaceutical products. We believe that our products will be regulated as drugs by FDA.

The process required by FDA under the new drug provisions of the Federal Food, Drug and Cosmetic Act before our products may be marketed in the United States generally involves the following:

·        pre-clinical laboratory and animal tests performed under FDA’s Good Laboratory Practices regulation;

·        development of manufacturing processes which conform to FDA-mandated cGMPs;

·        submission and acceptance of an Investigational New Drug application, or IND, which must become effective before clinical trials may begin in the United States;

·        adequate and well-controlled human clinical trials to establish the safety and efficacy of the product candidate in our intended use; and

·        FDA review and approval of an NDA, prior to any commercial sale or shipment of a product.

The testing and approval process requires substantial time, effort, and financial resources and we cannot be certain that any approval will be granted on a timely basis, if at all.

Pre-clinical tests include laboratory evaluation of the product candidate, its chemistry, formulation and stability, as well as animal studies to assess the potential safety and efficacy of the product candidate. The results of the pre-clinical tests, together with manufacturing information and analytical data, are then submitted to FDA as part of an IND, which must become effective before we may begin human clinical trials. Pre-clinical tests and studies can take several years to complete, and there is no guarantee that an IND based on those tests and studies will become effective to permit clinical testing to begin. An IND becomes effective 30 days after receipt by FDA, unless FDA, within the 30-day time period, raises concerns or questions about the conduct of the trials as outlined in the IND and imposes a clinical hold. In this case, the IND sponsor and FDA must resolve any outstanding concerns before clinical trials can begin. Prior to initiation of clinical studies, an independent Institutional Review Board at each medical site proposing to conduct the clinical trials must review and approve each study protocol. Similar requirements exist in other countries where we may choose to perform clinical trials.

Human clinical trials are typically conducted in three sequential phases that may overlap:

·        Phase 1:   The drug is initially introduced into healthy human subjects or patients and tested for safety and dosage tolerance. Absorption, metabolism, distribution and excretion studies are generally performed at this stage.

·        Phase 2:   The drug is studied in exploratory therapeutic trials in a limited number of subjects with the disease or medical condition for which the new drug is intended to be used in order to identify

possible adverse effects and safety risks, to determine the preliminary or potential efficacy of the product for specific targeted diseases or medical condition and to determine dosage tolerance and the optimal effective dose.

·        Phase 3:   When Phase 2 evaluations demonstrate that a specific dosage range of the drug is likely to be effective and has an acceptable safety profile, Phase 3 trials are undertaken to demonstrate clinical efficacy and to further test for safety in an expanded patient population, often at geographically dispersed clinical study sites.

We cannot be certain that we will successfully complete Phase 1, Phase 2 or Phase 3 testing of our product candidates within any specific time period, if at all. Furthermore, FDA, the Institutional Review Board or the sponsor may suspend or terminate clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

A description of the manufacturing process and quality control methods, including data to support the successful qualified manufacturing of product within the designated manufacturing facility, as well as results of pre-clinical studies, toxicology studies and clinical trials, among other things, are submitted to FDA as part of an NDA for approval prior to the marketing and commercial shipment of the product. FDA may deny a new drug application if all applicable regulatory criteria are not satisfied or may require additional data including clinical, toxicology or manufacturing data. Even after a new drug application is issued, FDA may withdraw product approval if compliance with regulatory standards is not maintained or if safety problems occur after the product reaches the market. In addition, FDA requires surveillance programs to monitor the consistency of manufacturing and the safety of approved products that have been commercialized. The agency has the power to require changes in labeling or to prevent further marketing of a product based on new data that may arise after commercialization. Similar requirements exist in other countries where we may choose to seek marketing approval.

Satisfaction of FDA requirements or similar requirements of state, local and foreign regulatory agencies typically takes several years and the actual time required may vary substantially, based upon the type, complexity and novelty of the pharmaceutical product. Government regulation may delay or prevent marketing of potential products altogether or for a considerable period of time and imposes costly and time-consuming requirements. We cannot be certain that FDA or any other regulatory agency will agree with our judgment and interpretations or will grant approval for any of our products under development on a timely basis, if at all. Success in pre-clinical or early stage clinical trials does not assure success in later stage clinical trials. Data obtained from pre-clinical and clinical activities is not always conclusive and may be susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Even if a product receives regulatory approval, the approval is typically limited to specific clinical indications. Further, even after regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. Delays in obtaining, or failures to obtain regulatory approvals would have a material adverse effect on our business. Marketing our products abroad will require similar regulatory approvals and is subject to similar risks. In addition, we cannot predict what adverse governmental regulations may arise from future U.S. or foreign governmental action.

Any products manufactured or distributed by us pursuant to FDA clearances or approvals are subject to continuing regulation by the FDA, including record-keeping requirements and reporting of adverse experiences. Drug manufacturers and their subcontractors are required to register their establishments with FDA and state agencies, and are subject to periodic unannounced inspections by FDA and state agencies for compliance with cGMPs, which impose procedural and documentation requirements upon us and our third party manufacturers. We cannot be certain that we, or our present or future suppliers, will be able to comply with the cGMP regulations and other FDA regulatory requirements. Failure to comply with these requirements can result in, among other things, total or partial suspension of production, failure of

the government to grant approval for marketing, and withdrawal, suspension, or revocation of marketing approvals.

Once FDA approves a product, a manufacturer must provide certain updated safety and efficacy information. Product changes, as well as certain changes in a manufacturing process or facility or other post-approval changes may necessitate additional FDA review and approval.

FDA regulates drug labeling and promotion activities. FDA has actively enforced regulations prohibiting the marketing of products for unapproved uses. Violations of the Federal Food, Drug, and Cosmetic Act or regulatory requirements may result in agency enforcement action, including voluntary or mandatory recall, suspension or revocation of product approval, product seizure, fines, injunctions or civil or criminal penalties. Our product development and testing activities are also subject to a variety of state laws and regulations. Any applicable state or local regulations may hinder our ability to manufacture or test our products in those states or localities. We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous substances. We may incur significant costs to comply with such laws and regulations now or in the future.

FDA’s policies may change and additional government regulations may be enacted which could prevent or delay regulatory approval of our potential products. Moreover, increased attention to the containment of health care costs in the United States and in foreign markets could result in new government regulations that could have a material adverse effect on our business. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the United States or abroad.

We have had ongoing discussions with FDA concerning the statistical analysis plan used in connection with our Phase 3 clinical trials of Imagify. In April 2005, based in part upon feedback from FDA, we revised the statistical analysis plan on which we base our patient enrollment estimates for the Imagify Phase 3 clinical trials. Since that time we have continued discussions with FDA. Continued discussions with FDA could lead to other changes relating to our statistical analysis plans. How, when or if the matters being discussed are resolved may affect whether Imagify is approved for the indication that we are seeking, the timing of such approval or whether Imagify is approved at all. Such timing could also lead to delays in the timing of the unblinding of the data from our Phase 3 clinical trials, and therefore public announcement of results from those trials.

Foreign Regulatory Approval

Outside the United States, our ability to market our products will also be contingent upon receiving marketing and pricing authorizations from the appropriate regulatory authorities. The foreign regulatory approval process includes all the risks associated with FDA approval described above. The requirements governing conduct of clinical trials and marketing authorization vary widely from country to country.

Under European Union regulatory systems, marketing authorizations may be submitted either under a centralized or decentralized procedure. The centralized procedure provides for the grant of a single marketing authorization that is valid for all European Union member states. The decentralized procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marketing authorization may submit an application to the remaining member states. Within 90 days of receiving the applications and assessment report, each member state must decide whether to recognize approval.

We, or a partner to whom we have assigned the right, will choose the appropriate route of European regulatory filing. In 2004, we entered into a strategic partnership with Nycomed under which they are primarily responsible for regulatory strategy and approval in Europe for our lead product candidate,

Imagify. However, the chosen regulatory strategy for our product candidates may not secure regulatory approvals or approvals of the chosen product indications. These approvals, if obtained, may take longer than anticipated. We cannot assure you that any of our product candidates will prove to be safe or effective, will receive regulatory approvals, or will be successfully commercialized.

Competition

The pharmaceutical and biotechnology industries in which we operate are characterized by rapidly advancing technologies, intense competition and an emphasis on proprietary products. Our competitors include large pharmaceutical and biotechnology companies, specialty pharmaceutical and generic drug companies, academic institutions, government agencies and research institutions. All of these competitors currently engage in, have engaged in or may engage in the future in the development, manufacturing, marketing and commercialization of new pharmaceuticals and pharmaceuticals, some of which may compete with our present or future product candidates.

We expect that our product candidates, if approved for marketing, will compete with existing drugs, therapies, drug delivery systems and technological approaches, as well as new drugs, therapies, drug delivery systems or technological approaches that may be developed or commercialized in the future. Any of these drugs, therapies, systems or approaches may receive government approval or gain market acceptance more rapidly than our product candidates, may offer therapeutic or cost advantages over our product candidates or may cure our targeted diseases or their underlying causes completely. As a result, our product candidates may become noncompetitive or obsolete.

Imagify, our cardiovascular drug for the assessment of myocardial perfusion, if approved for marketing and sale, will face intense competition. We believe that Imagify-enhanced cardiac stress ultrasound can be a cost-effective and convenient substitute for nuclear stress tests, the current standard of care in myocardial perfusion assessment. In addition, we believe Imagify will add useful myocardial perfusion information that current cardiac stress ultrasound tests cannot provide without a contrast agent. Imagify is designed for use with widely available ultrasound equipment and techniques currently used for wall motion studies using cardiac ultrasound. We expect to face intense competition from companies that market products related to these existing imaging techniques, as well as other companies that are developing ultrasound contrast agents for use in cardiac ultrasound.

Nuclear stress testing is an established technique for assessing myocardial perfusion. Radioactive contrast agents that are approved by the FDA for use in nuclear stress tests include Cardiolite®, which is marketed by Bristol-Myers Squibb Company; Myoview®, which is marketed by GE Healthcare; and thallium, which is marketed by GE Healthcare, Bristol-Myers Squibb and Tyco International. Cardiac ultrasound without contrast is an established technique for detecting abnormal wall motion, which some cardiologists may find satisfactory for the detection of coronary artery disease. However, cardiac ultrasound without contrast is incapable of assessing myocardial perfusion. We believe that Imagify-enhanced cardiac stress ultrasound will enable cardiac ultrasound to provide information on myocardial perfusion in addition to wall motion.

No ultrasound contrast agent has been approved by FDA for use in myocardial perfusion imaging using cardiac ultrasound. However, we are aware of other companies that are or may be developing ultrasound contrast agents for use in cardiac ultrasound. CardioSphere™, which is being developed by Point Biomedical Corporation, is an ultrasound contrast agent for the assessment of myocardial perfusion. In 2006, it was reported that Point Biomedical Corporation, in order to potential gain regulatory approval for CardioSphere, must design and commence new Phase 3 clinical trials. In addition, some companies have ultrasound contrast agents that are FDA approved for LVO and EBD in patients with suboptimal images or are in development. In the future, these companies may seek to broaden their indications to include myocardial perfusion assessment. These FDA-approved agents include Optison®, which is

marketed by GE Healthcare and Definity®, which is marketed by Bristol-Myers Squibb. SonoVue® is an ultrasound contrast agent marketed in Europe by Bracco for LVO and EBD and for radiology applications.

Numerous companies are seeking to improve the formulation of drugs, including efforts to improve the dissolution of hydrophobic drugs which efforts could compete with our HDDS technology. For example, AI-850, our reformulation of paclitaxel, if approved for marketing and sale, will also face intense competition. We are aware of companies, such as American Pharmaceutical Partners, NeoPharm and Sonus Pharmaceuticals that are applying significant resources and expertise to developing reformulations of paclitaxel for intravenous delivery that will compete with our current product candidate. In early 2005, American Pharmaceutical Partners received FDA approval for and is marketing their product, Abraxane. None of these other reformulations has received approval from FDA. Other companies, such as Cell Therapeutics, are developing new chemical entities that involve paclitaxel conjugated, or chemically bound, to another chemical. None of these new chemical entities have received final approval from FDA. In addition, a number of companies have developed technology for delivering hydrophobic drugs. Cardinal Health, CyDex and Elan have created formulations of hydrophobic drugs that have been approved by FDA.

Efforts by companies to improve the formulation drugs could result in competition for our PDDS technology. As a result, AI-128, our initial sustained release formulation of an asthma drug or other product candidates utilizing our PDDS technology, if approved for marketing and sale, will also face intense competition. Companies such as Alkermes possess technology that may be suitable for sustained release pulmonary drug delivery and may have competitive programs that have not been publicly announced or may decide to begin such programs in the future. We are not aware of any other company currently in human clinical development of a sustained release version of the asthma drug that is currently the subject of our research and development efforts. In addition, many asthma drugs are marketed by large pharmaceutical companies with much greater resources than us. These companies may be developing sustained release versions of their asthma drugs that would compete with our sustained release product candidate.

Many of our competitors in these markets have greater development, financial, manufacturing, marketing, and sales experience and resources than we do and we cannot be certain that they will not succeed in developing products or technologies which will render our technologies and products obsolete or noncompetitive. We cannot assure you that our products will compete successfully with these newly emerging technologies. In addition, many of those competitors have significantly greater experience than we do in their respective fields. Many of these competitors may have greater name recognition than we do, and may offer discounts as a competitive tactic.

Employees

As of March 2, 2007, we had 116 full-time employees, including 93 in research and development and 23 in general and administrative. Fourteen of our employees have M.D.s and/or Ph.D.s. From time to time, we also employ independent contractors to support our engineering and administrative organizations. None of our employees are represented by a collective bargaining unit and we have never experienced a work stoppage. We consider our relations with our employees to be good.

Organization and Trademarks

We were organized as a Delaware corporation on July 12, 1993.

We have trademarks in the United States and other countries, including “Acusphere”, “Imagify”, “HDDS” and “PDDS” and our logo.

This Annual Report on Form 10-K also contains the trademarks and trade names of other entities that are the property of their respective owners.

Financial Information

The financial information required under this Item 1 is incorporated herein by reference to Item 8 of this Annual Report on Form 10-K.

Available Information

Our website is available at www.acusphere.com . We make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, reports filed pursuant to Section 16 and amendments to those reports on our website as soon as reasonably practicable after such materials are electronically filed or furnished to the Securities and Exchange Commission. Information posted on our website is not incorporated by reference in this Annual Report on Form 10-K

ITEM 1A. RISK FACTORS

Certain Factors Which May Affect Future Results

Our operating results and financial condition have varied in the past and may in the future vary significantly depending on a number of factors. Except for the historical informa