e10vk

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PimzD7HPytX/YyPNhkW5ZPlwBpVYSUguUm6dudz3fSgBdWHn3UeMadKOi4ySc0ET 7aC+mtVvEIXl7RTIEvUo8w== 0000891618-08-000166.txt : 20080317 0000891618-08-000166.hdr.sgml : 20080317 20080317160855 ACCESSION NUMBER: 0000891618-08-000166 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 20071231 FILED AS OF DATE: 20080317 DATE AS OF CHANGE: 20080317 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Alexza Pharmaceuticals Inc. CENTRAL INDEX KEY: 0001344413 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 770567768 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-51820 FILM NUMBER: 08693069 BUSINESS ADDRESS: STREET 1: 2091 STIERLIN COURT CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 650.944.7000 MAIL ADDRESS: STREET 1: 2091 STIERLIN COURT CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 10-K 1 f39029e10vk.htm FORM 10-K e10vk

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K

For Annual and Transition Reports Pursuant to

Section 13 or 15(d) of the Securities Exchange Act of 1934


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended December 31, 2007
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission File Number: 000-51820

Alexza Pharmaceuticals, Inc.

(Exact name of Registrant as specified in its charter)


Delaware (State or Other Jurisdiction of Incorporation or Organization)		77-0567768 (I.R.S. Employer Identification Number)

2091 Stierlin Court

Mountain View, California 94043

(Address of Principal Executive Offices including Zip Code)

Registrant’s telephone number, including area code:

(650) 944-7000

Securities registered pursuant to Section 12 (b) of the Act:


Title of Each Class		Name of Each Exchange on Which Registered

Common Stock, par value $0.0001 per share		Nasdaq Global Market

Securities registered pursuant to Section 12 (g) of the Act:
None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of Form 10-K or any amendments to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting Company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant was $193,805,928 based on the closing sale price of the Registrant’s common stock on The NASDAQ Global Market on June 30, 2007. Shares of the Registrant’s common stock beneficially owned by each executive officer and director of the Registrant and by each person known by the Registrant to beneficially own 10% or more of its outstanding common stock have been excluded, in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the Registrant’s common stock as of March 1, 2008 was 31,156,728.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the 2008 Annual Meeting of Stockholders to be filed within 120 days after the end of the Registrant’s fiscal year ended December 31, 2007 are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent stated therein.

ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007

TABLE OF CONTENTS


PART I
	Item 1.	Business	1
	Item 1A.	Risk Factors	27
	Item 1B	Unresolved Staff Comments	44
	Item 2.	Properties	44
	Item 3.	Legal Proceedings	44
	Item 4.	Submission of Matters to a Vote of Security Holders	44

PART II
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	44
	Item 5B.	Use of Proceeds from the Sale of Registered Securities	45
	Item 5C.	Treasury Stock	45
	Item 6.	Selected Financial Data	46
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	47
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risks	63
	Item 8.	Financial Statements and Supplementary Data	64
	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	100
	Item 9A.	Controls and Procedures	100
	Item 9B.	Other Information	101

PART III
	Item 10.	Directors and Executive Officers of the Registrant	101
	Item 11.	Executive Compensation	102
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	102
	Item 13.	Certain Relationships and Related Transactions and Director Independence	102
	Item 14.	Principal Accountant Fees and Services	102

PART IV
	Item 15.	Exhibits and Financial Statement Schedules	102
Signatures			105
Exhibits Index			107
EXHIBIT 3.8
EXHIBIT 10.36
EXHIBIT 10.37
EXHIBIT 10.38
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

The names “Alexza” and “Staccato” are trademarks of Alexza Pharmaceuticals, Inc. We have registered the trademarks “Alexza Pharmaceuticals,” “Alexza” and “Staccato” with the U.S. Patent and Trademark Office. All other trademarks, trade names and service marks appearing in this Annual Report on Form 10-K are the property of their respective owners.

PART I.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under “Business,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report constitute forward-looking statements. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Examples of these statements include, but are not limited to, statements regarding the following: the implications of interim or final results of our clinical trials, the progress and timing of our research programs, including clinical testing, our anticipated timing for filing additional Investigational New Drug Applications with the United States Food and Drug Administration, the initiation or completion of Phase 1, Phase 2 or Phase 3 clinical testing for any of our product candidates, the extent to which our issued and pending patents may protect our products and technology, our ability to identify new product candidates using the Staccato system, the potential of such product candidates to lead to the development of safe or effective therapies, our ability to enter into collaborations, our future operating expenses, our future losses, our future expenditures for research and development, and the sufficiency of our cash resources. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. While we believe that we have a reasonable basis for each forward-looking statement contained in this Annual Report, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain.

In addition, you should refer to the “Risk Factors” section of this Annual Report for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Annual Report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.

We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.


Item 1.	*Business*

We are an emerging specialty pharmaceutical company focused on the development and commercialization of novel, proprietary products for the treatment of acute and intermittent conditions. We currently have six product candidates in clinical development. Our technology, the Staccato system, vaporizes excipient-free drugs to form condensation aerosols that, when inhaled, allows for rapid systemic drug delivery. Because of the particle size of the aerosol, the drug is quickly absorbed through the deep lung into the bloodstream, providing speed of therapeutic onset that is comparable to intravenous, or IV, administration but with greater ease, patient comfort and convenience.

drugs that have been in use for many years and are well characterized to create aerosolized forms of these drugs. We believe that we will be able to reduce the development time and risks associated with our product candidates, compared to the development of new chemical entities.

Our clinical-stage product candidates are:


	•	AZ-004 (Staccato loxapine). We are developing AZ-004 for the treatment of acute agitation in patients with schizophrenia or bi-polar disorder. In March 2007, we announced positive initial results from a multi-center, randomized, double-blind, placebo-controlled Phase 2a clinical trial in 129 patients in an in-patient clinical setting. The 10 mg dose of AZ-004 met the primary endpoint of the clinical trial, which was a statistically significant reduction in the measure of agitation from baseline to the 2-hour post-dose time point, as compared to placebo. The 10 mg dose of AZ-004 also exhibited a rapid onset of effect, with a statistically-significant improvement in the PANSS (Positive and Negative Symptom Scale) Excited Component (PEC) scores at 20 minutes post-dose, as compared to placebo. The effectiveness of the 10 mg dose was sustained throughout the 24-hour study period, as compared to placebo. The 5 mg dose failed to achieve statistical significance. In February 2008 we initiated a Phase 3 clinical trial that is designed to enroll approximately 300 schizophrenic patients with acute agitation at 25 U.S. clinical centers. The trial is an in-clinic, multi-center, randomized, double-blind, placebo-controlled study and will test AZ-004 at two dose levels, 5 and 10 mg. Patients may receive up to 3 doses of study drug in a 24-hour period, depending on their clinical status. The primary endpoint for the study is the change from baseline in the PEC score, measured at 2 hours after the first dose. Various assessments of a patient’s agitation state will be conducted at serial time points using standard agitation scales over the first 4-hour post-dose time period, with follow-up assessments at the end of the 24-hour study period. Side effects will be recorded throughout the 24-hour period. A second Phase 3 clinical trial is projected to begin in the third quarter of 2008. The design of the second study will be similar to the first trial, except that the patient population will be patients with bipolar disease. AZ-004 has been licensed to Symphony Allegro, Inc., or Symphony Allegro, and we have the right to repurchase all rights to this product candidate.

	•	AZ-001 (Staccato prochlorperazine). We are developing AZ-001 to treat patients suffering from acute migraine headaches. In March 2007, we announced positive initial results from an outpatient, multi-center, randomized, double blind, placebo-controlled Phase 2b clinical trial of AZ-001 in 400 migraine patients. All three doses of AZ-001 (5, 7.5 and 10 mg) met the primary endpoint of statistically significant pain relief 2-hours post-dose using the IHS (International Headache Society) 4-point headache pain rating scale, compared to placebo. In the two highest doses studied, AZ-001 also showed a statistically-significant difference in achieving a pain-free response at two hours, as compared with placebo. AZ-001 demonstrated rapid onset of pain relief, with statistically significant pain response in 15 minutes for the 7.5 mg dose and statistically-significant pain responses for all three doses at 30 minutes. AZ-001 also showed a sustained pain-free response, where a patient has a pain score of 0, or “no” headache, with statistically-significant elimination of pain at 24 hours post-dose at the two highest studied doses. Survival analysis for nausea, photophobia and phonophobia over the 2-hour period post-dose showed a statistically significant difference, compared to placebo. In December 2007, we completed enrollment of a thorough QT clinical trial, in which two doses of AZ-001 (5 and 10 mg) were compared to active control and to placebo. The purpose of a thorough QT study is to determine a drugs effect on cardiac rhythms. With > 40 subjects per treatment condition, we found that the active control, moxyfloxacin, produced a positive QT/QTc signal that verified the sensitivity of the clinical study. Based on a preliminary analysis of the data from the study, neither of the doses of AZ-001 produced a QT/QTc prolongation that would suggest an increased risk of cardiac arrhythmia.

	•	AZ-104 (Staccato loxapine). We are developing AZ-104 to treat patients suffering from acute migraine headaches. AZ-104 is a lower dose version of AZ-004. In March 2008, we announced initial results of an in-clinic, multi-center randomized, double-blind, single administration, placebo controlled Phase 2a proof-of-concept clinical trial in 168 migraine patients with or without aura. Three doses of AZ-104 (1.25, 2.5 and 5 mg) were evaluated against placebo in the clinical trial. Using the IHS) 4-point rating scale, the primary efficacy endpoint was pain-relief response at 2 hours post-administration. AZ-104 met the primary efficacy endpoint of the clinical trial for the two highest doses of the drug compared to placebo. Statistically


		significant improvements in pain response were observed in 76.7% of patients at the 5 mg dose (p= 0.02), 79.1% of patients at the 2.5 mg dose (p = 0.01) and 67.4% of patients at the 1.25 mg dose (p = 0.18), compared to 51.3% of patients receiving placebo. Using survival analysis for pain relief response, all three dose groups were statistically superior (p < .05) to placebo during the 4-hour post-treatment time period that the patients remained in the clinic. AZ-104 has been licensed to Symphony Allegro, and we have the right to repurchase all rights to this product candidate.


	•	AZ-002 (Staccato alprazolam). We are developing AZ-002 for the acute treatment of panic attacks associated with panic disorder. In April 2006, we initiated an in-clinic, single-center, double-blind, placebo-controlled, Phase 2a proof-of-concept clinical trial in patients with panic disorder. As a result of observing greater than expected levels of sedation in the first two patients enrolled in the trial, we reduced the dose of AZ-002, modified the AZ-002 device, added an open-label portion to the clinical protocol, manufactured and released new clinical trial materials for the trial, and added two additional study sites to the study group. In April 2007, we re-initiated dosing in the 42 patient clinical trial with a lower dose of AZ-002. We have completed the open-label, lead-in segment of the clinical trial, identifying the 1 mg AZ-002 dose as an acceptable dose in terms of its safety and efficacy profile, and have initiated the randomized, double blind, placebo-controlled segment of the clinical trial. We expect to complete enrollment of this trial in the second quarter of 2008. AZ-002 has been licensed to Symphony Allegro, and we have the right to repurchase all rights to this product candidate.

	•	AZ-003 (Staccato fentanyl). We are jointly developing AZ-003 with Endo Pharmaceuticals Inc., or Endo, for the treatment of breakthrough pain in cancer and non-cancer patients. Endo is responsible for regulatory, pre-clinical and clinical development, and for commercializing the product in North America. We are responsible for the development of the Staccato Electric Multiple Dose device and we have the exclusive right to manufacture the product for clinical development and commercial supply.

	•	AZ-007 (Staccato zaleplon). We are developing AZ-007 for the treatment of insomnia in patients who have difficulty falling asleep, including patients who awake in the middle of the night and have difficulty falling back asleep. We filed an Investigational New Drug application, or IND, in December 2007. In February 2008, we initiated a Phase 1 clinical trial that enrolled 40 healthy volunteers at a single site. The purpose of this trial is to assess the safety, tolerability and pharmacokinetic parameters of a single dose of AZ-007. Using a double blind, randomized trial design, four doses of AZ-007 (ranging from 0.5 to 4.0 mg) are being compared to placebo. We expect to report initial results of this trial in the second quarter of 2008.

In order for us to initiate a clinical development program, a drug compound must exhibit technical feasibility with our Staccato system and also have the potential to serve an important unmet medical need in a large patient population. We believe that, with the current development status of our single dose device, the inherent advantages of our Staccato system will enable us to move a compound from initial screening through filing of an IND in 12 to 18 months.

for resale under a resale registration statement pursuant to the terms of a registration rights agreement. If we do not exercise our purchase option by December 1, 2010, then Symphony Allegro will retain its exclusive license to develop and commercialize Staccato alprazolam and Staccato loxapine for all indications, and we will manufacture and sell Staccato alprazolam and Staccato loxapine to Symphony Allegro or its sublicensee for those purposes. Pursuant to a warrant purchase agreement, we issued to Symphony Allegro Holdings, LLC a warrant with a five-year term to purchase 2,000,000 shares of our common stock at $9.91 per share, also paid a transaction structuring fee of $2.5 million, and reimbursed approximately $329,000 of Symphony Allegro transaction expenses.

On December 27, 2007, we entered into a license, development and supply agreement, or the license agreement, with Endo for AZ-003 (Staccato fentanyl) and the fentanyl class of molecules for North America. Under the terms of the license agreement, Endo paid us an upfront fee of $10 million, and will pay potential additional milestone payments of up to $40 million upon achievement of predetermined regulatory and clinical milestones. Endo will also pay undisclosed royalties to us on net sales of the product, from which we will pay for the cost of goods for the manufacture of the commercial version of the product. We have primary responsibility for the development and costs of the Staccato Electronic Multiple Dose device and the exclusive right to manufacture the product for clinical development and commercial supply. Endo has responsibility for future pre-clinical, clinical and regulatory development, and, if AZ-003 is approved for marketing, for commercializing the product in North America. Each party will be responsible for all internal costs and expenses incurred related to the respective area of responsibility. Generally speaking, each party will also be responsible for external development costs incurred related to the respective area of responsibility, but we agreed to pay certain external development costs incurred by Endo in excess of an agreed upon threshold, with a maximum expense to us of $20 million. We retain all rights outside of North America. Endo has the right to terminate the license agreement on 90 days written notice. Upon such termination, all rights to the product, including regulatory filings, data and clinical and non-clinical data for use with the product will revert to us.

We have retained all other rights to our product candidates and the Staccato system. We plan to build a United States-based specialty sales force to commercialize our product candidates which are approved for marketing and which are intended for psychiatric markets. We plan to enter into strategic partnerships with other companies to commercialize products that are intended for certain markets in the United States and for all of our product candidates in geographic territories outside the United States.

Market Opportunity for Acute and Intermittent Conditions

Acute and intermittent medical conditions are characterized by a rapid onset of symptoms that are temporary and severe, and that occur at irregular intervals, unlike the symptoms of chronic medical conditions that continue at a relatively constant level over time. Approved drugs for the treatment of many acute and intermittent conditions, such as antipsychotics to treat agitation, triptans to treat migraine headaches and benzodiazepines to treat anxiety, are typically delivered either in tablets or by injections. Traditional inhalation technologies are also being developed to treat these conditions. These delivery methods have the following advantages and disadvantages:


	•	Oral Tablets. Oral tablets or capsules are convenient and cost effective, but they generally do not provide rapid onset of action. Oral tablets may require at least one to four hours to achieve peak plasma levels. Also, some drugs, if administered as a tablet or capsule, do not achieve adequate or consistent bioavailability due to the degradation of the drug by the stomach or liver or inability to be absorbed into the bloodstream.

	•	Injections. IV injections provide a rapid onset of action and can sometimes be used to titrate potent drugs with very rapid changes in effect. Titration refers to the ability of a patient to self-administer an initial dose of medication and then determine if the medication is effective; if the medication is effective no further dosing is required. However, if the medication is not yet effective, the patient can administer another dose and repeat this process until the patient determines that the medication has had an adequate effect. However, IV injections generally are administered by trained medical personnel in a medical care setting. Other forms of injections result in an onset of action that is generally substantially slower than IV injection, although often faster than oral administration. All forms of injections are invasive, can be painful to some patients and are often expensive. In addition, many drugs are not water soluble and can be difficult to formulate in an injectable form.


	•	Traditional Inhalation. Traditional dry powder and aerosolized inhalation delivery systems have been designed and used primarily for local delivery of drugs to the respiratory airways, not to the deep lung for rapid systemic drug delivery. Certain recent variants of these systems, however, can provide systemic delivery of drugs, either for the purpose of rapid onset of action or to enable noninvasive delivery of drugs that are not orally bioavailable. Nevertheless, many of these systems have difficulty in generating appropriate drug particle sizes or consistent emitted doses for deep lung delivery. To achieve appropriate drug particle sizes and consistent emitted doses, most traditional inhalation systems require the use of excipients and additives such as detergents, stabilizers and solvents, which may potentially cause toxicity or allergic reactions. Many traditional inhalation devices require patient coordination to deliver the correct drug dose, leading to potentially wide variations in the drug delivered to a patient.

As a result of these limitations, we believe there is a significant unmet medical and patient need for products for the treatment of acute and intermittent conditions that can be delivered in precise amounts, provide rapid therapeutic onset, and are noninvasive and easy to use.

Our Solution: Staccato System

Our Staccato system rapidly vaporizes an excipient-free drug compound to form a proprietary condensation aerosol that is inhaled and rapidly achieves systemic blood circulation via deep lung absorption. The Staccato system consistently creates aerosol particles averaging one to three and one-half microns in size, which is the most appropriate size for deep lung inhalation and absorption into the bloodstream.

We believe our Staccato system matches delivery characteristics and product attributes to patient needs for acute and intermittent conditions, and also has the following advantages:


	•	Rapid Onset. The aerosol produced with the Staccato system is designed to be rapidly absorbed through the deep lung with a speed of therapeutic onset comparable to an IV injection, generally achieving peak plasma levels of drug in two to five minutes.

	•	Ease of Use. The Staccato system is breath actuated, and a patient simply inhales to administer the drug dose. Unlike injections, the Staccato system is noninvasive and does not require caregiver assistance. The aerosol produced with the Staccato system is relatively insensitive to patient inhalation rates. Unlike many other inhalation technologies, the patient does not need to learn a special breathing pattern. In addition, the Staccato device is small and easily portable.

	•	Consistent Particle Size and Dose. The Staccato system uses rapid heating of the drug film to create consistent and appropriate particle sizes for deep lung inhalation and absorption into the bloodstream. The Staccato system also produces a consistent high emitted dose, regardless of the patient’s breathing pattern.

	•	Broad Applicability. We have screened over 400 drugs, and approximately 200 have exhibited initial vaporization feasibility using our Staccato system. The Staccato system can deliver both water soluble and water insoluble drugs and eliminates the need for excipient and additives such as detergents, stabilizers and solvents, avoiding the side effects that may be associated with the excipient or additives.

	•	Design Flexibility. The Staccato system can incorporate lockout and multiple dose features, potentially enhancing safety, convenience of patient titration and a variety of administration regimens.

Drug Candidates Based on the Staccato System

We combine small molecule drugs with our Staccato system to create proprietary product candidates. We believe that the drugs we are currently using are no longer eligible for patent protection as chemical entities or have their patent protection expiring in the next several years. These drugs have been widely used, and we believe their biological activity and safety are well understood and characterized. We have received composition of matter patent protection on the Staccato aerosolized forms of these drugs. We also intend to collaborate with pharmaceutical companies to develop new chemical entities, including compounds that might otherwise not be suitable for development because of limitations of traditional delivery methods.

Staccato System

Our product candidates employing Staccato system consist of three core components: (1) a heat source that includes an inert metal substrate; (2) a thin film of an excipient-free drug compound (also known as an active pharmaceutical ingredient, or API), coated on the substrate; and (3) an airway through which the patient inhales. The left panel of the illustration below depicts these core components prior to patient inhalation.

The right panel of the illustration below depicts the Staccato system during patient inhalation: (1) the heated substrate has reached peak temperature in less than one half second after the start of patient inhalation; (2) the thin drug film has been vaporized; and (3) the drug vapor has subsequently cooled and condensed into excipient-free drug aerosol particles that are being drawn into the patient’s lungs. The entire Staccato system actuation occurs in less than one second.

Five of our product candidates, AZ-004, AZ-001, AZ-002 AZ-104 and AZ-007, use the same disposable, single dose delivery device. The single dose delivery device consists of a metal substrate that is chemically heated through a battery-initiated reaction of energetic materials. In the current design, the heat package can be coated with up to 10 milligrams of API. The device is portable and easy to carry, with dimensions of approximately three inches in length, two inches in width, and three quarters of an inch in thickness. The device weighs approximately one ounce. A diagram of the single dose delivery device is shown below:

AZ-003 uses a multiple dose delivery device consisting of a reusable controller and a disposable dose cartridge. We have designed the multiple dose delivery device to meet the specific needs of our AZ-003 product candidate. The dose cartridge currently contains 25 separate metal substrates, each coated with the API, which rapidly heat upon application of electric current from the controller. In the current design, 25 micrograms of drug compound are coated on each metal substrate. The device is portable and easy to carry, with dimensions of approximately five inches in length, two and one-half inches in width and one inch in thickness. The controller weighs approximately four ounces, and the dose cartridge weighs approximately one ounce.

We continue to undertake research and development efforts to improve commercial manufacturability of our single dose device and to develop future generations of the Staccato technology.

Our Pipeline

As indicated below, we have one product candidate in Phase 3 clinical testing, one product candidate that has completed Phase 2 clinical testing, two product candidates in Phase 2 clinical testing, and two product candidates in Phase 1 clinical testing.


				Alexza
				Commercial
Product Candidate	API	Target Indication	Status	Rights

AZ-004	Loxapine	Acute agitation in schizophrenia or bi-polar disorder patients	Phase 3	Out-licensed with exclusive repurchase option*

AZ-001	Prochlorperazine	Migraine headaches	Completed Phase 2	Worldwide

AZ-002	Alprazolam	Panic attacks	Phase 2	Out-licensed with exclusive repurchase option*

AZ-104	Loxapine	Migraine headaches	Phase 2	Out-licensed with exclusive repurchase option*

AZ-003	Fentanyl	Acute pain	Phase 1	Out-licensed North American commercialization rights**

AZ-007	Zaleplon	Insomnia	Phase 1	Worldwide


*		Licensed to Symphony Allegro

**		Licensed to Endo

ACUTE AGITATION PROGRAM: AZ-004 (Staccato loxapine)

We are developing AZ-004 (Staccato loxapine) for the treatment of acute agitation in patients with schizophrenia or patients with bipolar disorder. Acute agitation, characterized by unpleasant arousal, tension, irritability and hostility, is one of the most common and severe symptoms of many major psychiatric disorders, including schizophrenia and bipolar disorder. According to the National Institute of Mental Health (NIMH), schizophrenia afflicts about 6.0 million adults in the United States and bipolar disease affects about 5.7 million American adults. We believe over 90% of these patients will experience agitation during their lifetime and that about 70% of those who experience agitation will have one to six episodes per year. Agitated patients are often treated in an emergency room setting, and are also treated as in-patients in psychiatric hospitals or psychiatric units in standard hospitals. We believe physicians currently treat acute agitation with intramuscular (IM) injections, rapid-dissolve tablets or standard tablets. IM injections are invasive, can be disconcerting to patients as they often require the use of restraints, and can be dangerous to the medical personnel while they attempt to inject the patient. IM injections can also take up to 60 minutes to work. Oral tablets provide convenience of dosing alternatives and have a slower onset

of action. Market research among physicians has identified speed of onset as an important factor that affects their choice of therapy for treating acute agitation. We believe that many patients with schizophrenia or bipolar disorder disease can make informed decisions regarding their treatment in an acute agitative state and would prefer a rapid-acting, noninvasive treatment. We believe there is a significant unmet medical need for an acute agitation treatment option that will provide a fast onset of effect, that is noninvasive and safer to administer, and that allows patients to be active participants in choosing acceptable treatment options for themselves.

The API of AZ-004 is loxapine, a generic drug belonging to the class of drugs known as antipsychotics. Loxapine is currently approved in oral and injectable (intramuscular only) formulations in the United States for the management of the manifestations of schizophrenia.

Development Status

Clinical Trials

Phase 3 Clinical Program

In February 2008 we initiated a Phase 3 clinical trial that is designed to enroll approximately 300 schizophrenic patients with acute agitation at 25 U.S. clinical centers. The trial is an in-clinic, multi-center, randomized, double-blind, placebo-controlled study and will test AZ-004 at two dose levels, 5 and 10 mg. Patients may receive up to 3 doses of study drug in a 24-hour period, depending on their clinical status. The primary endpoint for the study is the change from baseline in the PEC score, measured at 2 hours after the first dose. Various assessments of a patient’s agitation state will be conducted at serial time points using standard agitation scales over the first 4-hour post-dose time period, with follow-up assessments at the end of the 24-hour study period. Side effects will be recorded throughout the 24-hour period. A second Phase 3 clinical trial is projected to begin in the third quarter of 2008. The design of the second study will be similar to the first trial, except that the patient population will be patients with bipolar disease.

In March 2007, we reported initial results of a Phase 2a clinical trial of AZ-004. The Phase 2a clinical trial was designed as a multi-center, randomized, double-blind, placebo-controlled study of 129 patients in an in-patient clinical setting. In the trial, two doses of AZ-004 (Staccato loxapine in 5 and 10 mg doses) and placebo (Staccato device containing no drug) were tested. The primary aim of the clinical trial was to assess the safety and efficacy of a single dose of AZ-004 in acutely treating agitation in schizophrenic patients. Assessments of a patient’s agitation state were conducted at serial time points using both standard agitation scales and objective measures of patient’s movement over a 4-hour period, with follow-up assessments for the next 20 hours. The change in the PEC score at the 2-hour post-dose time point was the primary efficacy measure for the clinical study. All results were considered statistically significant at the p < 0.05 level and all analyses were made on an intent-to-treat basis. Side effects were recorded throughout the clinical trial study period.

Primary Efficacy Endpoint. The 10 mg dose of AZ-004 met the primary endpoint of the clinical trial, showing a statistically significant improvement, compared to placebo. The 5 mg dose of AZ-004 did not achieve statistical significance, compared to placebo.

PEC Scores (Mean Values)

Baseline

2-hour Post-

Study Arms

Mean

Dose Mean

Significance

10 mg AZ-004

17.3

8.8

p=0.0002

5 mg AZ-004

17.6

10.8

p=0.088

Placebo

17.7

12.7

Note: na = not applicable

Additional Efficacy Variables. The 10 mg dose of AZ-004 also exhibited a rapid onset of effect. At 10 minutes post-dose, the 10 mg dose exhibited an improvement in symptoms and at 20 minutes post-dose, the 10 mg dose showed statistically significant improvement in the PEC scores, compared to placebo. The effectiveness of the 10 mg dose was sustained throughout the 24-hour study period, compared to placebo.

Using the Behavioral Activity Rating Scale (BARS), the 10 mg dose of AZ-004 showed statistically significant improvement, compared to placebo, beginning at 30 minutes. This response was sustained throughout the 24-hour study period, compared to placebo.

Clinical Global Impression-Severity (CGI-S) scale ratings to measure agitation were completed at baseline, immediately prior to AZ-004 administration. At the 2-hour post-dose time point, a Clinical Global Impression-Improvement (CGI-I) evaluation was completed for each patient. Both the 10 mg and the 5 mg doses of AZ-004 showed statistically significant improvements in the CGI-I scale, compared to placebo.

Safety Evaluations. Side effects were recorded throughout the clinical trial period. The administration of AZ-004 was generally safe and well tolerated. The most common side effects reported were unpleasant taste, sedation and dizziness. These side effects were generally mild to moderate in severity, and occurred in both drug and placebo dose groups. There were three serious adverse events reported associated with the trial and all occurred at least one week post dosing. None of these serious adverse events were deemed attributable to study medication.

Preclinical Studies

Loxapine has been approved for marketing in oral and injectable forms. There are publicly available safety pharmacology, systemic toxicology, carcinogenicity and reproductive toxicology data we will be able to use for our regulatory filings. Therefore, our preclinical development testing is primarily focused on assessing the local tolerability of inhaled loxapine. Our two preclinical inhalation toxicology studies with loxapine have indicated that it was generally well tolerated. We continue to generate the preclinical data that will be required to submit a New Drug Application, or NDA, for AZ-004.

MIGRAINE HEADACHE PROGRAM: AZ-001 (Staccato procholoperazine) and AZ-104 (Staccato loxapine)

We are developing AZ-001 (Staccato prochlorperazine) and AZ-104 (Staccato loxapine) for the treatment of acute migraine headaches. Although there are numerous products available for the treatment of migraines, including simple analgesics such as aspirin and acetaminophen, and nonsteroidal anti-inflammatory drugs such as ibuprofen and naproxen, the prescription market is dominated by a class of orally administered medications commonly known as triptans.

According to the National Headache Foundation, approximately 13 million people in the United States have been diagnosed with migraine headaches and are treated with prescription medications. Acute migraine headaches occur often, usually one to four times a month. Of the estimated 29.5 million migraine sufferers (including diagnosed and undiagnosed sufferers), there are at least two groups of potential patients for whom we believe AZ-001 and AZ-104 could be effective and safe in comparison to triptans. Many migraine sufferers who do take triptans have an insufficient therapeutic response to these medications. In addition, according to the warning labels on triptans, patients with hypertension or high cholesterol, or who smoke cigarettes, are contraindicated for and should not take these medications due to potential cardiovascular and cerebrovascular health risks.

AZ-001 (Staccato prochlorperazine)

The API of AZ-001 is prochlorperazine, a generic drug belonging to the class of drugs known as phenothiazines. Prochlorperazine is currently approved in oral, injectable and suppository formulations in the United States for the treatment of several indications, including nausea and vomiting. In several published clinical studies, 10 mg of prochlorperazine administered intravenously demonstrated effective relief of migraine pain. Prochlorperazine is often administered intravenously to patients with severe migraine headaches who come to emergency departments or migraine treatment clinics. We believe the combination of prochlorperazine with our Staccato system could potentially result in a speed of therapeutic onset advantage over oral tablets and a convenience and comfort advantage over injections. In addition, AZ-001 may be appropriate for patients who do not achieve effective relief with triptans or cannot take triptans due to the cardiovascular risk sometimes associated with the administration of triptans. For patients who do not obtain adequate relief from current migraine therapies, AZ-001 may offer a new anti-migraine mechanism of action.

Development Status

Clinical Trials

We reported initial results of a Phase 2b clinical trial in March 2007. The AZ-001 Phase 2b clinical trial was an outpatient, multi-center, randomized, double blind, placebo-controlled study. The study was designed to evaluate the treatment of a single migraine attack in each of approximately 400 migraine patients, with and without aura. In the trial, three doses of AZ-001 (Staccato prochlorperazine in 5, 7.5 and 10 mg doses) and placebo (a Staccato device containing no drug) were tested, with 100 patients assigned to each treatment group. The primary efficacy endpoint for the trial was headache pain relief at 2-hours post-dose, as defined by the IHS 4-point headache pain rating scale. Secondary efficacy endpoints for the trial included various additional measurements of pain relief, as well as effects on nausea, vomiting, phonophobia and photophobia. The clinical trial study period was 24 hours post dosing for each patient. All results were considered statistically significant at the p < 0.05 level, and all analyses were made on an intent-to-treat basis. Side effects were recorded throughout the clinical trial study period, and a safety evaluation was made at each patient’s closeout visit.

Primary Efficacy Endpoint. AZ-001 met the primary efficacy endpoint of the clinical trial, which was pain relief at 2-hours post-dose using the IHS 4-point headache pain rating scale, for all three doses of the drug compared to placebo. Statistically significant improvements in pain response were observed in 66.0% of patients at the 10 mg dose (p=0.0013), 63.7% of patients at the 7.5 mg dose (p=0.0046) and 60.2% of patients at the 5 mg dose (p=0.0076), compared to 40.8% of patients receiving placebo.

Additional Efficacy Endpoints. Another measure of efficacy was the achievement of a pain-free response at 2 hours, where a patient has a pain score of 0, or “no”, headache pain at the 2-hours post-dose time point. In the trial, AZ-001 showed statistically significant differences from placebo in this measure with 35.0% of patients who received the 10 mg dose achieving pain-free status (p=0.0019) and 29.7% of patients who received the 7.5 mg dose achieving pain-free status (p=0.0226). Patients receiving the 5 mg dose (21.4%) did not achieve a statistically significant pain-free response, compared to placebo. The rate of pain-free response at 2 hours in patients receiving placebo was 15.3%.

We believe duration of efficacy is an important consideration in developing migraine therapeutics. A commonly used measure of duration of efficacy is the sustained pain-free response, whereby a patient reports a pain-free score at the 2-hour post-dose time point and remains pain-free for the remainder of the study period (through 24 hours). The 10.0 mg and 7.5 mg doses of AZ-001 showed statistically-significant differences in sustained pain-free response, compared to placebo. Sustained pain-free outcomes through 24 hours were observed in 30.1% and 23.1% of patients in the 10.0 mg and 7.5 mg dose groups, respectively. The placebo group exhibited a sustained pain-free response in 10.2% of patients.

AZ-001 exhibited rapid onset of pain relief. The 7.5 mg dose showed statistically significant pain response, compared to placebo, at 15 minutes (p=0.016). At 30 minutes, all three doses of AZ-001 showed statistically significant pain response, compared to placebo; 10 mg (p=0.0056), 7.5 mg (p=0.0003) and 5 mg (p=0.0056).

Symptom management is an important consideration in the overall efficacy of a migraine therapy. Important symptoms to be managed in migraine patients are nausea, vomiting, photophobia (sensitivity to light) and phonophobia (sensitivity to sound). Survival analyses for nausea, photophobia and phonophobia over the 2 hour time period post-dose showed a statistically significant difference, compared to placebo. The total number of patients with vomiting were too few to make conclusions about drug effect.

Safety Evaluations. Side effects were recorded throughout the clinical trial study period, and a safety evaluation was made at each patient’s closeout visit. There were no serious adverse events reported during the trial. The most common drug-related side effects reported across all three active dose groups in the clinical trial were taste (25 — 33%), throat irritation (18 — 30%), cough (16 — 30%), somnolence (6 — 10%), breathlessness (2 — 9%), and dizziness (0 — 9%). These side effects appeared to be dose related, with a lower incidence and severity of the side effects generally seen at the lower doses of AZ-001.

Preclinical Studies

We have completed several preclinical studies of AZ-001 including inhalation toxicology studies in two animal species, cardiovascular and respiratory safety studies in one species, and in vitro and in vivo studies to assess potential gene mutations. In animal toxicology studies of prochlorperazine aerosols involving prolonged daily dosing, we detected changes to, and increases in the number of, the cells in the upper airway of the test animals. The terms for these changes and increases are “squamous metaplasia” and “hyperplasia,” respectively. We also observed lung inflammation in some animals. Squamous metaplasia and hyperplasia occurred at doses that were substantially greater than those administered in our human clinical trials. In subsequent toxicology studies of AZ-001 involving intermittent dosing, we detected lower incidence and severity of squamous metaplasia and hyperplasia in the upper airway of the test animals compared to the daily dosing results. No lung inflammation was observed with intermittent dosing. We do not expect to observe these events when AZ-001 is delivered intermittently and at proportionately lower doses in future toxicology studies. We continue to conduct toxicology and other preclinical studies, including preliminary studies to prepare for potentially required longer term carcinogenicity studies, to generate the preclinical data that will be required to submit an NDA for AZ-001.

AZ-104 (Staccato loxapine)

We are developing AZ-104 for the treatment of acute migraine headaches. The API of AZ-104 is loxapine, a generic drug belonging to the class of drugs known as antipsychotics. Loxapine is currently approved in oral and injectable (intramuscular only) formulations in the United States for the management of the manifestations of schizophrenia.

Development Status

Clinical Trials

We completed enrollment of a Phase 2a proof-of-concept clinical trial for patients with migraine headache in December 2007 and reported initial results of this trial in February 2008. The Phase 2a clinical trial was an in-clinic, multi-center, randomized, double-blind, single-administration, placebo-controlled study in approximately 160 migraine patients with or without aura. Three doses of AZ-104 (1.25, 2.5 and 5 mg) were evaluated against placebo in the clinical trial. Using the IHS 4-point rating scale, the primary efficacy endpoint was pain-relief response at 2 hours post-administration. Secondary efficacy endpoints for the trial included additional pain response assessments and other symptom assessments at various time points. Safety evaluations were made throughout the clinical trial period.

Primary Efficacy Endpoint. AZ-104 met the primary efficacy endpoint of the clinical trial for two doses of the drug compared to placebo. Statistically significant improvements in pain response were observed in 76.7% of patients at the 5 mg dose (p = 0.02), 79.1% of patients at the 2.5 mg dose (p = 0.01) and 67.4% of patients at the 1.25 mg dose (p = 0.18), compared to 51.3% of patients receiving placebo. Using survival analysis for pain relief response, all three dose groups were statistically superior (p < 0.05) to placebo during the 4-hour post-treatment time period that the patients remained in the clinic.


	Primary Efficacy Endpoint — Pain Relief at 2-Hous Post-Dose
			Patients
			Achieving					p-value
Treatment	Number of Patients		Pain Relief		Percent Pain Relief			vs. Placebo

Placebo		39		20		51.3	%		na
1.25 mg		43		29		67.4	%		0.18
2.5 mg		43		34		79.1	%		0.01	*
5 mg		43		33		76.7	%		0.02	*


*		Statistically significant results

Additional Efficacy Endpoints. Additional measures of efficacy included the achievement of a pain-free response, in which a patient has a post-dose pain score of 0 (or “no”) headache pain. In the trial, AZ-104 showed statistically significant differences from placebo in this measure at the 2-hour time point with 30% of patients

achieving pain-free status at the 2.5 mg dose (p = 0.01) and 28% at the 1.25 mg dose (p = 0.02). While the 5.0 mg dose was numerically superior to placebo with 21% pain-free, this group did not achieve a statistically significant response, compared to placebo (p = 0.12). The rate of pain-free response at 2 hours in patients receiving placebo was 8%. Using survival analysis for pain free response, all three dose groups were statistically superior (p < 0.05) to placebo during the 4-hour post-treatment time period that the patients remained in the clinic.

A commonly used measure of duration of efficacy is the sustained pain-free response, in which a patient reports a pain-free score at the 2-hour post-dose time point and remains pain-free for the remainder of the study period (up to 24 hours). The 2.5 mg dose of AZ-104 showed a statistically significant difference in sustained pain-free response (26%, p = 0.04) compared to placebo (8%). Sustained pain-free outcomes for the 5 mg (16%) and the 1.25 mg (21%) dose groups were not statistically significant.

Important symptoms to be managed in migraine patients are nausea, photophobia (sensitivity to light) and phonophobia (sensitivity to sound). This proof-of-concept trial was not powered to detect differences in these measurements. AZ-104 did exhibit statistically significant improvement in nausea across all dose levels (survival analysis, p = 0.02). Positive trends were observed in the improvement of the other symptoms, but the changes were not statistically significant.

Safety Evaluations. Side effects were recorded throughout the clinical trial study period. There were no serious adverse events reported during the trial. The most common drug-related side effects (incidence ³ 5% in at least one drug dose group) reported across the three drug dose groups and placebo are listed in the table below.


	Placebo		1.25 mg		2.5 mg		5 mg
Side Effects	(%)		(%)		(%)		(%)

Dysgeusia		13		19		23		37
Somnolence		13		5		23		23
Fatigue		8		0		7		14
Oral discomfort		3		0		2		7
Dizziness		5		2		7		2
Hypoaesthesia, pharyngeal		0		0		0		7
Throat irritation		0		7		0		0
Dry mouth		5		2		5		5
Hypoaesthesia, oral		0		2		5		2
Attention disturbance		0		5		0		2
Hypotension		3		0		2		5

Preclinical Studies

Loxapine has been approved for marketing in oral and injectable forms. There are publicly available safety pharmacology, systemic toxicology, carcinogenicity and reproductive toxicology data we will be able to use for our regulatory filings. Therefore, our preclinical development testing is primarily focused on assessing the local tolerability of inhaled loxapine. Our two preclinical inhalation toxicology studies with loxapine have indicated that it was generally well tolerated. We continue to conduct toxicology, including extended duration exposure testing, and other preclinical studies to generate the data that will be required to submit an NDA for AZ-104.

PANIC ATTACK PROGRAM: AZ-002 (Staccato alprazolam)

We are developing AZ-002 (Staccato alprazolam) for the acute treatment of panic attacks associated with panic disorder, a condition characterized by the frequent, unpredictable occurrence of panic attacks. Although there are several chronic treatments approved to treat panic disorder, there are currently no approved drugs to acutely treat associated panic attacks. According to the NIMH approximately 6 million people in the United States suffer from panic disorder. Approximately 60% of patients seek treatment for their panic attacks. The current leading treatments for panic disorder are selective serotonin reuptake inhibitors, or SSRIs, taken prophylactically on a daily basis. Clinical literature indicates that approximately 46% of patients suffering from anxiety disorders, including panic disorder, are also prescribed benzodiazepines to take on an “as-needed” basis, indicating a level of ineffective

treatment with the SSRIs alone. In addition, patients initiating SSRI drug therapy often take several weeks to experience therapeutic effects and during this time may experience breakthrough panic attacks.

We believe some physicians may generally prescribe benzodiazepines for patients to take as needed, when they feel a panic attack coming on, or during an attack. However, because the symptoms of a panic attack typically have a rapid onset and last less than 30 minutes, we believe oral benzodiazepines often do not work fast enough to provide patients with adequate relief.

The API of AZ-002 is alprazolam, a generic drug belonging to the class of drugs known as benzodiazepines. Alprazolam is currently approved in oral formulations in the United States for use in the management of anxiety disorder, for the short term relief of symptoms of anxiety, for anxiety associated with depression, and for the treatment of panic disorder with or without agoraphobia, or abnormal fear of being in public places. We believe alprazolam is one of the most frequently prescribed psychoactive drugs in the United States. Alprazolam oral tablet formulations are usually prescribed for a short-duration course of therapy of a few days to a few weeks with the goal of reducing the frequency of symptoms of anxiety or panic disorder, including panic attacks. However, the oral tablet formulations are not intended to acutely treat or reduce the severity of panic attacks when they occur. We believe alprazolam’s demonstrated ability to reduce the frequency of panic attacks, coupled with the noninvasive nature and pharmacokinetic, or PK, properties of the aerosolized form of alprazolam produced by our Staccato system, make AZ-002 a viable product candidate for the acute treatment of panic attacks. Pharmacokinetics is the analysis of absorption, distribution, metabolism and excretion of a drug by the body. AZ-002 has been licensed to Symphony Allegro, and we have the right to repurchase all rights to this product candidate.

Development Status

Clinical Trials

In April 2006, we initiated a Phase 2a proof-of-concept clinical trial with AZ-002 in patients with panic disorder. The primary aim of the clinical trial is to assess the safety and efficacy of a single dose of AZ-002 in treating a pharmacologically-induced panic attack. Changes in the intensity and the duration of the induced panic attack, using psychological and physiological measurements, are being evaluated at multiple time points during the study. The first two patients dosed in the study exhibited a higher level of sedation than had been observed at the same dose in healthy volunteers in the AZ-002 Phase 1 clinical trial. In consultation with the clinical investigator, we modified the protocol to reduce the dose of AZ-001 and to include an open label lead-in stage of the study in which patient sedation was assessed. To facilitate patient enrollment in the clinical trial, we recruited two additional clinical sites to conduct the study. In April 2007, we re-initiated dosing in the 42 patient clinical trial with a lower dose of AZ-002. We have completed the open-label, lead-in segment of the clinical trial, identifying the 1 mg AZ-002 dose as an acceptable dose in terms of its safety and efficacy profile, and have initiated the randomized, double blind, placebo-controlled segment of the clinical trial. We expect to complete enrollment of this trial in the second quarter of 2008.

In the manufacture of the new dosage strengths required for the amended protocol, a higher variability of the alprazolam emitted dose was observed. Further testing showed that alprazolam aerosols are electrically charged leading to variable deposition on the internal airway housing of the device. We believe this aerosol characteristic is unique to alprazolam, and it has not been observed in our other development product candidates. Consequently, the manufacturing process for AZ-002 was modified to incorporate a conductive airway housing to reduce the effects of the electrically charged aerosol. We have manufactured AZ-002 using the new airway housing, and we believe this change has resolved the aerosol emitted dose variability.

Preclinical Studies

Alprazolam has been approved for marketing in oral tablet form. There are publicly available safety pharmacology, systemic toxicology, carcinogenicity and reproductive toxicology data that we will be able to use for our regulatory filings. Therefore, our preclinical development plan is primarily focused on assessing the local tolerability of inhaled alprazolam. To date, our two preclinical inhalation toxicology studies with inhaled alprazolam have indicated that it is generally well tolerated. We continue to conduct safety assessments, including

extended duration exposure testing in toxicology studies, to generate the preclinical data that will be required to submit an NDA for AZ-002.

ACUTE PAIN PROGRAM: AZ-003 (Staccato fentanyl)

We are developing our product candidate AZ-003 (Staccato fentanyl) for the treatment of breakthrough pain in cancer and non-cancer patients. Based on our analysis of industry data and clinical literature, we believe over 25 million postoperative patients experience inadequate pain relief, despite receiving some form of pain management and, according to a three month study on cancer pain by Portenoy and Hagen (1990) and a cross-sectional study on cancer pain by Caraceni (2004), approximately 65% of patients diagnosed with cancer pain experience breakthrough cancer pain. A patient controlled analgesia, or PCA, IV pump is often used directly after surgery so the patient can achieve quick pain relief as needed. The PCA pump approach generally works well, but typically requires patients to remain in the hospital with an IV line in place. Physicians generally treat cancer pain using a combination of a chronic, long-acting drug and an acute or rapid acting drug for breakthrough pain. Treating a breakthrough pain episode with an oral medication is difficult due to the slow onset of therapeutic effect. However, patients usually also find more invasive, injectable treatments undesirable. Based on preclinical testing and the results of our Phase 1 clinical trial, we believe the PK of fentanyl delivered using a Staccato system will be similar to the PK of IV fentanyl administration. We believe many patients would benefit from a noninvasive but fast acting therapy that allows them to titrate the amount of pain medication to the amount of pain relief required.

In December 2007, we entered into a license and development agreement with Endo, for development of AZ-003 and the fentanyl class of molecules in North America. In the partnership, we have primary responsibility for the development of the Staccato Electric Multiple Dose device and the exclusive right to manufacture the product for clinical development and commercial supply. Endo has primary responsibility for regulatory, pre-clinical and clinical development, and for commercializing the product in North America.

The API of AZ-003 is fentanyl, a generic drug belonging to the class of drugs known as opioid analgesics. Fentanyl is currently approved in three different formulations in the United States for the management of various types of pain: injectable, transmucosal, which deliver drugs through the mucous membranes of the mouth or nose, and transdermal, which deliver drug through the skin. Since the Staccato system can incorporate lockout and multiple dose features, we believe that AZ-003 will facilitate patient titration to the minimum effective drug dose in a safe, convenient, easy to use and simple delivery system. In addition, we believe the incorporation of patient lockout features may be a significant safety advantage and has the potential to prevent diversion, or use by individuals who have not been prescribed the drug.

Development Status

Clinical Studies

We completed the initial analysis of the top-line results of our Phase 1 clinical trial with AZ-003 in December 2006. The primary aims of the Phase 1 clinical trial were to evaluate the arterial PK and absolute bioavailability for AZ-003 by comparing the AZ-003 profile to that of IV fentanyl, and to examine the pharmacodynamics, tolerability and safety of AZ-003 in opioid naive healthy subjects. The trial enrolled 50 subjects and was conducted at a single clinical center in two stages. Stage 1 of the protocol was an open-label, crossover comparison of a 25 g dose of AZ-003 by a single inhalation and the same dose of fentanyl administered intravenously over five seconds. Stage 2 of the protocol was a randomized double-blind, placebo-controlled, dose escalation of AZ-003 evaluating cumulative doses of 50, 100, 150 and 300 g of fentanyl. A 25 g individual dose of fentanyl was inhaled once in Stage 1, or 2, 4 or 6 times at 4 minute intervals for the first four different cohorts in Stage 2. A fifth cohort in Stage 2 received a 150 g dosing sequence starting at time zero and then a second 150 g dosing sequence starting at 60 minutes after the first dose, for a cumulative dose of 300 g. In addition to comprehensive PK sample collection, pharmacodynamic data were generated using pupillometry, a surrogate measure used to assess the functional activity of opioids.

The AZ-003 PK was substantially equivalent to the IV fentanyl PK, with similar peak plasma concentration (Cmax), time to maximum plasma concentration (Tmax) and area under the curve concentration (AUC). These data suggest very high absolute bioavailability of the inhaled dose. Mean peak arterial plasma concentrations were

observed within 30 seconds for both administration routes. In Stage 2 of the clinical trial, ascending doses of AZ-003 controlled by the Staccato device, exhibited dose-proportionality of fentanyl throughout the dosing range from 50 mcg to 300 mcg, following an AUC analysis. There were no serious adverse events attributable to AZ-003, and the results from the clinical study showed that AZ-003 was generally safe and well tolerated at all doses.

In October 2007, clinical data from the AZ-003 Phase 1 clinical trial were presented in four different presentations at the 2007 American Society of Anesthesiologists Annual Meeting, in San Francisco, California. The four presentations were entitled, “Pharmacokinetic Profiles of Fentanyl Delivered by Intravenous and Inhaled Thermal Aerosol Routes”, “Pharmacokinetic Profile of Multiple Doses of Fentanyl Delivered by Inhaled Thermal Aerosol Route”, “Pharmacodynamic Response to Fentanyl Delivered by Intravenous and Inhaled Thermal Aerosol Routes” and “Pharmacodynamic Response to Multiple Doses of Fentanyl Delivered by Inhaled Thermal Aerosol Route”. This clinical trial demonstrated that the pharmacokinetic profile of AZ-003 in a single breath offers a speed of onset and consistency equivalent to fentanyl administered intravenously over 5 seconds. This clinical trial also demonstrated that the pharmacodynamic profile of AZ-003 in a single breath was comparable to that of fentanyl administered by intravenous administration.

Preclinical Studies

Fentanyl is approved for marketing in injectable, transdermal and transmucosal forms. We are able to use publicly available safety pharmacology, systemic toxicology and reproductive toxicology data for our regulatory filings. Therefore, our preclinical development testing was primarily focused on assessing the local tolerability of inhaled fentanyl. Our two preclinical inhalation toxicology tests in two animal species with fentanyl have indicated that it was generally well tolerated. Endo is responsible for future preclinical development of AZ-003.

INSOMNIA PROGRAM: AZ-007 (Staccato zaleplon)

We are developing AZ-007 for the treatment of insomnia in patients who have difficulty falling asleep, including those patients with middle of the night awakening who have difficulty falling back asleep. Insomnia is the most prevalent sleep disorder, and we believe that it affects at least 15% to 20% of the US population, with some estimates of up to 50% of Americans reporting difficulty getting a good nights’ sleep at least a few nights a week. Insomnia can be due to any variety of causes, including depression, grief or stress, menopause, age, shift work, or environmental disruption. Whatever the cause of insomnia, it can take its toll on both the afflicted and the non-afflicted. Sleep disturbances have a major negative impact on public health and economic productivity. Costs for direct healthcare associated with insomnia are estimated to be approximately $14 billion to $15 billion each year.

Market Opportunity

Insomnia is a prevalent disorder that drives almost $5 billion in worldwide sales of prescription medications each year. In a large survey conducted by the National Sleep Foundation in 2005, results showed that 54% of the respondents experienced a minimum of one symptom of insomnia at least a few nights a week. Of those, respondents complained primarily of waking up feeling unrefreshed (38%), waking up frequently during the night (32%), having difficulty falling asleep (21%), and waking up too early and not being able to get back to sleep (21%).

Although benzodiazepines have been the gold standard in treatment of sleep disorders for decades, issues with drug misuse and dependency are common and concerning. Other current leading treatments for insomnia include non-benzodiazepine GABA-A receptor agonists, which include Ambien^® (immediate release and controlled-release tablets), Sonata^®, and Lunesta^®, which have less abuse potential and side effects than classical benzodiazepines and can be used for longer term treatment. Patients and physicians surveyed suggest that current oral forms of these leading insomnia medications can take from 30 — 60 minutes to work, while promotions for insomnia medications cite 20 — 30 minutes. Compounds with a longer half-life that keep patients asleep longer, or those that are dosed in the middle of the night are also those that have residual side effects that can cause a ’hangover’ feeling the next day.

We believe the opportunity in insomnia is achieving a balance in treating patients so they can fall asleep quickly (whether at bedtime or in the middle of the night) while enabling them to function well the next day without a groggy feeling. We believe there is a potentially significant clinical need for rapid and predictable onset of sleep in

patients with insomnia, coupled with a predictable duration of sleep and rapid, clear awakening that can be satisfied with AZ-007.

Development Status

Clinical Studies

In February 2008 we initiated a single-center, randomized, dose-escalation Phase 1 clinical trial in healthy male and female subjects. The primary objectives of the study are to examine the tolerability and safety of AZ-007 in a healthy volunteer population, to establish the pharmacokinetics of zaleplon in the target therapeutic range following AZ-007 doses, and to support the dosing selection for AZ-007 to be used in the Phase 2 clinical trial of this development program. Dose selection is based on AZ-007’s pharmacokinetic, pharmacodynamic, and tolerability profiles determined in this study.

Preclinical Studies

Zaleplon has been approved for marketing in oral form. There are publicly available safety pharmacology, systemic toxicology, carcinogenicity and reproductive toxicology data we will be able to use for our regulatory filings. Therefore, our preclinical development testing is primarily focused on assessing the local tolerability of inhaled zaleplon. Our two preclinical inhalation toxicology studies with zaleplon have indicated that it was generally well tolerated. We continue to conduct toxicology, including extended duration exposure testing, and other preclinical studies to generate the data that will be required to submit an NDA for AZ-007.

Product Candidate Selection

We believe our Staccato system is broadly applicable to a large number of medically important small molecule compounds that could be useful in the treatment of acute and intermittent conditions. Since our inception, we have undertaken technical feasibility screening of approximately 400 compounds, which has resulted in the identification of approximately 200 compounds that have demonstrated initial vaporization feasibility. We intend to continue to screen additional drug compounds for vaporization feasibility with our Staccato system.

Once we have established initial vaporization feasibility, we conduct experiments and activities designed to identify viable product candidates. These experiments and activities include calculation of emitted doses, analysis of whether or not the emitted dose would be therapeutic, particle size analyses, early product stability studies and comprehensive medical and market needs assessments. After completion of these experiments and activities, a formal Product Selection Advisory Board, or PSAB, composed of employees and outside experts, is convened to evaluate these data.

After a positive PSAB decision, we initiate preclinical pharmacology and toxicology studies, with the intent of filing an IND upon successful completion of our preclinical studies. During this preclinical period, we also manufacture toxicology study supplies and initiate the manufacturing scale-up to move the product candidate through manufacturing design verification testing and the production of clinical trial materials.

We believe that, with the current development status of our single dose device, we can move a compound from initial screening through filing of an IND in 12 to 18 months.

Our Strategy

We intend to develop an extensive portfolio of products. Key elements of our strategy include:


	•	Focus on Acute and Intermittent Conditions. We focus our development and commercialization efforts on product candidates based on our Staccato system that are intended to address important unmet medical and patient needs in the treatment of acute and intermittent conditions. To meet these needs, we believe that products that provide rapid onset, ease of use, noninvasive administration and, in some cases, patient titration of dosage are required.


	•	Develop Commercialization Capabilities. We plan to build a United States-based specialty sales force to commercialize our product candidates which are approved for marketing and which are intended for psychiatric markets.

	•	Establish Strategic Partnerships. We intend to strategically partner with pharmaceutical and other companies to provide development funding or to address markets that may require a larger sales force, greater marketing resources or specific expertise to maximize the value of some product candidates. We also intend to seek international distribution partners for our product candidates. We may also enter into strategic partnerships with other pharmaceutical companies to combine our Staccato system with their proprietary compounds.

	•	Retain and Control Product Manufacturing. We own all manufacturing rights to our product candidates. We intend to internally complete the final manufacture and assembly of our product candidates and any future products, potentially enabling greater intellectual property protection and economic return from our future products. We also believe controlling the final manufacture and assembly reduces the risk of supply interruptions and allows more cost effective manufacturing.

Licensing Collaborations

Symphony Allegro, Inc.

On December 1, 2006 we entered into a transaction involving a series of related agreements providing for the financing of additional clinical and nonclinical development of AZ-002, Staccato alprazolam, and AZ-004, Staccato loxapine. Pursuant to the agreements, Symphony Capital LLC and other investors have invested $50 million to form Symphony Allegro to fund additional clinical and nonclinical development of Staccato alprazolam and Staccato loxapine. We have exclusively licensed to Symphony Allegro certain intellectual property rights related to Staccato alprazolam and Staccato loxapine. We have retained manufacturing rights to these two product candidates. We continue to be primarily responsible for the development of these two product candidates in accordance with a development plan and related development budgets. Pursuant to the agreements, we have received an exclusive purchase option that gives us the right, but not the obligation, to acquire all, but not less than all, of the equity of Symphony Allegro, and reacquire the intellectual property rights that we licensed to Symphony Allegro. This purchase option is exercisable at predetermined prices between December 1, 2007 and December 1, 2010. The purchase option exercise price may be paid for in cash or in a combination of cash and our common stock, in our sole discretion, provided that the common stock portion may not exceed 40% of the purchase option exercise price or 10% of our common stock issued and outstanding as of the purchase option closing date. If we pay a portion of the purchase option exercise price in shares of our common stock, then we will be required to register such shares for resale under a resale registration statement pursuant to the terms of a registration rights agreement. If we do not exercise our purchase option by December 1, 2010, then Symphony Allegro will retain its exclusive license to develop and commercialize Staccato alprazolam and Staccato loxapine for all indications, and we will manufacture and sell Staccato alprazolam and Staccato loxapine to Symphony Allegro or its sublicensee for those purposes. Pursuant to a warrant purchase agreement, we issued to Symphony Allegro Holdings, LLC a warrant with a five-year term to purchase 2,000,000 shares of our common stock at $9.91 per share. We also paid a transaction structuring fee of $2.5 million, and reimbursed approximately $329,000 of Symphony Allegro transaction expenses to Symphony Allegro Holdings LLC.

Endo Pharmaceuticals, Inc.

and regulatory development, and, if AZ-003 is approved for marketing, for commercializing the product in North America. Each party will be responsible for all internal costs and expenses incurred related to the respective area of responsibility. Generally speaking, each party will also be responsible for external development costs incurred related to the respective area of responsibility, but we agreed to pay certain external development costs incurred by Endo in excess of an agreed upon threshold, with a maximum expense to us of $20 million. We retain all rights outside of North America. Endo has the right to terminate the license Agreement on 90 days written notice. Upon such termination, all rights to the product, including regulatory filings, data and clinical and non-clinical data for use with the product will revert to us.

Manufacturing

We manufacture our product candidates with components supplied by vendors and with parts manufactured in-house. We believe that manufacturing our product candidates will potentially enable greater intellectual property protection and economies of scale and decrease the risk of supply interruptions.

We outsource the production of some components of our product candidates, including the printed circuit boards and the molded plastic airways. We currently use single source suppliers for these components, as well as for the API used in each of our product candidates. We will outsource the heat packages used in the single dose version of our Staccato system device in the future. We do not carry a significant inventory of these components, and establishing additional or replacement suppliers for any of these components may not be accomplished quickly, or at all, and could cause significant additional expense. With the exception of Autoliv ASP Inc., or Autoliv, which will provide chemical heat packages as described below, our suppliers have no contractual obligations to continue to supply us with any of the components necessary to manufacture our product candidates. Any supply interruption from our vendors would limit our ability to manufacture our product candidates and could delay clinical trials for, and regulatory approval of, our product candidates.

On November 2, 2007, we entered into a manufacturing and supply agreement, or the supply agreement, with Autoliv relating to the commercial supply of chemical heat packages that can be incorporated into our single dose Staccato device. Autoliv had developed these chemical heat packages for us pursuant to a development agreement between Autoliv and us executed in October 2005. Under the terms of the supply agreement, Autoliv will develop a manufacturing line capable of producing 10 million chemical heat packages a year. Alexza will pay Autoliv $12 million upon the earlier of December 31, 2011 or 60 days after the approval by the FDA of an NDA filed by us. If either party terminates the supply agreement, we will be required to reimburse Autoliv for certain expenses related to the equipment and tooling used in the production and testing of the chemical heat packages up to $12 million. Upon either payment Autoliv will be required to transfer possession and ownership of such equipment and tooling to us.

Autoliv has agreed to manufacture, assemble and test the chemical heat packages solely for us in conformance with our specifications. We will pay Autoliv a specified purchase price, which varies based on annual quantities ordered by us, per chemical heat package delivered. The initial term of the supply agreement expires on December 31, 2012 and may be extended by written mutual consent. The supply agreement provides that during the term of the supply agreement, Autoliv will be our exclusive supplier of chemical heat packages. In addition, the supply agreement grants Autoliv the right to negotiate for the right to supply commercially any second generation chemical heat package, or a second generation product, and provides that we will pay Autoliv certain royalty payments if we manufacture second generation products ourselves or if we obtain second generation products from a third party manufacturer. Upon the expiration or termination of the supply agreement we will also be required, on an ongoing basis, to pay Autoliv certain royalty payments related to the manufacture of the chemical heat packages by us or third party manufacturers.

The supply agreement also contains certain provisions regarding the rights and responsibilities of the parties with respect to manufacturing specifications, forecasting and ordering, delivery arrangements, payment terms, packaging requirements, change orders, intellectual property rights confidentiality and indemnification, as well as certain other customary matters.

The chemical heat packages for our single dose delivery device are manufactured by coating energetic materials on the inside surface of the metal substrate. After inspection and qualification, we assemble the

components of our product candidates and coat the exterior of the metal substrate with a thin film of API. We then place the plastic airway around the assembly and package a completed device in a pharmaceutical-grade foil pouch. The controller for our multiple dose delivery design includes the battery power source for heating the individual metal substrates, a microprocessor that directs the electric current to the appropriate metal substrate at the appropriate time, and an icon-based liquid crystal display that shows the number of doses remaining in the dose cartridge and the controller status. We may need to develop additional versions of our devices for future product candidates.

We believe we have developed quality assurance and quality control systems applicable to the design, manufacture, packaging, labeling and storage of our product candidates in compliance with applicable regulations. These systems include extensive requirements with respect to quality management and organization, product design, manufacturing facilities, equipment, purchase and handling of components, production and process controls, packaging and labeling controls, device evaluation, distribution and record keeping.

In 2007, we completed a current good manufacturing practices, or cGMP, compliant pilot manufacturing facility in our new location in Mountain View, California. In November 2007, we received a pharmaceutical manufacturing license from the California State Food and Drug Branch for this facility. We believe this pilot manufacturing facility will have sufficient capacity to manufacture materials for toxicology studies and clinical trial materials for future clinical trials. We also believe that this facility may be sufficient to manufacture early commercial-scale batches of our products. In February 2008, we completed the move from Palo Alto to our new Mountain View facilities.

Marketing and Sales

We plan to build a United States based specialty sales force to commercialize any of our product candidates, which are approved for marketing and which are intended for psychiatric markets. We plan to enter into strategic partnerships with other companies to commercialize products that are intended for certain markets in the United States and for all of our product candidates in geographic territories outside the United States.

Government Regulation

The testing, manufacturing, labeling, advertising, promotion, distribution, export and marketing of our product candidates are subject to extensive regulation by governmental authorities in the United States and other countries. Our product candidates include drug compounds incorporated into our delivery device and are considered “combination products” in the United States. We have agreed with the FDA that our product candidates will be reviewed by the FDA’s Center for Drug Evaluation and Research. The FDA, under the Federal Food, Drug and Cosmetic Act, or FDCA, regulates pharmaceutical products in the United States. The steps required before a drug may be approved for marketing in the United States generally include:


	•	preclinical laboratory studies and animal tests;

	•	the submission to the FDA of an IND for human clinical testing, which must become effective before human clinical trials commence;

	•	adequate and well controlled human clinical trials to establish the safety and efficacy of the product;

	•	the submission to the FDA of an NDA;

	•	satisfactory completion of an FDA inspection of the manufacturing facilities at which the product is made to assess compliance with cGMP. In addition, the FDA may audit clinical trial sites that generated the data in support of the NDA; and

	•	FDA review and approval of the NDA.

The testing and approval process requires substantial time, effort and financial resources, and the receipt and timing of any approval is uncertain. Preclinical studies include laboratory evaluations of the product candidate, as well as animal studies to assess the potential safety and efficacy of the product candidate. The results of the preclinical studies, together with manufacturing information and analytical data, are submitted to the FDA as part of

the IND, which must become effective before clinical trials may be commenced. The IND will become effective automatically 30 days after receipt by the FDA, unless the FDA raises concerns or questions about the conduct of the trials as outlined in the IND prior to that time. In this case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can proceed.

Clinical trials involve the administration of the product candidates to healthy volunteers or patients under the supervision of a qualified principal investigator. Further, each clinical trial must be reviewed and approved by an independent institutional review board, or IRB, at or servicing each institution at which the clinical trial will be conducted. The IRB will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution.

Clinical trials typically are conducted in three sequential phases prior to approval, but the phases may overlap. A fourth, or post-approval, phase may include additional clinical studies. These phases generally include the following:


	•	Phase 1. Phase 1 clinical trials involve the initial introduction of the drug into human subjects, frequently healthy volunteers. These studies are designed to determine the metabolism and pharmacologic actions of the drug in humans, the adverse effects associated with increasing doses and, if possible, to gain early evidence of effectiveness. In Phase 1 clinical trials, the drug is usually tested for safety, including adverse effects, dosage tolerance, absorption, distribution, metabolism, excretion and pharmacodynamics.

	•	Phase 2. Phase 2 clinical trials usually involve studies in a limited patient population to (1) evaluate the efficacy of the drug for specific, targeted indications; (2) determine dosage tolerance and optimal dosage; and (3) identify possible adverse effects and safety risks. Although there are no statutory or regulatory definitions for Phase 2a and Phase 2b, Phase 2a is commonly used to describe a Phase 2 clinical trial evaluating efficacy, adverse effects and safety risks and Phase 2b is commonly used to describe a subsequent Phase 2 clinical trial that also evaluates dosage tolerance and optimal dosage.

	•	Phase 3. If a compound is found to be potentially effective and to have an acceptable safety profile in Phase 2 clinical trials, the clinical trial program will be expanded to further demonstrate clinical efficacy, optimal dosage and safety within an expanded patient population at geographically dispersed clinical trial sites. Phase 3 clinical trials usually include several hundred to several thousand patients.

	•	Phase 4. Phase 4 clinical trials are studies required of, or agreed to, by a sponsor that are conducted after the FDA has approved a product for marketing. These studies are used to gain additional experience from the treatment of patients in the intended therapeutic indication and to document a clinical benefit in the case of drugs approved under accelerated approval regulations. If the FDA approves a product while a company has ongoing clinical trials that were not necessary for approval, a company may be able to use the data from these clinical trials to meet all or part of any Phase 4 clinical trial requirement. These clinical trials are often referred to as Phase 3/4 post-approval clinical trials. Failure to promptly conduct Phase 4 clinical trials could result in withdrawal of approval for products approved under accelerated approval regulations.

In the case of products for the treatment of severe or life threatening diseases, the initial clinical trials are sometimes conducted in patients rather than in healthy volunteers. Since these patients are already afflicted with the target disease, it is possible that such clinical trials may provide evidence of efficacy traditionally obtained in Phase 2 clinical trials. These trials are referred to frequently as Phase 1/2 clinical trials. The FDA may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

The results of preclinical studies and clinical trials, together with detailed information on the manufacture and composition of the product, are submitted to the FDA in the form of an NDA requesting approval to market the product. Generally, regulatory approval of a new drug by the FDA may follow one of three routes. The most traditional of these routes is the submission of a full NDA under Section 505(b)(1) of the FDCA. A second route, which is possible where an applicant chooses to rely in part on the FDA’s conclusion about the safety and effectiveness of previously approved drugs is to submit a more limited NDA described in Section 505(b)(2) of the FDCA. The final route is the submission of an Abbreviated New Drug Application for products that are shown to be therapeutically equivalent to previously approved drug products as permitted under Section 505(j) of the FDCA. We

do not expect any of our product candidates to be submitted under Section 505(j). Both Section 505(b)(1) and Section 505(b)(2) applications are required by the FDA to contain full reports of investigations of safety and effectiveness. However, in contrast to a traditional NDA submitted pursuant to Section 505(b)(1) in which the applicant submits all of the data demonstrating safety and effectiveness, we believe an application submitted pursuant to Section 505(b)(2) can rely upon findings by the FDA that the parent drug is safe and effective in that indication. As a consequence, the preclinical and clinical development programs leading to the submission of an NDA under Section 505(b)(2) may be less expensive to carry out and can be concluded in a shorter period of time than programs required for a Section 505(b)(1) application. In its review of any NDA submissions, however, the FDA has broad discretion to require an applicant to generate additional data related to safety and efficacy, and it is impossible to predict the number or nature of the studies that may be required before the FDA will grant approval. Notwithstanding the approval of many products by the FDA pursuant to Section 505(b)(2), over the last few years certain brand-name pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA changes its interpretation of Section 505(b)(2), this could delay or even prevent the FDA from approving any Section 505(b)(2) NDA that we submit.

To the extent that a Section 505(b)(2) applicant is relying on the FDA’s findings for an already-approved product, the applicant is required to certify to the FDA concerning any patents listed for the approved product in the FDA’s Orange Book publication. A certification that the new product will not infringe the already approved products’ Orange Book-listed patents or that such patents are invalid is called a paragraph IV certification, and could be challenged in court by the patent owner or holder of the application of the already approved products. This could delay the approval of any Section 505(b)(2) application we submit. In addition, any period of marketing exclusivity applicable to the already approved product might delay approval of any Section 505(b)(2) application we submit. Any Section 505(b)(1) or Section 505(b)(2) application we submit for a drug product containing a previously approved API might be eligible for three years of marketing exclusivity, provided new clinical investigations that were conducted or sponsored by the applicant are essential to the FDA’s approval of the application. Five years of marketing exclusivity is granted if FDA approves an NDA for a new chemical entity. In addition, we can list in the FDA’s Orange Book publication any of our patents claiming the drug product, drug substance or that cover an approved method-of-use. In order for a generic applicant to rely on the FDA’s approval of any NDA we submit, such generic applicant must certify to any Orange Book listed patents and might be subject to any marketing exclusivity covering our approved drug product.

In the NDA submissions for our product candidates that are currently undergoing clinical trials, we intend to follow the development pathway permitted under the FDCA that we believe will maximize the commercial opportunities for these product candidates. We are currently pursuing the Section 505(b)(2) application route for our product candidates. As such, we intend to engage in discussions with the FDA to determine which, if any, portions of our development program can be modified, based on previous FDA findings of a drug’s safety and effectiveness.

Before approving an NDA, the FDA will inspect the facilities at which the product is manufactured, whether ours or our third party manufacturers’, and will not approve the product unless the manufacturing facility complies with cGMP. The FDA reviews all NDA’s submitted before it accepts them for filing and may request additional information rather than accept an NDA for filing. Once the NDA submission has been accepted for filing, the FDA begins an in-depth review of the NDA. Under the goals and policies agreed to by the FDA under the Prescription Drug User Fee Act, or PDUFA, the FDA has 10 months in which to complete its initial review of a standard NDA and respond to the applicant, and six months for a priority NDA. The FDA does not always meet the PDUFA goal dates for standard and priority NDA’s. The review process is often significantly extended by FDA requests for additional information or clarification. The FDA may delay approval of an NDA if applicable regulatory criteria are not satisfied, require additional testing or information and/or require post-marketing testing and surveillance to monitor safety or efficacy of a product. FDA approval of any NDA submitted by us will be at a time the FDA chooses. Also, if regulatory approval of a product is granted, such approval may entail limitations on the indicated uses for which such product may be marketed. Once approved, the FDA may withdraw the product approval if compliance with pre and post-marketing regulatory requirements and conditions of approvals are not maintained or if problems occur after the product reaches the marketplace. In addition, the FDA may require post-marketing studies, referred to as Phase 4 clinical trials, to monitor the effect of approved products and may limit further marketing of the product based on the results of these post-marketing studies.

If we obtain regulatory approval for a product, this approval will be limited to those diseases and conditions for which the product is effective, as demonstrated through clinical trials. Even if this regulatory approval is obtained, a marketed product, its manufacturer and its manufacturing facilities are subject to continual review and periodic inspections by the FDA and, in our case, the State of California. Discovery of previously unknown problems with a medicine, device, manufacturer or facility may result in restrictions on the marketing or manufacturing of an approved product, including costly recalls or withdrawal of the product from the market. The FDA has broad post-market regulatory and enforcement powers, including the ability to suspend or delay issuance of approvals, seize or recall products, withdraw approvals, enjoin violations and institute criminal prosecution.

In addition to regulation by the FDA and certain state regulatory agencies, the United States Drug Enforcement Administration, or DEA, imposes various registration, recordkeeping and reporting requirements, procurement and manufacturing quotas, labeling and packaging requirements, security controls and a restriction on prescription refills on certain pharmaceutical products under the Controlled Substances Act. A principal factor in determining the particular requirements, if any, applicable to a product is its actual or potential abuse profile. The DEA regulates drug substances as Schedule I, II, III, IV or V substances, with Schedule I and II substances considered to present the highest risk of substance abuse and Schedule V substances the lowest risk. Alprazolam, the API in AZ-002, is regulated as a Schedule IV substance, fentanyl, the API in AZ-003, is regulated as a Schedule II substance, and zaleplon, the API in AZ-007, is regulated as a Schedule IV substance. Each of these product candidates are subject to DEA regulations relating to manufacturing, storage, distribution and physician prescription procedures, and the DEA regulates the amount of the scheduled substance that would be available for clinical trials and commercial distribution. As a Schedule II substance, fentanyl is subject to additional controls, including quotas on the amount of product that can be manufactured and limitations on prescription refills. We have received necessary registrations from the DEA for the manufacture of AZ-002, AZ-003 and AZ-007. The DEA periodically inspects facilities for compliance with its rules and regulations. Failure to comply with current and future regulations of the DEA could lead to a variety of sanctions, including revocation, or denial of renewal, of DEA registrations, injunctions, or civil or criminal penalties, and could harm our business and financial condition.

The single dose design of our Staccato system uses what we refer to as “energetic materials” to generate the rapid heating necessary for vaporizing the drug while avoiding degradation. Manufacture of products containing these types of materials is controlled by the Bureau of Alcohol, Tobacco, Firearms and Explosives, or ATF, under 18 United States Code Chapter 40. Technically, the energetic materials used in our Staccato system are classified as “low explosives,” and we have been granted a license/permit by the ATF for the manufacture of such low explosives.

Additionally, due to inclusion of the energetic materials in our Staccato system, shipments of the single dose design of our Staccato system are regulated by the Department of Transportation, or DOT, under Section 173.56, Title 49 of the United States Code of Federal Regulations. The single dose version of our Staccato device has been granted “Not Regulated as an Explosive” status by the DOT.

We have received funding for one or more research projects from a funding agency of the United States government, and inventions conceived or first actually reduced to practice during the performance of the research project are subject to the rights and limitations of certain federal statutes and various implementing regulations known generally and collectively as the “Bayh-Dole Requirements.” As a funding recipient, we are subject to certain invention reporting requirements, and certain limitations are placed on assignment of the invention rights. In addition, the federal government retains a non-exclusive, irrevocable, paid-up license to practice the invention and, in exceptional cases, the federal government may seek to take title to the invention.

We also will be subject to a variety of foreign regulations governing clinical trials and the marketing of any future products. Outside the United States, our ability to market a product depends upon receiving a marketing authorization from the appropriate regulatory authorities. The requirements governing the conduct of clinical trials, marketing authorization, pricing and reimbursement vary widely from country to country. In any country, however, we will only be permitted to commercialize our products if the appropriate regulatory authority is satisfied that we have presented adequate evidence of safety, quality and efficacy. Whether or not FDA approval has been obtained, approval of a product by the comparable regulatory authorities of foreign countries must be obtained prior to the commencement of marketing of the product in those countries. The time needed to secure approval may be longer or

shorter than that required for FDA approval. The regulatory approval and oversight process in other countries includes all of the risks associated with the FDA process described above.

Pharmaceutical Pricing and Reimbursement

In both domestic and foreign markets, our ability to commercialize successfully and attract strategic partners for our product candidates depends in significant part on the availability of adequate coverage and reimbursement from third-party payors, including, in the United States, governmental payors such as the Medicare and Medicaid programs, managed care organizations, and private health insurers. Third-party payors are increasingly challenging prices charged for medical products and services and examining their cost effectiveness, in addition to their safety and efficacy. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the cost effectiveness of any future products. Even with studies, our product candidates may be considered less safe, less effective or less cost effective than existing products, and third-party payors therefore may not provide coverage and reimbursement for our product candidates, in whole or in part.

Political, economic and regulatory influences are subjecting the healthcare industry in the United States to fundamental changes. There have been, and we expect there will continue to be, a number of legislative and regulatory proposals to change the healthcare system in ways that could significantly affect our business. We anticipate that Congress, state legislatures and the private sector will continue to consider and may adopt healthcare policies intended to curb rising healthcare costs. These cost containment measures include:


	•	controls on government funded reimbursement for medical products and services;

	•	controls on healthcare providers;

	•	challenges to the pricing of medical products and services or limits or prohibitions on reimbursement for specific products and therapies through other means;

	•	reform of drug importation laws; and

	•	expansion of use of managed care systems in which healthcare providers contract to provide comprehensive healthcare for a fixed cost per person.

We are unable to predict what additional legislation, regulations or policies, if any, relating to the healthcare industry or third-party coverage and reimbursement may be enacted in the future or what effect such legislation, regulations or policies would have on our business. Any cost containment measures, including those listed above, or other healthcare system reforms that are adopted could have a material adverse effect on our ability to operate profitably.

Patents and Proprietary Rights

We actively seek to patent the technologies, inventions and improvements we consider important to the development of our business. In addition, we rely on trade secrets and contractual arrangements to protect our proprietary information. Some areas for which we seek patent protection include:


	•	the Staccato system and its components;

	•	methods of using the Staccato system;

	•	the aerosolized form of drug compounds produced by the Staccato system; and

	•	methods of making and using the drug containing aerosols, including methods of administering the aerosols to a patient.

As of February 1, 2008, we held over 95 issued and allowed U.S. and international patents. Most of our patents are directed to compositions for delivery of an aerosol comprising drugs other than our lead product candidates described below, and cover the process for producing these aerosols using the Staccato system. As of that date, we held over 55 additional pending patent applications in the United States. We also hold over 125 pending corresponding foreign patent applications or Patent Cooperation Treaty applications that will permit us to pursue additional patents outside of the United States. The claims in these various patents and patent applications are

directed to various aspects of our drug delivery devices and their components, methods of using our devices, drug containing aerosol compositions and methods of making and using such compositions.

AZ-004/AZ-104 (Staccato loxapine)

One of our issued U.S. patents covers compositions for delivery of a condensation aerosol comprising loxapine and covers the process for producing such condensation aerosol using the Staccato system technology. This patent will not expire until 2022. Counterparts to this patent are pending in a number of foreign jurisdictions, including Europe. We also have three other U.S. patents directed to condensation aerosol compositions for delivery of loxapine, kits containing devices for forming such compositions and methods of administering such compositions.

AZ-001 (Staccato prochlorperazine)

One of our issued U.S. patents covers compositions for delivery of a condensation aerosol comprising prochlorperazine and covers the process for producing such condensation aerosol using the Staccato system technology. This patent will not expire until 2022. Counterparts to this patent are pending in a number of foreign jurisdictions, including Europe. We also have three other U.S. patents directed to condensation aerosol compositions for delivery of prochlorperazine, kits containing devices for forming such compositions, and methods of administering such compositions.

AZ-002 (Staccato alprazolam)

One of our issued U.S. patents covers compositions for delivery of a condensation aerosol comprising alprazolam and covers the process for producing such condensation aerosol using the Staccato system technology. This patent will not expire until 2022. Counterparts to this patent are pending in a number of foreign jurisdictions, including Europe. We also have three other U.S. patents directed to condensation aerosol compositions for delivery of alprazolam, kits containing devices for forming such compositions, and methods of administering such compositions.

AZ-003 (Staccato fentanyl)

One of our issued U.S. patents covers compositions for delivery of a condensation aerosol comprising fentanyl and covers the process for producing such condensation aerosol using the Staccato system technology. This patent will not expire until 2022. Counterparts to this patent are pending in a number of foreign jurisdictions, including Europe. We also have three other U.S. patents directed to condensation aerosol compositions for delivery of fentanyl, kits containing devices for forming such compositions, and methods of administering such compositions.

AZ-007 (Staccato zaleplon)

One of our issued U.S. patents covers compositions for delivery of a condensation aerosol comprising zaleplon and covers the process for producing such condensation aerosol using the Staccato system technology. This patent will not expire until 2022. Counterparts to this patent are pending in a number of foreign jurisdictions, including Europe. We also have three other U.S. patents directed to condensation aerosol compositions for delivery of zaleplon, kits containing devices for forming such compositions, and methods of administering such compositions.

Competition

The pharmaceutical and biotechnology industries are intensely competitive. Many pharmaceutical companies, biotechnology companies, public and private universities, government agencies and research organizations are actively engaged in research and development of products targeting the same markets as our product candidates. Many of these organizations have substantially greater financial, research, drug development, manufacturing and marketing resources than we have. Large pharmaceutical companies in particular have extensive experience in clinical testing and obtaining regulatory approvals for drugs. Our ability to compete successfully will depend largely on our ability to:


	•	develop products that are superior to other products in the market;


	•	attract and retain qualified scientific, product development and commercial personnel;

	•	obtain patent and/or other proprietary protection covering our future products and technologies;

	•	obtain required regulatory approvals; and

	•	successfully collaborate with pharmaceutical and biotechnology companies in the development and commercialization of new products.

We expect any future products we develop to compete on the basis of, among other things, product efficacy and safety, time to market, price, extent of adverse side effects experienced and convenience of treatment procedures. One or more of our competitors may develop products based upon the principles underlying our proprietary technologies earlier than we do, obtain approvals for such products from the FDA more rapidly than we do or develop alternative products or therapies that are safer, more effective and/or more cost effective than any future products developed by us. In addition, our ability to compete may be affected if insurers and other third-party payors encourage the use of generic products through other routes of administration, making our pulmonary delivery products less attractive from a cost perspective.

Any future products developed by us would compete with a number of alternative drugs and therapies, including the following:


	•	AZ-004 would compete with the injectable form of loxapine (Loxitane^®) and other antipsychotic drugs, such as Zyprexa^® Geodon^® and Abilify^®;

	•	AZ-001 and AZ-104 would compete with available triptan drugs, such as Imitrex^®, Zomig^® and Maxalt^®, and IV prochlorperazine;

	•	AZ-002 would compete with the oral tablet form of alprazolam and other benzodiazepines and antidepressant drugs, such as Klonopin^®, Paxil^®, Prozac^® and Effexor^®;

	•	AZ-003 would compete with injectable and other forms of fentanyl and various generic oxycodone, hydrocodone and morphine products; and

	•	AZ-007 would compete with non-benzodiazepine GABA-A receptor agonists, which include Ambien^® (immediate release and controlled-release tablets), Sonata^®, and Lunesta^®.

Many of these existing drugs have substantial current sales and long histories of effective and safe use. As patent protection expires for these drugs, we will also compete with their generic versions. In addition to currently marketed drugs and their generic versions, we believe there are a number of drug candidates in clinical trials that, if approved in the future, would compete with any future products we may develop.

Employees

As of March 1, 2008, we had 144 full time employees, 27 of whom held Ph.D. or M.D. degrees and 110 of whom were engaged in full time research and development activities. We plan to continue to expand our product candidate development programs and hire additional staff to facilitate this growth. We continue to search for qualified individuals with interdisciplinary training to address the various aspects and applications of our development candidates and our technologies. None of our employees is represented by a labor union, and we consider our employee relations to be good.

Corporate Information

We were incorporated in the state of Delaware on December 19, 2000 as FaxMed, Inc. In June 2001, we changed our name to Alexza Corporation and in December 2001 we became Alexza Molecular Delivery Corporation. In July 2005, we changed our name to Alexza Pharmaceuticals, Inc.

Available Information

Our website address is www.alexza.com; however, information found on, or that can be accessed through, our website is not incorporated by reference into this Annual Report. We file electronically with the SEC our Annual Report, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. We make available free of charge on or through our website copies of these reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov. You may also read and copy any of our materials filed with the SEC at the SEC’s Public References Room at 100 F Street, NW, Washington, DC 20549. Information regarding the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.


Item 1A.	*Risk Factors*

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this Annual Report, before deciding whether to invest in shares of our common stock. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of operations. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Relating to Our Business

We have a history of net losses. We expect to continue to incur substantial and increasing net losses for the foreseeable future, and we may never achieve or maintain profitability.

We are not profitable and have incurred significant net losses in each year since our inception, including net losses of $45.1 million, $41.8 million, and $32.4 million for the years ended December 31, 2007, 2006 and 2005, respectively. As of December 31, 2007, we had a deficit accumulated during development stage of $164.1 million. We expect our expenses to increase as we expand our product candidate and manufacturing development programs and add the necessary infrastructure to support operating as a public company. As a result, we expect to incur substantial and increasing net losses and negative cash flow for the foreseeable future. These losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity (deficit) and working capital.

Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability. Currently, we have no products approved for commercial sale, and to date we have not generated any product revenue. We have financed our operations primarily through the sale of equity securities, capital lease and equipment financing and government grants. The size of our future net losses will depend, in part, on the rate of growth of our expenses and the rate of growth, if any, of our revenues. Revenues from strategic partnerships are uncertain because we may not enter into any additional strategic partnerships, and we do not expect any revenue in 2008 from our partnership with Endo. If we are unable to develop and commercialize one or more of our product candidates or if sales revenue from any product candidate that receives marketing approval is insufficient, we will not achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability.

We are a development stage company. Our success depends substantially on our lead product candidates. If we do not develop commercially successful products, we may be forced to cease operations.

You must evaluate us in light of the uncertainties and complexities affecting a development stage pharmaceutical company. We have not completed Phase 3 clinical trials for any of our product candidates. Each of our product candidates is at an early stage of development and will be unsuccessful if it:


	•	does not demonstrate acceptable safety and efficacy in preclinical studies and clinical trials or otherwise does not meet applicable regulatory standards for approval;

	•	does not offer therapeutic or other improvements over existing or future drugs used to treat the same or similar conditions;

	•	is not capable of being produced in commercial quantities at an acceptable cost, or at all; or

	•	is not accepted by patients, the medical community or third party payors.

Our ability to generate product revenue in the future is dependent on the successful development and commercialization of our product candidates. We have not proven our ability to develop and commercialize products. Problems frequently encountered in connection with the development and utilization of new and

unproven technologies and the competitive environment in which we operate might limit our ability to develop commercially successful products. We do not expect any of our current product candidates to be commercially available before 2011, if at all. If we are unable to make our product candidates commercially available, we will not generate product revenues, and we will not be successful.

We will need substantial additional capital in the future. If additional capital is not available, we will have to delay, reduce or cease operations.

We will need to raise additional capital to fund our operations, to develop our product candidates and to develop our manufacturing capabilities. Our future capital requirements will be substantial and will depend on many factors including:


	•	the scope, rate of progress, results and costs of our preclinical studies, clinical trials and other research and development activities, and our manufacturing development and commercial manufacturing activities;

	•	the amount and timing of payments from Symphony Allegro related to the development of Staccato alprazolam and Staccato loxapine;

	•	the amount and timing of any payments to Symphony Allegro related to the repurchase of rights to Staccato alprazolam and Staccato loxapine;

	•	the amount and timing of any milestone and royalty payments from Endo related to the development and commercialization of Staccato fentanyl;

	•	the cost, timing and outcomes of regulatory proceedings;

	•	the cost and timing of developing sales and marketing capabilities;

	•	the cost and timing of developing sales and marketing capabilities prior to receipt of any regulatory approval of our product candidates;

	•	the cost and timing of developing manufacturing capacity;

	•	revenues received from any future products;

	•	payments received under any future strategic partnerships;

	•	the filing, prosecution and enforcement of patent claims;

	•	the costs associated with building out and moving to our new facilities in 2007 and 2008; and

	•	the costs associated with commercializing our product candidates, if they receive regulatory approval.

We anticipate that existing cash, cash equivalents and marketable securities, along with interest earned thereon, funding available under our equipment financing arrangements, expected payments from Symphony Allegro, expected proceeds from stock option exercises and purchases under our Employee Stock Purchase Plan, will enable us to maintain our currently planned operations through the middle of 2009. Changing circumstances may cause us to consume capital significantly faster than we currently anticipate. We may be unable to raise sufficient additional capital on terms favorable to us, or at all. If we fail to raise sufficient funds, we will have to delay development programs or reduce or cease operations, or we may be required to enter into a strategic partnership at an earlier stage of development than currently anticipated. Our estimates of future capital use are uncertain, and changes in our development plans, payments received from Symphony Allegro, partnering activities, regulatory requirements and other developments may increase our rate of spending and decrease the amount of time our available resources will fund our operations.

We may never be able to generate a sufficient amount of product revenue to cover our expenses. Until we do, we expect to finance our future cash needs through public or private equity offerings, debt financings, strategic partnerships or licensing arrangements, as well as interest income earned on cash and marketable securities balances and proceeds from stock option exercises and purchases under our Employee Stock Purchase Plan. Any financing transaction may contain unfavorable terms. If we raise additional funds by issuing equity securities, our stockholders’ equity will be diluted. If we raise additional funds through strategic partnerships, we may be required

to relinquish rights to our product candidates or technologies, or to grant licenses on terms that are not favorable to us.

Unless our preclinical studies demonstrate the safety of our product candidates, we will not be able to commercialize our product candidates.

To obtain regulatory approval to market and sell any of our product candidates, we must satisfy the FDA and other regulatory authorities abroad, through extensive preclinical studies, that our product candidates are safe. Our Staccato system creates condensation aerosols from drug compounds, and there currently are no approved products that use a similar method of drug delivery. Companies developing other inhalation products have not defined or successfully completed the types of preclinical studies we believe will be required for submission to regulatory authorities as we seek approval to conduct our clinical trials. We may not conduct the types of preclinical testing eventually required by regulatory authorities, or the preclinical tests may indicate that our product candidates are not safe for use in humans. Preclinical testing is expensive, can take many years and have an uncertain outcome. In addition, success in initial preclinical testing does not ensure that later preclinical testing will be successful. We may experience numerous unforeseen events during, or as a result of, the preclinical testing process, which could delay or prevent our ability to develop or commercialize our product candidates, including:


	•	our preclinical testing may produce inconclusive or negative safety results, which may require us to conduct additional preclinical testing or to abandon product candidates that we believed to be promising;

	•	our product candidates may have unfavorable pharmacology, toxicology or carcinogenicity; and

	•	our product candidates may cause undesirable side effects.

Any such events would increase our costs and could delay or prevent our ability to commercialize our product candidates, which could adversely impact our business, financial condition and results of operations.

Preclinical studies indicated possible adverse impact of pulmonary delivery of AZ-001.

In our daily dosing animal toxicology studies of prochlorperazine, the active pharmaceutical ingredient, or API, in AZ-001, we detected changes to, and increases of, the cells in the upper airway of the test animals. The terms for these changes and increases are “squamous metaplasia” and “hyperplasia,” respectively. We also observed lung inflammation in some animals. These findings occurred in daily dosing studies at doses that were proportionately substantially greater than any dose we expect to continue to develop or commercialize. In subsequent toxicology studies of AZ-001 involving intermittent dosing consistent with its intended use, we detected lower incidence and severity of the changes to, and increases of, the cells in the upper airway of the test animals compared to the daily dosing results. We did not observe any lung inflammation with intermittent dosing. These findings suggest that the delivery of the pure drug compound of AZ-001 at the proportionately higher doses used in daily dosing toxicology studies may cause adverse consequences if we were to administer prochlorperazine chronically for prolonged periods of time. If we observe these findings in our clinical trials of AZ-001, it could prevent further development or commercialization of AZ-001.

Failure or delay in commencing or completing clinical trials for our product candidates could harm our business.

To date, we have not completed all the clinical trials necessary to support an application with the FDA for approval to market any of our product candidates. Current and planned clinical trials may be delayed or terminated as a result of many factors, including:


	•	delays or failure in reaching agreement on acceptable clinical trial contracts or clinical trial protocols with prospective sites;

	•	regulators or institutional review boards may not authorize us to commence a clinical trial;

	•	regulators or institutional review boards may suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or concerns about patient safety;


	•	we may suspend or terminate our clinical trials if we believe that they expose the participating patients to unacceptable health risks;

	•	we may experience slower than expected patient enrollment or lack of a sufficient number of patients that meet the enrollment criteria for our clinical trials;

	•	patients may not complete clinical trials due to safety issues, side effects, dissatisfaction with the product candidate, or other reasons;

	•	we may have difficulty in maintaining contact with patients after treatment, preventing us from collecting the data required by our study protocol;

	•	product candidates may demonstrate a lack of efficacy during clinical trials;

	•	we may experience governmental or regulatory delays, failure to obtain regulatory approval or changes in regulatory requirements, policy and guidelines; and

	•	we may experience delays in our ability to manufacture clinical trial materials in a timely manner as a result of ongoing process and design enhancements to our Staccato system and the move to a new facility in late 2007 and early 2008.

Any delay in commencing or completing clinical trials for our product candidates would delay commercialization of our product candidates and harm our business, financial condition and results of operations. It is possible that none of our product candidates will successfully complete clinical trials or receive regulatory approval, which would severely harm our business, financial condition and results of operations.

Continuing development of our single dose version device may delay regulatory submissions and marketing approval for AZ-004

Our clinical studies to date for our AZ-004, AZ-001, AZ-104, AZ-002 and AZ-007 product candidates have been completed using a version of our single dose Staccato device we refer to as the chemical single dose, or CSD, device. We are developing a version of the CSD which is intended to cost less to manufacture than the current version of CSD. We refer to the newer version of this single dose device as the commercial production device, or CPD, version. The CPD incorporates the same basic chemical heat package and electronics as the CSD. We plan to conduct a bioequivalence study in normal volunteers in the second half of 2008 using the CSD and the CPD versions of the device to determine if the drug dose dispensed by the two devices is bioequivalent. If the results of the planned bioequivalence study and the available analytical data do not support the bioequivalency or if the FDA or foreign regulatory authorities determine the CPD is unacceptable for any other reason, we may be required to conduct an additional Phase 3 clinical trial for AZ-004 with the CPD version of the device. Conducting an additional Phase 3 clinical trial would delay the filing of an NDA which would also delay any potential marketing approval in the United States. We may also decide to file an NDA for AZ-004 using the current version of the CSD, which we anticipate would cost more to produce and may limit market adoption of the product if and when it is approved.

If our product candidates do not meet safety and efficacy endpoints in clinical trials, they will not receive regulatory approval, and we will be unable to market them.

Our product candidates are in preclinical and clinical development and have not received regulatory approval from the FDA or any foreign regulatory authority. The clinical development and regulatory approval process is extremely expensive and takes many years. The timing of any approval cannot be accurately predicted. If we fail to obtain regulatory approval for our current or future product candidates, we will be unable to market and sell them and therefore may never be profitable.

As part of the regulatory process, we must conduct clinical trials for each product candidate to demonstrate safety and efficacy to the satisfaction of the FDA and other regulatory authorities abroad. The number and design of clinical trials that will be required varies depending on the product candidate, the condition being evaluated, the trial results and regulations applicable to any particular product candidate.

Prior clinical trial program designs and results are not necessarily predictive of future clinical trial designs or results. Initial results may not be confirmed upon full analysis of the detailed results of a trial. Product candidates in later stage clinical trials may fail to show the desired safety and efficacy despite having progressed through initial clinical trials with acceptable endpoints. Prior clinical trial program designs and results are not necessarily predictive of future clinical trial designs or results.

If our product candidates fail to show a clinically significant benefit compared to placebo, they will not be approved for marketing.

Device failure rates higher than we anticipate may result in clinical trials that do not meet their specific efficacy endpoints. Device failures or improper device use by patients may impact the results of future trials. The design of our clinical trials is based on many assumptions about the expected effect of our product candidates, and if those assumptions prove incorrect, the clinical trials may not produce statistically significant results. In addition, because we are developing AZ-002 for a novel indication, and may develop future product candidates for other novel indications, and because our Staccato system is not similar to other approved drug delivery methods, there is no clear precedent for the application of detailed regulatory requirements to our product candidates. We cannot assure you that the design of, or data collected from, the clinical trials of our product candidates will be sufficient to support the FDA and foreign regulatory approvals.

Regulatory authorities may not approve our product candidates even if they meet safety and efficacy endpoints in clinical trials.

The FDA and other foreign regulatory agencies can delay, limit or deny marketing approval for many reasons, including:


	•	a product candidate may not be considered safe or effective;

	•	the manufacturing processes or facilities we have selected may not meet the applicable requirements; and

	•	changes in their approval policies or adoption of new regulations may require additional work on our part.

Any delay in, or failure to receive or maintain, approval for any of our product candidates could prevent us from ever generating meaningful revenues or achieving profitability.

Our product candidates may not be approved even if they achieve their endpoints in clinical trials. Regulatory agencies, including the FDA, or their advisors may disagree with our trial design and our interpretations of data from preclinical studies and clinical trials. Regulatory agencies may change requirements for approval even after a clinical trial design has been approved. Regulatory agencies also may approve a product candidate for fewer or more limited indications than requested or may grant approval subject to the performance of post-marketing studies. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates.

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

Even if we receive regulatory approval to market a particular product candidate, the FDA or a foreign regulatory authority could condition approval on conducting additional costly post-approval studies or could limit the scope of our approved labeling. Moreover, the product may later cause adverse effects that limit or prevent its widespread use, force us to withdraw it from the market or impede or delay our ability to obtain regulatory approvals in additional countries. In addition, we will continue to be subject to FDA review and periodic inspections to ensure adherence to applicable regulations. After receiving marketing approval, the FDA imposes extensive regulatory requirements on the manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion and record keeping related to the product.

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


	•	restrictions on the products, suppliers or manufacturing processes;

	•	warning letters or untitled letters;

	•	civil or criminal penalties or fines;

	•	injunctions;

	•	product seizures, detentions or import bans;

	•	voluntary or mandatory product recalls and publicity requirements;

	•	suspension or withdrawal of regulatory approvals;

	•	total or partial suspension of production; and

	•	refusal to approve pending applications for marketing approval of new drugs or supplements to approved applications.

If we do not produce our devices cost effectively, we will never be profitable.

Our Staccato system based product candidates contain electronic and other components in addition to the active pharmaceutical ingredients. As a result of the cost of developing and producing these components, the cost to produce our product candidates, and any approved products, will likely be higher per dose than the cost to produce intravenous or oral tablet products. This increased cost of goods may prevent us from ever selling any products at a profit. In addition, we are developing single dose and multiple dose versions of our Staccato system. Developing multiple versions of our Staccato system may reduce or eliminate our ability to achieve manufacturing economies of scale. In addition, developing multiple versions of our Staccato system reduces our ability to focus development resources on each version, potentially reducing our ability to effectively develop any particular version. We expect to continue to modify each of our product candidates throughout their clinical development to improve their performance, dependability, manufacturability and quality. Some of these modifications may require additional regulatory review and approval, which may delay or prevent us from conducting clinical trials. The development and production of our technology entail a number of technical challenges, including achieving adequate dependability, that may be expensive or time consuming to solve. Any delay in or failure to develop and manufacture any future products in a cost effective way could prevent us from generating any meaningful revenues and prevent us from becoming profitable.

We rely on third parties to conduct our preclinical studies and our clinical trials. If these third parties do not perform as contractually required or expected, we may not be able to obtain regulatory approval for our product candidates, or we may be delayed in doing so.

We do not have the ability to conduct preclinical studies or clinical trials independently for our product candidates. We must rely on third parties, such as contract research organizations, medical institutions, academic institutions, clinical investigators and contract laboratories, to conduct our preclinical studies and clinical trials. We are responsible for confirming that our preclinical studies are conducted in accordance with applicable regulations and that each of our clinical trials is conducted in accordance with its general investigational plan and protocol. The FDA requires us to comply with regulations and standards, commonly referred to as good laboratory practices, or GLP, for conducting and recording the results of our preclinical studies and good clinical practices for conducting, monitoring, recording and reporting the results of clinical trials, to assure that data and reported results are accurate and that the clinical trial participants are adequately protected. Our reliance on third parties does not relieve us of these responsibilities. If the third parties conducting our clinical trials do not perform their contractual duties or obligations, do not meet expected deadlines, fail to comply with the FDA’s good clinical practice regulations, do not adhere to our clinical trial protocols or otherwise fail to generate reliable clinical data, we may need to enter into new arrangements with alternative third parties and our clinical trials may be extended, delayed or terminated or

may need to be repeated, and we may not be able to obtain regulatory approval for or commercialize the product candidate being tested in such trials.

Problems with the third parties that manufacture the active pharmaceutical ingredients in our product candidates may delay our clinical trials or subject us to liability.

We do not currently own or operate manufacturing facilities for clinical or commercial production of the API used in any of our product candidates. We have no experience in drug manufacturing, and we lack the resources and the capability to manufacture any of the APIs used in our product candidates, on either a clinical or commercial scale. As a result, we rely on third parties to supply the API used in each of our product candidates. We expect to continue to depend on third parties to supply the API for our lead product candidates and any additional product candidates we develop in the foreseeable future.

An API manufacturer must meet high precision and quality standards for that API to meet regulatory specifications and comply with regulatory requirements. A contract manufacturer is subject to ongoing periodic unannounced inspection by the FDA and corresponding state and foreign authorities to ensure strict compliance with current good manufacturing practice, or cGMP, and other applicable government regulations and corresponding foreign standards. Additionally, a contract manufacturer must pass a pre-approval inspection by the FDA to ensure strict compliance with cGMP prior to the FDA’s approval of any product candidate for marketing. A contract manufacturer’s failure to conform with cGMP could result in the FDA’s refusal to approve or a delay in the FDA’s approval of a product candidate for marketing. We are ultimately responsible for confirming that the APIs used in our product candidates are manufactured in accordance with applicable regulations.

Our third party suppliers may not carry out their contractual obligations or meet our deadlines. In addition, the API they supply to us may not meet our specifications and quality policies and procedures. If we need to find alternative suppliers of the API used in any of our product candidates, we may not be able to contract for such supplies on acceptable terms, if at all. Any such failure to supply or delay caused by such contract manufacturers would have an adverse effect on our ability to continue clinical development of our product candidates or commercialize any future products.

If our third party drug suppliers fail to achieve and maintain high manufacturing standards in compliance with cGMP regulations, we could be subject to certain product liability claims in the event such failure to comply resulted in defective products that caused injury or harm.

If we experience problems with the manufacturers of components of our product candidates, our development programs may be delayed or we may be subject to liability.

We outsource the manufacturing of some of the components of our Staccato system, including the printed circuit boards and the plastic airways, and we will outsource the manufacturing of the chemical heat packages to be used in our commercial single dose device. We have no experience in the manufacturing of components (other than our current chemical heat packages), and we currently lack the resources and the capability to manufacture them, on either a clinical or commercial scale. As a result, we rely on third parties to supply these components. We expect to continue to depend on third parties to supply these components for our current product candidates and any devices based on the Staccato system we develop in the foreseeable future.

The third party suppliers of the components of our Staccato system must meet high precision and quality standards for those components to comply with regulatory requirements. A contract manufacturer is subject to ongoing periodic unannounced inspection by the FDA and corresponding state and foreign authorities to ensure strict compliance with the FDA’s Quality System Regulation, or QSR, which sets forth the FDA’s current good manufacturing practice requirements for medical devices and their components, and other applicable government regulations and corresponding foreign standards. We are ultimately responsible for confirming that the components used in the Staccato system are manufactured in accordance with the QSR or other applicable regulations.

Our third party suppliers may not comply with their contractual obligations or meet our deadlines, or the components they supply to us may not meet our specifications and quality policies and procedures. If we need to find alternative suppliers of the components used in the Staccato system, we may not be able to contract for such

components on acceptable terms, if at all. Any such failure to supply or delay caused by such contract manufacturers would have an adverse affect on our ability to continue clinical development of our product candidates or commercialize any future products.

In addition, the heat packages used in the single dose version of our Staccato system are manufactured using certain energetic, or highly combustible, materials that are used to generate the rapid heating necessary for vaporizing the drug compound while avoiding degradation. Manufacture of products containing these types of materials is regulated by the U.S. government. We currently manufacture the heat packages that are being used in the devices used in our clinical trials. We have entered into a supply agreement with Autoliv. for the manufacture of the heat packages in the commercial design of our single dose version of our Staccato system. If we are unable to manufacture the heat packages used in our ongoing clinical trials or if in the future Autoliv is unable to manufacture the heat packages to our specifications, or does not carry out its contractual obligations to supply our heat packages or to supply them to us, our clinical trials may be delayed, suspended or terminated while we seek additional suitable manufacturers of our heat packages, which may prevent us from commercializing our product candidates that utilize the single dose version of the Staccato system.

If we do not establish additional strategic partnerships, we will have to undertake development and commercialization efforts on our own, which would be costly and delay our ability to commercialize any future products.

A key element of our business strategy is our intent to selectively partner with pharmaceutical, biotechnology and other companies to obtain assistance for the development and potential commercialization of our product candidates. In December, 2006, we entered into such a development relationship with Symphony Allegro and in December 2007, we entered into a license and development agreement with Endo related to AZ-003 (Staccato fentanyl). We intend to enter into additional strategic partnerships with third parties to develop and commercialize our product candidates that are intended for larger markets, and we may enter into strategic partnerships for product candidates that are targeted toward specialty markets. To date, other than Symphony Allegro and Endo, we have not entered into any strategic partnerships for any of our product candidates. We face significant competition in seeking appropriate strategic partners, and these strategic partnerships can be intricate and time consuming to negotiate and document. We may not be able to negotiate strategic partnerships on acceptable terms, or at all. We are unable to predict when, if ever, we will enter into any additional strategic partnerships because of the numerous risks and uncertainties associated with establishing strategic partnerships. If we are unable to negotiate additional strategic partnerships for our product candidates we may be forced to curtail the development of a particular candidate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization, reduce the scope of our sales or marketing activities or undertake development or commercialization activities at our own expense. In addition, we will bear all the risk related to the development of that product candidate. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms, or at all. If we do not have sufficient funds, we will not be able to bring our product candidates to market and generate product revenue.

If we enter into additional strategic partnerships, we may be required to relinquish important rights to and control over the development of our product candidates or otherwise be subject to terms unfavorable to us.

Due to our relationship with Symphony Allegro and Endo we are, and for any additional strategic partnerships with pharmaceutical or biotechnology companies we will be, subject to a number of risks, including:


	•	we may not be able to control the amount and timing of resources that our strategic partners devote to the development or commercialization of product candidates;

	•	strategic partners may delay clinical trials, provide insufficient funding, terminate a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new version of a product candidate for clinical testing;


	•	strategic partners may not pursue further development and commercialization of products resulting from the strategic partnering arrangement or may elect to discontinue research and development programs;

	•	strategic partners may not commit adequate resources to the marketing and distribution of any future products, limiting our potential revenues from these products;

	•	disputes may arise between us and our strategic partners that result in the delay or termination of the research, development or commercialization of our product candidates or that result in costly litigation or arbitration that diverts management’s attention and consumes resources;

	•	strategic partners may experience financial difficulties;

	•	strategic partners may not properly maintain or defend our intellectual property rights or may use our proprietary information in a manner that could jeopardize or invalidate our proprietary information or expose us to potential litigation;

	•	business combinations or significant changes in a strategic partner’s business strategy may also adversely affect a strategic partner’s willingness or ability to complete its obligations under any arrangement;

	•	strategic partners could independently move forward with a competing product candidate developed either independently or in collaboration with others, including our competitors; and

	•	strategic partners could terminate the arrangement or allow it to expire, which would delay the development and may increase the cost of developing our product candidates.

We have exclusively licensed certain intellectual property rights to Staccato alprazolam and Staccato loxapine in connection with our Symphony Allegro arrangement and will not receive material future royalties or revenues with respect to this intellectual property unless we exercise an option to repurchase the rights to the programs in the future through the acquisition of Symphony Allegro. We may not obtain sufficient clinical data in order to determine whether we should exercise this option prior to the expiration of the development period, and even if we decide to exercise the option, we may not have the financial resources to exercise it in a timely manner.

In December 2006, we entered into a transaction providing for the financing of additional clinical and nonclinical development of Staccato alprazolam, our AZ-002 program, and Staccato loxapine, our AZ-004 and AZ-104 programs. Pursuant to the agreements, Symphony Capital LLC and its investors have invested $50 million to form Symphony Allegro, to fund additional clinical and nonclinical development of Staccato alprazolam and Staccato loxapine. We have exclusively licensed to Symphony Allegro certain intellectual property rights related to Staccato alprazolam and Staccato loxapine. We have retained manufacturing rights to these two product candidates. As part of the arrangement, we received an option granting us the exclusive right, but not the obligation, to acquire the licensed programs at specified points in time at specified prices during the term of the development period through the acquisition of Symphony Allegro. The development programs under the arrangement are jointly managed by Symphony Allegro and us, and there can be no assurance that we will agree on various decisions that will enable us to successfully develop the potential products, or even if we are in agreement on the development plans, that the development efforts will result in sufficient clinical data to make a fully informed decision with respect to the exercise of our option. If we do not exercise our purchase option by December 1, 2010, then Symphony Allegro will retain its exclusive license to develop and commercialize Staccato alprazolam and Staccato loxapine for all indications, and we will manufacture and sell Staccato alprazolam and Staccato loxapine to Symphony Allegro or its sublicensee for those purposes.

If we elect to exercise the purchase option, we will be required to make a payment estimated to be $104 million in the fourth quarter of 2009, which at our election may be paid partially in shares of our common stock. As a result, in order to exercise the option, we will be required to make a substantial payment of cash and possibly issue a substantial number of shares of our common stock. We do not currently have the resources to exercise the option, and we may be required to enter into a financing arrangement or license arrangement with one or more third parties, or some combination of these, in order to exercise the option, even if we paid a portion of the purchase price with our common stock. There can be no assurance that any financing or licensing arrangement will be available or even if

available, that the terms would be favorable to us and our stockholders. In addition, the exercise of the purchase option may require us to record a significant charge to earnings and may adversely impact future operating results.

If we fail to gain market acceptance among physicians, patients, third-party payors and the medical community, we will not become profitable.

The Staccato system is a fundamentally new method of drug delivery. Any future product based on our Staccato system may not gain market acceptance among physicians, patients, third-party payors and the medical community. If these products do not achieve an adequate level of acceptance, we will not generate sufficient product revenues to become profitable. The degree of market acceptance of any of our product candidates, if approved for commercial sale, will depend on a number of factors, including:


	•	demonstration of efficacy and safety in clinical trials;

	•	the existence, prevalence and severity of any side effects;

	•	potential or perceived advantages or disadvantages compared to alternative treatments;

	•	perceptions about the relationship or similarity between our product candidates and the parent drug compound upon which each product candidate is based;

	•	the timing of market entry relative to competitive treatments;

	•	the ability to offer any future products for sale at competitive prices;

	•	relative convenience, product dependability and ease of administration;

	•	the strength of marketing and distribution support;

	•	the sufficiency of coverage and reimbursement of our product candidates by governmental and other third-party payors; and

	•	the product labeling or product insert required by the FDA or regulatory authorities in other countries.

Our pipeline may be limited by the number of drug compounds suitable for use with the Staccato system.

The current versions of the Staccato system cannot deliver large molecule drugs, such as peptides and proteins. In addition, the physical size of the metal substrates in the single dose and multiple dose versions of the Staccato system limits their use to drugs that require dose amounts less than 10 to 15 milligrams and 100 to 200 micrograms, respectively. Further, approximately 200 of the 400 small molecule compounds we have screened for initial vaporization feasibility did not form drug aerosols with the 97% purity we use as an internal standard for further development. There are also many drug compounds that are covered by composition of matter patents that prevent us from developing the compound in the Staccato system without a license from the patent owner, which may not be available on acceptable terms, if at all. If we are not able to identify additional drug compounds that can be developed with the Staccato system, we may not develop enough products to develop a sustainable business.

AZ-001 and other product candidates that we may develop may require expensive carcinogenicity tests.

The API in AZ-001, prochlorperazine, was approved by the FDA in 1956 for the treatment of severe nausea and vomiting. At that time, the FDA did not require the carcinogenicity testing that is now generally required for marketing approval. It is unclear whether we will be required to perform such testing prior to filing our application for marketing approval of AZ-001 or whether we will be allowed to perform such testing after we file an application. Such carcinogenicity testing will be expensive and require significant additional resources to complete and may delay approval to market AZ-001. We may encounter similar requirements with other product candidates incorporating drugs that have not undergone carcinogenicity testing. Any carcinogenicity testing we are required to complete will increase the costs to develop a particular product candidate and may delay or halt the development of such product candidate.

If some or all of our patents expire, are invalidated or are unenforceable, or if some or all of our patent applications do not yield issued patents or yield patents with narrow claims, competitors may develop competing products using our or similar intellectual property and our business will suffer.

Our success will depend in part on our ability to obtain and maintain patent and trade secret protection for our technologies and product candidates both in the United States and other countries. We do not know whether any patents will issue from any of our pending or future patent applications. In addition, a third party may successfully circumvent our patents. Our rights under any issued patents may not provide us with sufficient protection against competitive products or otherwise cover commercially valuable products or processes.

The degree of protection for our proprietary technologies and product candidates is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:


	•	we might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;

	•	we might not have been the first to file patent applications for these inventions;

	•	others may independently develop similar or alternative technologies or duplicate any of our technologies;

	•	it is possible that none of our pending patent applications will result in issued patents;

	•	the claims of our issued patents may be narrower than as filed and not sufficiently broad to prevent third parties from circumventing them;

	•	we may not develop additional proprietary technologies or drug candidates that are patentable;

	•	our patent applications or patents may be subject to interference, opposition or similar administrative proceedings;

	•	any patents issued to us or our potential strategic partners may not provide a basis for commercially viable products or may be challenged by third parties in the course of litigation or administrative proceedings such as reexaminations or interferences; and

	•	the patents of others may have an adverse effect on our ability to do business.

Even if valid and enforceable patents cover our product candidates and technologies, the patents will provide protection only for a limited amount of time.

Our and our potential strategic partners’ ability to obtain patents is uncertain because, to date, some legal principles remain unresolved, there has not been a consistent policy regarding the breadth or interpretation of claims allowed in patents in the United States, and the specific content of patents and patent applications that are necessary to support and interpret patent claims is highly uncertain due to the complex nature of the relevant legal, scientific and factual issues. Furthermore, the policies governing pharmaceutical and medical device patents outside the United States may be even more uncertain. Changes in either patent laws or interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection.

Even if patents are issued regarding our product candidates or methods of using them, those patents can be challenged by our competitors who can argue that our patents are invalid and/or unenforceable. Third parties may challenge our rights to, or the scope or validity of, our patents. Patents also may not protect our product candidates if competitors devise ways of making these or similar product candidates without legally infringing our patents. The Federal Food, Drug and Cosmetic Act and the FDA regulations and policies provide incentives to manufacturers to challenge patent validity or create modified, non-infringing versions of a drug or device in order to facilitate the approval of generic substitutes. These same types of incentives encourage manufacturers to submit new drug applications that rely on literature and clinical data not prepared for or by the drug sponsor.

We also rely on trade secrets to protect our technology, especially where we do not believe that patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. The employees, consultants,

contractors, outside scientific collaborators and other advisors of our company and our strategic partners may unintentionally or willfully disclose our confidential information to competitors. Enforcing a claim that a third party illegally obtained and is using our trade secrets is expensive and time consuming and the outcome is unpredictable. Failure to protect or maintain trade secret protection could adversely affect our competitive business position.

Our research and development collaborators may have rights to publish data and other information in which we have rights. In addition, we sometimes engage individuals or entities to conduct research that may be relevant to our business. The ability of these individuals or entities to publish or otherwise publicly disclose data and other information generated during the course of their research is subject to certain contractual limitations. These contractual provisions may be insufficient or inadequate to protect our trade secrets and may impair our patent rights. If we do not apply for patent protection prior to such publication or if we cannot otherwise maintain the confidentiality of our technology and other confidential information, then our ability to receive patent protection or protect our proprietary information may be jeopardized.

Litigation or other proceedings or third party claims of intellectual property infringement could require us to spend time and money and could shut down some of our operations.

Our commercial success depends in part on not infringing patents and proprietary rights of third parties. Others have filed, and in the future are likely to file, patent applications covering products that are similar to our product candidates, as well as methods of making or using similar or identical products. If these patent applications result in issued patents and we wish to use the claimed technology, we would need to obtain a license from the third party. We may not be able to obtain these licenses at a reasonable cost, if at all.

In particular, we are aware of at least one pending U.S. patent application and foreign counterparts filed by a biopharmaceutical company relating to the use of drugs, including alprazolam which is the API in AZ-002, for treating disorders of the central nervous system by pulmonary delivery. In addition, we are aware of another pending U.S. patent application and foreign counterparts, filed by another biopharmaceutical company, that claims a method of making a vapor medicament under specific manufacturing conditions. We do not currently have a license to these patent applications. If these patent applications were to result in issued patents as originally filed, the relevant patent holders at that time may assert that we require licenses.

If these patent applications issue as originally filed, we believe we have valid defenses against any assertions that our product candidates are infringing. We do not know whether a court would determine that our defenses are valid. If we decide to pursue a license to one or more of these patent applications, or patents issued therefrom, we do not know that we will be able to obtain such a license on commercially reasonable terms, or at all.

In addition, administrative proceedings, such as interferences and reexaminations before the U.S. Patent and Trademark Office, could limit the scope of our patent rights. We may incur substantial costs and diversion of management and technical personnel as a result of our involvement in such proceedings. In particular, our patents and patent applications may be subject to interferences in which the priority of invention may be awarded to a third party. We do not know whether our patents and patent applications will be entitled to priority over patents or patent applications held by such a third party. Our issued patents may also be subject to reexamination proceedings. We do not know whether our patents would survive reexamination in light of new questions of patentability that may be raised following their issuance.

Third parties may assert that we are employing their proprietary technology or their proprietary products without authorization. In addition, third parties may already have or may obtain patents in the future and claim that use of our technologies or our products infringes these patents. We could incur substantial costs and diversion of management and technical personnel in defending our self against any of these claims. Furthermore, parties making claims against us may be able to obtain injunctive or other equitable relief, which could effectively block our ability to further develop, commercialize and sell any future products and could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties. We may not be able to obtain these licenses at a reasonable cost, if at all. In that event, we could encounter delays in product introductions while we attempt to develop alternative methods or products. In the event we cannot develop alternative methods or products, we may be effectively

blocked from developing, commercializing or selling any future products. Defense of any lawsuit or failure to obtain any of these licenses would be expensive and could prevent us from commercializing any future products.

We review from time to time publicly available information concerning the technological development efforts of other companies in our industry. If we determine that these efforts violate our intellectual property or other rights, we intend to take appropriate action, which could include litigation. Any action we take could result in substantial costs and diversion of management and technical personnel in enforcing our patents or other intellectual property rights against others. Furthermore, the outcome of any action we take to protect our rights may not be resolved in our favor.

Competition in the pharmaceutical industry is intense. If our competitors are able to develop and market products that are more effective, safer or less costly than any future products that we may develop, our commercial opportunity will be reduced or eliminated.

We face competition from established as well as emerging pharmaceutical and biotechnology companies, as well as from academic institutions, government agencies and private and public research institutions. Our commercial opportunity will be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer side effects or are less expensive than any future products that we may develop and commercialize. In addition, significant delays in the development of our product candidates could allow our competitors to bring products to market before us and impair our ability to commercialize our product candidates.

We anticipate that, if approved, AZ-004 would compete with the available intramuscular, or IM, injectable form and oral forms of loxapine for the treatment of agitation, and other forms of available antipsychotic drugs.

We anticipate that, if approved, AZ-001 and AZ-104 would compete with currently marketed triptan drugs and with other migraine headache treatments, including intravenous, or IV, delivery of prochlorperazine, the API in AZ-001. In addition, we are aware of at least 14 product candidates for the treatment of migraines, including triptan products and a sumatriptan/naproxen combination product.

We anticipate that, if approved, AZ-002 would compete with the oral tablet form of alprazolam and several other approved anti-depressant drugs. In addition, we are aware of two product candidates in early stage clinical development for the treatment of acute panic attacks.

We anticipate that, if approved, AZ-003 would compete with some of the available forms of fentanyl, including injectable fentanyl, oral transmucosal fentanyl formulations and ionophoretic transdermal delivery of fentanyl. We are also aware of at least 20 products in Phase 2 and Phase 3 clinical trial development for acute pain, five of which are fentanyl products. Two of these fentanyl products are inhaled versions. In addition, if approved, AZ-003 would compete with various generic opioid drugs, such as oxycodone, hydrocodone and morphine, or combination products including one or more of such drugs.

We anticipate that, if approved, AZ-007 would compete with non-benzodiazepine GABA-A receptor agonists, which include Ambien^® (immediate release and controlled-release tablets), Sonata^®, and Lunesta^®.

Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Established pharmaceutical companies may invest heavily to discover quickly and develop novel compounds or drug delivery technology that could make our product candidates obsolete. Smaller or early stage companies may also prove to be significant competitors, particularly through strategic partnerships with large and established companies. In addition, these third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies and technology licenses complementary to our programs or advantageous to our business. Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA approval or discovering, developing and commercializing products before we do. If we are not able to compete effectively against our current and future competitors, our business will not grow and our financial condition will suffer.

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, we may be unable to generate significant product revenue.

We do not have a sales and marketing organization and have no experience in the sales, marketing and distribution of pharmaceutical products. There are risks involved with establishing our own sales and marketing capabilities, as well as entering into arrangements with third parties to perform these services. Developing an internal sales force is expensive and time consuming and could delay any product launch. On the other hand, if we enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenues or the profitability of these product revenues are likely to be lower than if we market and sell any products that we develop ourselves.

We may establish our own specialty sales force and/or engage pharmaceutical or other healthcare companies with existing sales and marketing organization and distribution systems to sell, market and distribute any future products. We may not be able to establish a specialty sales force or establish sales and distribution relationships on acceptable terms. Factors that may inhibit our efforts to commercialize any future products without strategic partners or licensees include:


	•	our inability to recruit and retain adequate numbers of effective sales and marketing personnel;

	•	the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe any future products;

	•	the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and

	•	unforeseen costs and expenses associated with creating an independent sales and marketing organization.

Because the establishment of sales and marketing capabilities depends on the progress towards commercialization of our product candidates and because of the numerous risks and uncertainties involved with establishing our own sales and marketing capabilities, we are unable to predict when, if ever, we will establish our own sales and marketing capabilities. However, we do not anticipate establishing sales and marketing capabilities until at least 2010. If we are not able to partner with a third party and are unsuccessful in recruiting sales and marketing personnel or in building a sales and marketing infrastructure, we will have difficulty commercializing our product candidates, which would adversely affect our business and financial condition.

If we lose our key personnel or are unable to attract and retain additional personnel, we may be unable to develop or commercialize our product candidates.

We are highly dependent on our President and Chief Executive Officer, Thomas B. King, the loss of whose services might adversely impact the achievement of our objectives. In addition, recruiting and retaining qualified clinical, scientific and engineering personnel to manage clinical trials of our product candidates and to perform future research and development work will be critical to our success. There is currently a shortage of skilled executives in our industry, which is likely to continue. As a result, competition for skilled personnel is intense and the turnover rate can be high. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced management and clinical, scientific and engineering personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. In addition, we do not have employment agreements with any of our employees, and they could leave our employment at will. We have change of control agreements with our executive officers and vice presidents that provide for certain benefits upon termination or a change in role or responsibility in connection with a change of control of our company. We do not maintain life insurance policies on any employees. Failure to attract and retain personnel would prevent us from developing and commercializing our product candidates.

We may encounter difficulties in managing our growth, which could increase our losses.

We expect to experience substantial growth in our business over the next few years. We expect to substantially increase our number of employees to service our internal programs and planned strategic partnering arrangements. This growth will place a strain on our human and capital resources. If we are unable to manage this growth

effectively, our losses could increase. Our need to manage our operations and growth effectively requires us to continue to expend funds to improve our operational, financial and management controls, reporting systems and procedures, to attract and retain sufficient numbers of talented employees and to manage our facility requirements. If we are unable to implement improvements to our management information and control systems successfully in an efficient or timely manner, or if we encounter deficiencies in existing systems and controls, then management may receive inadequate information to manage our day to day operations.

If plaintiffs bring product liability lawsuits against us, we may incur substantial liabilities and may be required to limit commercialization of the product candidates that we may develop.

We face an inherent risk of product liability as a result of the clinical testing of our product candidates in clinical trials and will face an even greater risk if we commercialize any products. We may be held liable if any product we develop causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing or sale. Regardless of merit or eventual outcome, liability claims may result in decreased demand for any product candidates or products that we may develop, injury to our reputation, withdrawal of clinical trials, costs to defend litigation, substantial monetary awards to clinical trial participants or patients, loss of revenue and the inability to commercialize any products that we develop. We have product liability insurance that covers our clinical trials up to a $10 million aggregate annual limit. We intend to expand product liability insurance coverage to include the sale of commercial products if we obtain marketing approval for any products that we may develop. However, this insurance may be prohibitively expensive, or may not fully cover our potential liabilities. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or delay the commercialization of our product candidates. If we are sued for any injury caused by any future products, our liability could exceed our total assets.

Our product candidates AZ-002, AZ-003 and AZ-007 contain drug substances which are regulated by the U.S. Drug Enforcement Administration. Failure to comply with applicable regulations could harm our business.

The Controlled Substances Act imposes various registration, recordkeeping and reporting requirements, procurement and manufacturing quotas, labeling and packaging requirements, security controls and a restriction on prescription refills on certain pharmaceutical products. A principal factor in determining the particular requirements, if any, applicable to a product is its actual or potential abuse profile. The U.S. Drug Enforcement Administration, or DEA, regulates chemical compounds as Schedule I, II, III, IV or V substances, with Schedule I substances considered to present the highest risk of substance abuse and Schedule V substances the lowest risk. Alprazolam, the API in AZ-002, is regulated as a Schedule IV substance, fentanyl, the API in AZ-003, is regulated as a Schedule II substance, and zaleplon, the API in AZ-007, is regulated as a Schedule IV substance. Each of these product candidates is subject to DEA regulations relating to manufacture, storage, distribution and physician prescription procedures, and the DEA regulates the amount of the scheduled substance that would be available for clinical trials and commercial distribution. As a Schedule II substance, fentanyl is subject to more stringent controls, including quotas on the amount of product that can be manufactured as well as a prohibition on the refilling of prescriptions without a new prescription from the physician. The DEA periodically inspects facilities for compliance with its rules and regulations. Failure to comply with current and future regulations of the DEA could lead to a variety of sanctions, including revocation, or denial of renewal, or of DEA registrations, injunctions, or civil or criminal penalties and could harm our business, financial condition and results of operations.

The single dose version of our Staccato system contains materials that are regulated by the U.S. government, and failure to comply with applicable regulations could harm our business.

The single dose version of our Staccato system uses energetic materials to generate the rapid heating necessary for vaporizing the drug, while avoiding degradation. Manufacture of products containing energetic materials is controlled by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, or ATF. Technically, the energetic materials used in our Staccato system are classified as “low explosives,” and the ATF has granted us a license/permit for the manufacture of such low explosives. Additionally, due to inclusion of the energetic materials in our Staccato system, the Department of Transportation, or DOT, regulates shipments of the single dose version of our Staccato

system. The DOT has granted the single dose version of our Staccato system “Not Regulated as an Explosive” status. Failure to comply with the current and future regulations of the ATF or DOT could subject us to future liabilities and could harm our business, financial condition and results of operations. Furthermore, these regulations could restrict our ability to expand our facilities or construct new facilities or could require us to incur other significant expenses in order to maintain compliance.

We use hazardous chemicals and highly combustible materials in our business. Any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly.

Our research and development processes involve the controlled use of hazardous materials, including chemicals. We also use energetic materials in the manufacture of the chemical heat packages that are used in our single dose devices. Our operations produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge or injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use or the use by third parties of these materials and our liability may exceed our total assets. We maintain insurance for the use of hazardous materials in the aggregate amount of $1 million, which may not be adequate to cover any claims. Compliance with environmental and other laws and regulations may be expensive, and current or future regulations may impair our research, development or production efforts.

Certain of our suppliers are working with these types of hazardous and highly combustible materials in connection with our component manufacturing agreements. In the event of a lawsuit or investigation, we could be held responsible for any injury caused to persons or property by exposure to, or release of, these hazardous and highly combustible materials. Further, under certain circumstances, we have agreed to indemnify our suppliers against damages and other liabilities arising out of development activities or products produced in connection with these agreements.

We will need to implement additional finance and accounting systems, procedures and controls in the future as we grow and to satisfy new reporting requirements.

The laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, and rules enacted and proposed by the U.S. Securities and Exchange Commission, or SEC, and by the Nasdaq Global Market, will result in increased costs to us as we continue to undertake efforts to comply with rules and respond to the requirements applicable to public companies. The rules make it more difficult and costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage as compared to the polices previously available to public companies. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees or as executive officers.

As a public company, we need to comply with Sarbanes-Oxley and the related rules and regulations of the SEC, including expanded disclosure, accelerated reporting requirements and more complex accounting rules. Compliance with Section 404 of Sarbanes-Oxley and other requirements will continue to increase our costs and require additional management resources. We have been upgrading our finance and accounting systems, procedures and controls and will need to continue to implement additional finance and accounting systems, procedures and controls as we grow to satisfy new reporting requirements. We currently do not have an internal audit group. In addition, we may need to hire additional legal and accounting staff with appropriate experience and technical knowledge, and we cannot assure you that if additional staffing is necessary that we will be able to do so in a timely fashion.

Our facilities are located near known earthquake fault zones, and the occurrence of an earthquake or other catastrophic disaster could damage our facilities and equipment, which could cause us to curtail or cease operations.

Our facilities are located in the San Francisco Bay Area near known earthquake fault zones and, therefore, are vulnerable to damage from earthquakes. We are also vulnerable to damage from other types of disasters, such as power loss, fire, floods and similar events. If any disaster were to occur, our ability to operate our business could be seriously impaired. We currently may not have adequate insurance to cover our losses resulting from disasters or other similar significant business interruptions, and we do not plan to purchase additional insurance to cover such losses due to the cost of obtaining such coverage. Any significant losses that are not recoverable under our insurance policies could seriously impair our business, financial condition and results of operations.

Risks Relating to Owning Our Common Stock

Our stock price has been and may continue to be extremely volatile.

Our common stock price has experienced large fluctuations since our initial public offering in March 2006. In addition, the trading prices of life science and biotechnology company stocks in general have experienced extreme price fluctuations in recent years. The valuations of many life science companies without consistent product revenues and earnings are extraordinarily high based on conventional valuation standards, such as price to revenue ratios. These trading prices and valuations may not be sustained. Any negative change in the public’s perception of the prospects of life science or biotechnology companies could depress our stock price regardless of our results of operations. Other broad market and industry factors may decrease the trading price of our common stock, regardless of our performance. Market fluctuations, as well as general political and economic conditions such as terrorism, military conflict, recession or interest rate or currency rate fluctuations, also may decrease the trading price of our common stock. In addition, our stock price could be subject to wide fluctuations in response to various factors, including:


	•	actual or anticipated results and timing of our clinical trials;

	•	actual or anticipated regulatory approvals of our product candidates or competing products;

	•	changes in laws or regulations applicable to our product candidates;

	•	changes in the expected or actual timing of our development programs, including delays or cancellations of clinical trials for our product candidates;

	•	period to period fluctuations in our operating results;

	•	announcements of new technological innovations or new products by us or our competitors;

	•	changes in financial estimates or recommendations by securities analysts;

	•	conditions or trends in the life science and biotechnology industries;

	•	changes in the market valuations of other life science or biotechnology companies;

	•	developments in domestic and international governmental policy or regulations;

	•	announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

	•	additions or departures of key personnel;

	•	disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

	•	sales of our common stock by us; and

	•	sales and distributions of our common stock by our stockholders.

In the past, stockholders have often instituted securities class action litigation after periods of volatility in the market price of a company’s securities. If a stockholder files a securities class action suit against us, we would incur substantial legal fees, and our management’s attention and resources would be diverted from operating our business in order to respond to the litigation.


Item 1B.	*Unresolved Staff Comments*

None.


Item 2.	*Properties*

We lease two buildings with an aggregate of 106,894 square feet of office, manufacturing, and laboratory facilities in Mountain View, California, which we began to occupy in the fourth quarter of 2007. We currently occupy 87,560 square feet of these facilities and will gain access to the remaining 19,334 square feet on or about June 1, 2008. The lease for both facilities expires on March 31, 2018, and we have two options to extend the lease for five years each. We believe that the Mountain View facilities are sufficient for our office, manufacturing and laboratory needs through approximately the end of 2010 and that future growth thereafter can be accommodated by leasing additional space near the Mountain View facilities.

The leases on our two recently vacated facilities in Palo Alto, California expire on March 31, 2008 and June 30, 2008, during which time we will complete the decommissioning of the facilities to return to the landlord in accordance with the terms of the lease.


Item 3.	*Legal Proceedings*

None


Item 4.	*Submission of Matters to a Vote of Security Holders*

None.

PART II


Item 5.	*Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities*

On March 8, 2006, our common stock began to trade on the NASDAQ Global Market under the symbol “ALXA.” The following table sets forth, for the periods indicated, the high and low sales prices of our common stock.


2007	High		Low

First Quarter	$	15.80	$	8.52
Second Quarter		12.80		7.86
Third Quarter		10.10		7.11
Fourth Quarter		9.72		7.00


2006	High		Low

March 8, 2006-March 31, 2006	$	10.59	$	8.00
Second Quarter		10.00		6.51
Third Quarter		8.35		6.12
Fourth Quarter		12.09		7.29

As of December 31, 2007, there were 211 holders of record of our common stock. We have not paid cash dividends on our common stock since our inception, and we do not anticipate paying any in the foreseeable future.


Item 5B.	*Use of Proceeds from the Sale of Registered Securities*

March 2006 Initial Public Offering

Our initial public offering of common stock was effected through a Registration Statement on Form S-1 (File No. 333-130644), that was declared effective by the SEC on March 8, 2006. We registered 6,325,000 shares of our common stock, including the full underwriters’ over-allocation, with a proposed maximum aggregate offering price of $50.6 million, of which we sold 6,325,000 shares at $8.00 per share and an aggregate offering price of $50.6 million. The offering was completed after the sale of 6,325,000 shares. Piper Jaffray & Co. and Pacific Growth Equities, LLC were the joint book-running managing underwriters of our initial public offering and RBC Capital Markets and JMP Securities, acted as co-managers.

Of this amount, $3.5 million was paid in underwriting discounts and commissions, and an additional $2.2 million of expenses were incurred. None of the expenses were paid, directly or indirectly, to directors, officers or persons owning 10% or more of our common stock, or to our affiliates. As of December 31, 2007, we had applied the aggregate net proceeds of $44.9 million from our initial public offering as follows:


	•	approximately $41.5 million was used for working capital; and

	•	the remainder of the net proceeds from the offering, approximately $3.4 million, remain invested in cash, cash equivalents and marketable securities.

The foregoing amounts represent our best estimate of our use of proceeds for the period indicated. No payments were made to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries and to non-employee directors as compensation for board or board committee service.

May 2007 Public Offering

Our follow-on public offering of common stock was effected through a shelf Registration Statement on Form S-3 (File No. 333-141739), that was declared effective by the SEC on April 16, 2007. We registered to sell common stock, preferred stock, debt securities and/or warrants, either individually or in units, with a total value of up to $150,000,000. We may also offer common stock or preferred stock upon conversion of debt securities, common stock upon conversion of preferred stock or common stock, preferred stock or debt securities upon the exercise of warrants. On May 2, 2007, we sold 6,900,000 shares at $10.25 per share and an aggregate offering price of $70.7 million. The offering was completed after the sale of 6,900,000 shares. Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. Incorporated were the joint book-running managing underwriters of our public offering and Pacific Growth Equities and RBC Capital Markets, acted as co-managers.

Of this amount, $4.2 million was paid in underwriting discounts and commissions, and an additional $0.5 million of expenses were incurred. None of the expenses were paid, directly or indirectly, to directors, officers or persons owning 10% or more of our common stock, or to our affiliates. As of December 31, 2007, the aggregate net proceeds of $66.0 million from our public offering remained invested in cash, cash equivalents and marketable securities.


Item 5C.	*Treasury Stock*

None


Item 6.	*Selected Financial Data*

The data set forth below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes included elsewhere herein.


																Period from
																December 19,
																2000
																(Inception) to
	Year Ended December 31,															December 31,
	2007			2006			2005			2004			2003			2007
	(In thousands, except per share data)

Consolidated Statement of Operations Data:
Revenue	$	—		$	1,028		$	2,230		$	2,436		$	1,002		$	6,945
Operating expenses:
Research and development(1)		45,645			36,494			26,235			15,147			11,487			143,118
General and administrative(1)		14,888			9,969			9,654			4,155			4,213			45,063
Acquired in-process research and development		—			—			—			—			—			3,916
		—			—			—			—			—			—

Total operating expenses(1)		60,533			46,463			35,889			19,302			15,700			192,097

Loss from operations		(60,533	)		(45,435	)		(33,659	)		(16,866	)		(14,698	)		(185,152	)
Interest and other income and interest expense, net		4,623			1,909			1,257			241			370			8,546

Loss before noncontrolling interest in Symphony Allegro, Inc.		(55,910	)		(43,526	)		(32,402	)		(16,625	)		(14,328	)		(176,606	)
Loss attributed to noncontrolling interest in Symphony Allegro, Inc.		10,791			1,720			—			—			—			12,511

		—			—			—			—			—			—
Net loss	$	(45,119	)	$	(41,806	)	$	(32,402	)	$	(16,625	)	$	(14,328	)	$	(164,095	)

Basic and diluted net loss per common share	$	(1.58	)	$	(2.13	)	$	(18.98	)	$	(11.41	)	$	(10.81	)

Shares used to compute basic and diluted net loss per common share		28,605			19,584			1,707			1,457			1,325


(1)		Includes stock-based compensation as follows:


											Period from
											December 19,
											2000
											(Inception) to
	Year Ended December 31,										December 31,
	2007		2006		2005		2004		2003		2007
	(In thousands)

Research and development	$	1,885	$	1,770	$	167	$	59	$	32	$	3,926
General and administrative		1,531		447		874		—		—		2,852

Total	$	3,416	$	2,217	$	1,041	$	59	$	32	$	6,778

During the year ended December 31, 2005, we recorded compensation expense in relation to the extinguishment of officer notes receivable, representing $875,000 of research and development expense and $3.1 million of general and administrative expense.


	December 31,
	2007			2006			2005			2004			2003
	(In thousands)

Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities	$	69,391		$	42,623		$	38,369		$	62,294		$	28,387
Investments held by Symphony Allegro, Inc.		39,449			49,956			—			—			—
Working capital		106,092			79,649			30,760			60,027			27,144
Total assets		149,125			105,766			47,405			69,280			34,477
Noncurrent portion of equipment financing obligations		6,317			5,865			5,155			1,840			1,551
Convertible preferred stock		—			—			107,194			107,194			57,414
Deficit accumulated during development stage		(164,095	)		(118,976	)		(77,170	)		(44,768	)		(28,143	)
Total stockholders’ equity (deficit)		75,991			49,774			(74,385	)		(43,396	)		(26,982	)


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that are based upon current expectations. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential” or “continue” or the negative of these terms or other comparable terminology. Forward-looking statements involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Overview

We are an emerging specialty pharmaceutical company focused on the development and commercialization of novel, proprietary products for the treatment of acute and intermittent conditions. We currently have six product candidates in clinical development. Our technology, the Staccato system, vaporizes an excipient-free drug to form a condensation aerosol that, when inhaled, allows for rapid systemic drug delivery. Because of the particle size of the aerosol, the drug is quickly absorbed through the deep lung into the bloodstream, providing speed of therapeutic onset that is comparable to IV administration but with greater ease, patient comfort and convenience.

We have identified approximately 200 drug compounds that have demonstrated initial vaporization feasibility for delivery with our technology. We believe that a number of these drug compounds, when delivered by the Staccato system, will have a desirable therapeutic profile for the treatment of acute and intermittent conditions. We are initially focusing on developing proprietary products by combining our Staccato system with small molecule drugs that have been in use for many years and are well characterized to create aerosolized forms of these drugs. We believe that we will be able to reduce the development time and risks associated with our product candidates, compared to the development of new chemical entities.

Our clinical-stage product candidates are:


	•	AZ-004 (Staccato loxapine). We are developing AZ-004 for the treatment of acute agitation in patients with schizophrenia or bi-polar disorder. In March 2007, we announced positive initial results from a multi-center, randomized, double-blind, placebo-controlled Phase 2a clinical trial in 129 patients in an in-patient clinical setting. The 10 mg dose of AZ-004 met the primary endpoint of the clinical trial, which was a statistically significant reduction in the measure of agitation from baseline to the 2-hour post-dose time point, as compared to placebo. The 10 mg dose of AZ-004 also exhibited a rapid onset of effect, with a statistically-significant improvement in the PANSS (Positive and Negative Symptom Scale) Excited Component (PEC) scores at 20 minutes post-dose, as compared to placebo. The effectiveness of the


		10 mg dose was sustained throughout the 24-hour study period, as compared to placebo. The 5 mg dose failed to achieve statistical significance. In February 2008 we initiated a Phase 3 clinical trial that is designed to enroll approximately 300 schizophrenic patients with acute agitation at 25 U.S. clinical centers. The trial is an in-clinic, multi-center, randomized, double-blind, placebo-controlled study and will test AZ-004 at two dose levels, 5 and 10 mg. Patients may receive up to 3 doses of study drug in a 24-hour period, depending on their clinical status. The primary endpoint for the study is the change from baseline in the PEC score, measured at 2 hours after the first dose. Various assessments of a patient’s agitation state will be conducted at serial time points using standard agitation scales over the first 4-hour post-dose time period, with follow-up assessments at the end of the 24-hour study period. Side effects will be recorded throughout the 24-hour period. A second Phase 3 clinical trial is projected to begin in the third quarter of 2008. The design of the second study will be similar to the first trial, except that the patient population will be patients with bipolar disease. AZ-004 has been licensed to Symphony Allegro, Inc., or Symphony Allegro, and we have the right to repurchase all rights to this product candidate.


	•	AZ-001 (Staccato prochlorperazine). We are developing AZ-001 to treat patients suffering from acute migraine headaches. In March 2007, we announced positive initial results from an outpatient, multi-center, randomized, double blind, placebo-controlled Phase 2b clinical trial of AZ-001 in 400 migraine patients. All three doses of AZ-001 (5, 7.5 and 10 mg) met the primary endpoint of statistically significant pain relief 2-hours post-dose using the IHS (International Headache Society) 4-point headache pain rating scale, compared to placebo. In the two highest doses studied, AZ-001 also showed a statistically-significant difference in achieving a pain-free response at two hours, as compared with placebo. AZ-001 demonstrated rapid onset of pain relief, with statistically significant pain response in 15 minutes for the 7.5 mg dose and statistically-significant pain responses for all three doses at 30 minutes. AZ-001 also showed a sustained pain-free response, where a patient has a pain score of 0, or “no” headache, with statistically-significant elimination of pain at 24 hours post-dose at the two highest studied doses. Survival analysis for nausea, photophobia and phonophobia over the 2-hour period post-dose showed a statistically significant difference, compared to placebo. In December 2007, we completed enrollment of a thorough QT clinical trial, in which two doses of AZ-001 (5 and 10 mg) were compared to active control and to placebo. The purpose of a thorough QT study is to determine a drugs effect on cardiac rhythms. With > 40 subjects per treatment condition, we found that the active control, moxyfloxacin, produced a positive QT/QTc signal that verified the sensitivity of the clinical study. Based on a preliminary analysis of the data from the study, neither of the doses of AZ-001 produced a QT/QTc prolongation that would suggest an increased risk of cardiac arrhythmia.

	•	AZ-104 (Staccato loxapine). We are developing AZ-104 to treat patients suffering from acute migraine headaches. AZ-104 is a lower dose version of AZ-004. In March 2008, we announced initial results of an in-clinic, multi-center randomized, double-blind, single administration, placebo controlled Phase 2a proof-of-concept clinical trial in 168 migraine patients with or without aura. Three doses of AZ-104 (1.25, 2.5 and 5 mg) were evaluated against placebo in the clinical trial. Using the IHS) 4-point rating scale, the primary efficacy endpoint was pain-relief response at 2 hours post-administration. AZ-104 met the primary efficacy endpoint of the clinical trial for the two highest doses of the drug compared to placebo. Statistically significant improvements in pain response were observed in 76.7% of patients at the 5 mg dose (p= 0.02), 79.1% of patients at the 2.5 mg dose (p = 0.01) and 67.4% of patients at the 1.25 mg dose (p = 0.18), compared to 51.3% of patients receiving placebo. Using survival analysis for pain relief response, all three dose groups were statistically superior (p < .05) to placebo during the 4-hour post-treatment time period that the patients remained in the clinic. AZ-104 has been licensed to Symphony Allegro, and we have the right to repurchase all rights to this product candidate.

	•	AZ-002 (Staccato alprazolam). We are developing AZ-002 for the acute treatment of panic attacks associated with panic disorder. In April 2006, we initiated an in-clinic, single-center, double-blind, placebo-controlled, Phase 2a proof-of-concept clinical trial in patients with panic disorder. As a result of observing greater than expected levels of sedation in the first two patients enrolled in the trial, we reduced the dose of AZ-002, modified the AZ-002 device, added an open-label portion to the clinical protocol, manufactured and released new clinical trial materials for the trial, and added two additional study sites to the study group.


		In April 2007, we re-initiated dosing in the 42 patient clinical trial with a lower dose of AZ-002. We have completed the open-label, lead-in segment of the clinical trial, identifying the 1 mg AZ-002 dose as an acceptable dose in terms of its safety and efficacy profile, and have initiated the randomized, double blind, placebo-controlled segment of the clinical trial. We expect to complete enrollment of this trial in the second quarter of 2008. AZ-002 has been licensed to Symphony Allegro, and we have the right to repurchase all rights to this product candidate.


	•	AZ-003 (Staccato fentanyl). We are jointly developing AZ-003 with Endo Pharmaceuticals Inc., or Endo, for the treatment of breakthrough pain in cancer and non-cancer patients. Endo is responsible for regulatory, pre-clinical and clinical development, and for commercializing the product in North America. We are responsible for the development of the Staccato Electric Multiple Dose device and we have the exclusive right to manufacture the product for clinical development and commercial supply.

	•	AZ-007 (Staccato zaleplon). We are developing AZ-007 for the treatment of insomnia in patients who have difficulty falling asleep, including patients who awake in the middle of the night and have difficulty falling back asleep. We filed an Investigational New Drug application, or IND, in December 2007. In February 2008, we initiated a Phase 1 clinical trial that enrolled 40 healthy volunteers at a single site. The purpose of this trial is to assess the safety, tolerability and pharmacokinetic parameters of a single dose of AZ-007. Using a double blind, randomized trial design, four doses of AZ-007 (ranging from 0.5 to 4.0 mg) are being compared to placebo. We expect to report initial results of this trial in the second quarter of 2008.

We were incorporated December 19, 2000. We have funded our operations primarily through the sale of equity securities, capital lease and equipment financings and government grants. We have generated $6.9 million in revenue from inception through December 31, 2007, substantially all of which was earned through United States Small Business Innovation Research grants. We did not have any revenues in 2007, and we do not expect any material product revenue until at least 2011.

From inception through 2003, we focused on the development of our technology, the selection and preclinical testing of product candidates and the manufacture of clinical trial supplies. In 2004, we expanded our activities to include the clinical development of our product candidates. The continued development of our product candidates will require significant additional expenditures, including expenses for preclinical studies, clinical trials, research and development, manufacturing development and seeking regulatory approvals. We rely on third parties to conduct a portion of our preclinical studies and all of our clinical trials, and we expect these expenditures to increase in future years as we continue development of our product candidates. In 2008, we intend to conduct several clinical trials, including our on-going Phase 3 clinical trial for AZ-004, and an additional Phase 3 clinical trial for AZ-004. With our partner Endo, we intend to continue device development and manufacturing of AZ-003. These clinical trials and development efforts will result in higher expenditures than in previous years. If these product candidates continue to progress, expenses for future clinical trials will be significantly higher than those incurred to date.

In 2007, we completed a current good manufacturing practice pilot manufacturing facility in Mountain View, California and completed the move of our operations to the new facility in the first quarter of 2008. We intend the pilot manufacturing facility to be capable of manufacturing materials for toxicology studies and clinical trial materials for future clinical trials. Facility lease payments will decrease in the second and third quarters of 2008 as the leases on our Palo Alto, California facilities expire.

licensed to Symphony Allegro. This purchase option is exercisable at predetermined prices between December 1, 2007 and December 1, 2010. The purchase option exercise price may be paid for in cash or in a combination of cash and our common stock, in our sole discretion, provided that the common stock portion may not exceed 40% of the purchase option exercise price or 10% of our common stock issued and outstanding as of the purchase option closing date. If we pay a portion of the purchase option exercise price in shares of our common stock, then we will be required to register such shares for resale under a resale registration statement pursuant to the terms of a registration rights agreement. If we do not exercise our purchase option by December 1, 2010, then Symphony Allegro will retain its exclusive license to develop and commercialize Staccato alprazolam and Staccato loxapine for all indications, and we will manufacture and sell Staccato alprazolam and Staccato loxapine to Symphony Allegro or its sublicensee for those purposes.

On December 27, 2007, we entered into a license, development and supply agreement, or the license agreement, with Endo for AZ-003 (Staccato fentanyl) and the fentanyl class of molecules for North America. Under the terms of the license agreement, Endo paid us an upfront fee of $10 million, and will pay potential additional milestone payments of up to $40 million upon achievement of predetermined regulatory and clinical milestones. Endo will also pay undisclosed royalties to us on net sales of the product, from which we will pay for the cost of goods for the manufacture of the commercial version of the product. We have primary responsibility for the development and costs of the Staccato Electronic Multiple Dose device and the exclusive right to manufacture the product for clinical development and commercial supply. Endo has responsibility for future pre-clinical, clinical and regulatory development, and, if AZ-003 is approved for marketing, for commercializing the product in North America. Each party will be responsible for all internal costs and expenses incurred related to the respective area of responsibility. Generally speaking, each party will also be responsible for external development costs incurred related to the respective area of responsibility, but we agreed to pay certain external development costs incurred by Endo in excess of an agreed upon threshold, with a maximum expense to us of $20 million. We and Endo have established a joint steering committee and a joint development committee to oversee the development of AZ-003. We have the right, but not the obligation to participate on each of the committees. We retain all rights outside of North America. Endo has the right to terminate the license agreement on 90 days written notice. Upon such termination, all rights to the product, including regulatory filings, data and clinical and non-clinical data for use with the product will revert to us. We will recognize expense related to the agreement when incurred.

As our activities have expanded, we have consistently increased the number of our employees. We expect that we will add a significant number of employees during the remainder of 2008 to support our expanded operations.

We have incurred significant losses since our inception. As of December 31, 2007, our deficit accumulated during development stage was $164.1 million and total stockholders’ equity was $76.0 million. We recognized net losses of $45.1 million, $41.8 million, and $32.4 million, in 2007, 2006 and 2005, respectively. We expect our net losses to increase as we continue our existing and planned preclinical studies and clinical trials, expand our research and development efforts, continue our manufacturing development, begin commercialization development, and add infrastructure to support these expanded operations.

The process of conducting preclinical studies and clinical trials necessary to obtain FDA approval is costly and time consuming. We consider the development of our product candidates to be crucial to our long term success. If we do not complete development of our product candidates and obtain regulatory approval to market one or more of these product candidates, we may be forced to cease operations. The probability of success for each product candidate may be impacted by numerous factors, including preclinical data, clinical data, competition, device development, manufacturing capability, regulatory approval and commercial viability. Our strategy includes entering into strategic partnerships with third parties to participate in the development and commercialization of some of our product candidates, such as our Symphony Allegro and Endo relationships. Endo has control over future preclinical and clinical development of AZ-003. If in the future we enter into additional partnerships, third parties could have control over preclinical development or clinical trials for some of our product candidates. Accordingly, the progress of such product candidate would not be under our control. We cannot forecast with any degree of certainty which of our product candidates, if any, will be subject to any future partnerships or how such arrangements would affect our development plans or capital requirements.

As a result of the uncertainties discussed above, the uncertainty associated with clinical trial enrollments, and the risks inherent in the development process, we are unable to determine the duration and completion costs of the current or future clinical stages of our product candidates or when, or to what extent, we will generate revenues from the commercialization and sale of any of our product candidates. Development timelines, probability of success and development costs vary widely. While we are currently focused on developing our product candidates, we anticipate that we and our partners, will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success of each product candidate, as well as an ongoing assessment as to the product candidate’s commercial potential. We anticipate developing additional product candidates, which will also increase our research and development expenses in future periods. We do not expect any of our current product candidates to be commercially available before 2011, if at all. We anticipate that existing cash, cash equivalents and marketable securities, along with interest earned thereon, funding available under our equipment financing arrangements, expected payments from Symphony Allegro, expected proceeds from stock option exercises and purchases under our Employee Stock Purchase Plan, will enable us to maintain our currently planned operations through the middle of 2009

Critical Accounting Estimates and Judgments

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments related to development costs. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making assumptions about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 2 of the notes to consolidated financial statements appearing elsewhere in this Annual Report, we believe the following accounting policies are critical to the process of making significant estimates and judgments in preparation of our financial statements.

Preclinical Study and Clinical Trial Accruals

We estimate our preclinical study and clinical trial expenses based on our estimates of the services received pursuant to contracts with multiple research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on our behalf. The financial terms of these agreements vary from contract to contract and may result in uneven payment flows. Preclinical study and clinical trial expenses include the following:


	•	fees paid to contract research organizations in connection with preclinical studies;

	•	fees paid to contract research organizations and other clinical sites in connection with clinical trials; and

	•	fees paid to contract manufacturers in connection with the production of components and drug materials for preclinical studies and clinical trials.

We record accruals for these preclinical study and clinical trial costs based upon the estimated amount of work completed. All such costs are charged to research and development expenses based on these estimates. Costs related to patient enrollment in clinical trials are accrued as patients are entered in the trial. We monitor patient enrollment levels and related activities to the extent possible through internal reviews, correspondence and discussions with research institutions and organizations. However, if we have incomplete or inaccurate information, we may underestimate or overestimate activity levels associated with various preclinical studies and clinical trials at a given point in time. In this event, we could record significant research and development expenses in future periods when the actual activity level becomes known. To date, we have not made any material adjustments to our estimates of preclinical study and clinical trial costs. We make good faith estimates which we believe to be accurate, but the actual costs and timing of clinical trials are highly uncertain, subject to risk and may change depending upon a

number of factors, including our clinical development plan. With the start of our Phase 3 clinical trial in the first quarter of 2008 and future Phase 3 clinical trials, the process of estimating clinical trial costs will become more difficult as the trials will involve larger numbers of patients and clinical sites.

Stock-Based Compensation

Employee Equity Incentive Awards Issued on or Subsequent to January 1, 2006

On January 1, 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting Standard No. 123R, Share-Based Payment, or SFAS 123R. As required, we adopted SFAS 123R using the prospective transition method. Under this transition method, beginning January 1, 2006, compensation cost recognized includes: (a) compensation cost for share-based payments granted prior to, but not yet vested as of December 31, 2005 related to (i) employees, based on the intrinsic value in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25, and (ii) non-employees based on the options fair value in accordance with the provisions of SFAS 123, and (b) compensation cost for all share-based payments granted or modified subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R.

We currently use the Black-Scholes option pricing model to determine the fair value of stock options and purchase rights issued under the employee stock purchase plan. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rates and expected dividends.

The estimated fair value of restricted stock unit awards is calculated based on the market price of our common stock on the date of grant, reduced by the present value of dividends expected to be paid on our common stock prior to vesting of the restricted stock unit. Our current estimate assumes no dividends will be paid prior to the vesting of the restricted stock unit.

Through 2007, we estimated the expected term of options using the “simplified” method, as illustrated in SAB 107. Beginning in 2008, we will estimate the expected term of our options based on historical option activity. As we have been operating as a public company for a period of time that is significantly shorter than our estimated expected option term, we are unable to use actual price volatility data. Therefore, we estimate the volatility of our common stock based on volatility of similar entities. We base the risk-free interest rate that we use in the option pricing model on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option pricing model.

We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. All share based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

If factors change and we employ different assumptions for estimating share-based compensation expense in future periods or if we decide to use a different valuation model, the expenses in future periods may differ significantly from what we have recorded in the current period and could materially affect our operating loss, net loss and net loss per share.

See Note 2 to the consolidated financial statements for further information regarding the SFAS 123R disclosures.

Employee Equity Incentive Awards Issued Prior to January 1, 2006

Prior to January 1, 2006, we used the intrinsic value recognition method for equity incentive awards issued to employees in accordance with APB 25. During the year ended December 31, 2005, we granted options to employees

to purchase a total of 777,492 shares of common stock at exercise prices ranging from $1.10 to $6.88 per share. We did not obtain contemporaneous valuations from an unrelated valuation specialist during this period. Instead, we relied on our board of directors, the members of which have extensive experience in the life sciences industry and all but one of whom are non-employee directors, to determine a reasonable estimate of the then current value of our common stock. Given the absence of an active market for our common stock during 2005, our board of directors determined the estimated fair value of our common stock on the date of grant based on several factors.

In connection with the preparation of our financial statements in connection with our initial public offering in March 2006, we reassessed the estimated fair value of our common stock in light of the expected completion of the offering. In reassessing the fair value of our common stock during 2005 for purposes of computing the stock-based compensation expense, we reassessed the fair value of the common stock assuming the successful completion of our initial public offering and then determined the reassessed fair value at previous points in time. In determining the reassessed fair value of our common stock during 2005, we established $9.90 as the reassessed fair value at December 31, 2005 (90% of the midpoint of the estimated price range of the initial public offering) and applied it over the prior 12 month period using a straight line basis. We also considered other material factors in reassessing fair value for financial reporting purposes as of the respective option grant dates, including the completion of our Phase 1 clinical trial of AZ-002 in September 2005, the completion of our Phase 1 clinical trial of AZ-004 in November 2005, the results of our Phase 2a clinical trial of AZ-001, valuations of existing comparable publicly traded companies, the state of the public offering market for development stage life sciences companies and our decision to pursue an initial public offering. We believe this approach was consistent with valuation methodologies applied by other life science companies pursuing an initial public offering. The reassessed fair value used to compute the stock-based compensation expense may not be reflective of the fair market value that would result from the application of other valuation methods, including accepted valuation methods for tax purposes.

Based upon the reassessment discussed above, we determined that the reassessed fair value of the options to purchase 777,492 shares of common stock ranged from $2.04 to $9.90 per share during the year ended December 31, 2005. We took into account the factors identified above in determining the reassessed fair value of the common stock as of each grant date. Share-based compensation resulting from this reassessment equals the difference between the reassessed fair value per share of our common stock on the date of grant and the exercise price per share and is being amortized over the vesting period of the underlying options, generally four years.

As a result of the reassessed fair value of options granted, we recorded deferred stock-based compensation relative to these options of approximately $3.3 million during the year ended December 31, 2005, which is being amortized over the vesting period of the applicable options on a straight-line basis. During the years ended December 31, 2007, 2006 and 2005, we amortized $577,000, $727,000 and $404,000, respectively, of deferred stock-based compensation. At December 31, 2007 we have $739,000 of deferred stock compensation to be amortized in future periods as follows: $471,000 in 2008 and $268,000 in 2009.

In addition, we had three officer stock option grants that were subject to variable accounting treatment. See Note 2 to the consolidated financial statements. With the variable options, we measured additional compensation each period based on the incremental difference between the reassessed fair value of the shares and the exercise price of the stock options and recorded compensation expense on a graded vesting basis in accordance with FIN 28, Accounting for Stock Appreciation Rights and other Variable Stock Option or Award Plans. As a result of the reassessed fair value, we recorded $442,000 of stock-based compensation expense during the year ended December 31, 2005. As a result of changes in our stock price, we recorded a $442,000 reduction in compensation expense during the first quarter of 2006. As the exercise price was fixed in March 2006, the contingency was resolved and variable accounting for these options ceased.

In December 2005, we extinguished the housing loans that were made to the three officers having a total principal value of $2.3 million and we agreed to pay $1.7 million of taxes related to the extinguishment on the officers’ behalf. We recognized compensation expense of $4.0 million in the quarter ended December 31, 2005 as a result of the extinguishments of the officers’ notes and related taxes. In connection with the loan extinguishment agreements, we settled the loan extinguishment by reducing the aggregate intrinsic value of their stock options as described below. As a result, variable stock-based compensation expense was reduced by an amount equal to the $4.0 million loan extinguishment and related taxes in the quarter ended December 31, 2005.

In settlement for the extinguishment of the officer notes receivable, we increased the exercise price of certain options to purchase common stock held by these officers such that the aggregate intrinsic value of their stock option awards was reduced by an amount equal to the amounts of the loans extinguished and related taxes paid on their behalf. We settled this transaction based on our initial public offering price of $8.00 per share.

Symphony Allegro, Inc.

On December 1, 2006 we entered into a transaction involving a series of related agreements with Symphony Capital LLC, or Symphony Capital, Symphony Allegro Holdings LLC, or Holdings, and Holdings’ wholly owned subsidiary Symphony Allegro, Inc., or Allegro, to fund the clinical development of AZ-002, Staccato alprazolam, and AZ-004/104, Staccato loxapine, or the Programs. Symphony Capital and other investors, together referred to as Symphony, invested $50 million in Holdings, which then invested the $50 million in Allegro. Pursuant to the agreements, Allegro agreed to invest up to the full $50 million to fund the clinical development of the Programs, and we licensed to Allegro certain intellectual property rights related to these Programs. We have retained manufacturing rights to these two product candidates. Pursuant to the agreements, we continue to be primarily responsible for all preclinical, clinical and device development efforts as well as maintenance of the intellectual property portfolio for the Programs. We and Allegro have established a development committee to oversee the programs. We participate in the development committee and have the right to appoint one of the five board of director seats of Allegro. We have incurred and may continue to incur expenses related to the Programs that are not funded by Allegro. Pursuant to the agreements, we have received an exclusive purchase option, or the Purchase Option, that gives us the right, but not the obligation, to acquire all, but not less than all, of the equity of Allegro, and reacquire the intellectual property rights that we licensed to Allegro. The Purchase Option is exercisable at predetermined prices that increase over time and range from $67.5 million starting December 31, 2007 to $122.5 million through November 30, 2010. The Purchase Option exercise price may be paid for in cash or in a combination of cash and our common stock, in our sole discretion, provided that the common stock portion may not exceed 40% of the purchase option exercise price or 10% of our common stock issued and outstanding as of the purchase option closing date. If we pay a portion of the Purchase Option exercise price in shares of our common stock, then we will be required to register such shares for resale under a resale registration statement pursuant to the terms of a registration rights agreement. If we do not exercise the Purchase Option by December 1, 2010, then Allegro will retain its exclusive license to develop and commercialize Staccato alprazolam and Staccato loxapine for all indications, and, if they are ultimately commercialized, we will manufacture and sell Staccato alprazolam and Staccato loxapine to Allegro or its sublicensee for those purposes. In consideration for the Purchase Option, we issued to Holdings a five-year warrant to purchase 2,000,000 shares of our common stock at $9.91 per share and paid $2.85 million for structuring fees and related expenses to Symphony Capital.

Under FASB Interpretation No. 46 (FIN 46R), Consolidation of Variable Interest Entities, a variable interest entity (VIE) is (1) an entity that has equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support, or (2) an entity that has equity investors that cannot make significant decisions about the entity’s operations or that do not absorb their proportionate share of the expected losses or do not receive the expected residual returns of the entity. FIN 46R requires a VIE to be consolidated by the party that is deemed to be the primary beneficiary, which is the party that has exposure to a majority of the potential variability in the VIE’s outcomes. The application of FIN 46R to a given arrangement requires significant management judgment.

We have consolidated the financial position and results of operations of Allegro in accordance with FIN 46R. We believe Allegro is by design a VIE because we have a purchase option to acquire its outstanding voting stock at prices that are fixed based upon the date the option is exercised. The fixed nature of the purchase option price limits Symphony’s returns, as the investor in Allegro.

FIN 46R deems parties to be de facto agents if they cannot sell, transfer, or encumber their interests without the prior approval of an enterprise. Symphony is considered to be a de facto agent of the Company pursuant to this provision, and because we and Symphony, as a related party group, absorb a majority of Allegro’s variability, we evaluated whether, pursuant to FIN 46R’s requirements, we are most closely associated with Allegro. We concluded that we are most closely associated with Allegro and should consolidate Allegro because (1) we originally developed the technology that was assigned to Allegro, (2) we will continue to oversee and monitor the development program, (3) our employees will continue to perform substantially all of the development work,

(4) we significantly influenced the design of the responsibilities and corporate structure of Allegro, (5) Allegro’s operations are substantially similar to our activities, and (6) through the Purchase Option, we have the ability to meaningfully participate in the benefits of a successful development effort.

Symphony will be required to absorb the development risk for its equity investment in Allegro. Pursuant to FIN 46R’s requirements, Symphony’s equity investment in Allegro is classified as noncontrolling interest in our consolidated balance sheets. The noncontrolling interest held by Symphony has been reduced by the $10.7 million fair value of the warrant it received in consideration for the Purchase Option and $2.85 million of fees we immediately paid to Symphony upon the transaction’s closing because the total consideration provided by us to Symphony effectively reduces Symphony’s at-risk equity investment in Allegro. While we perform the research and development on behalf of Allegro, our development risk is limited to the consideration we provided to Symphony (the warrant and fees).

Losses incurred by Allegro are charged to the noncontrolling interest until that balance has been reduced to zero, at which point our net loss will be increased for the research and development expenses incurred subsequent to that date. Net losses incurred by Allegro and charged to the noncontrolling interest were $10.8 million and $1.7 million for the years ended December 31, 2007 and 2006, respectively. At December 31, 2007, the noncontrolling interest balance was $24.0 million. We currently expect the noncontrolling interest to be exhausted by the end of 2009. As of December 31, 2007, the investments held by Allegro were $39.4 million, which we expect to spend through the term of the collaboration in 2011.

If we do not exercise the Purchase Option, we would expect to recognize losses incurred after the noncontrolling interest in Allegro is reduced to zero. Furthermore, if the Purchase Option expires unexercised, we would then be required to deconsolidate Allegro. That potential deconsolidation would not be expected to impact our earnings because the carrying value of the net assets of Allegro would be expected to be zero.

In contrast, if we exercise the Purchase Option, we will retain control of Allegro. As such, we would expect to record the exercise of the Purchase Option as a return to the noncontrolling interest. We do not expect to recognize an asset for the Purchase Option payment to be made to Symphony. Instead, the payment is expected to be accounted for as a capital transaction (that is, a return to the noncontrolling interest) that would not affect our net income or loss. However, because the exercise of the Purchase Option will be accounted for as a capital transaction, it will be treated as a deemed dividend for purposes of reporting earnings per share, increasing loss per share or decreasing income per share, as the case may be, in the period we exercise the Purchase Option. If the Programs are successful and the resources are available, we expect to exercise the Purchase Option.

Results of Operations

Comparison of Years Ended December 31, 2007 and 2006

Revenue. We had no revenues in 2007 and had $1.0 million of revenues in 2006. In 2006, we recognized approximately $1.0 million of government grant revenue and $30,000 of revenue from drug compound feasibility screening. We do not expect additional grant revenue in 2008, as we place greater emphasis on strategic partnerships and allocate fewer resources to obtaining grants. We do not expect to generate significant, if any, revenues from drug compound feasibility screening in future periods.

Operating Expenses

Share-based compensation expenses had varying degrees of impact on our comparative operating expenses for the years ended December 31, 2007, 2006 and 2005. Our operating expenses for the years ended December 31, 2007, 2006 and 2005 are as follows (in thousands):


	Year Ended December 31,
	2007		2006		2005

Non share-based compensation expenses:
Research and development	$	43,760	$	34,724	$	26,067
General and administrative		13,357		9,522		8,781

Total non share-based compensation expenses		57,117		44,246		34,848
Share-based compensation expenses:
Research and development		1,885		1,770		167
General and administrative		1,531		447		874

Total share-based compensation expenses		3,416		2,217		1,041

Total operating expenses	$	60,533	$	46,463	$	35,889

Research and Development Expenses. Research and development expenses consist of costs associated with research activities, as well as costs associated with our product development efforts, conducting preclinical studies and clinical trials and manufacturing development efforts. All research and development costs, including those funded by third parties, are expensed as incurred. Research and development expenses include:


	•	external research and development expenses incurred under agreements with third party contract research organizations and investigational sites where a substantial portion of our preclinical studies and all of our clinical trials are conducted;

	•	third party supplier, consultant and employee related expenses, which include salary and benefits;

	•	facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment and laboratory and other supplies; and

	•	in 2006 and 2005, certain incremental charges related to officer loan extinguishments and non-cash stock-based compensation expense.

The table below sets forth our research and development expenses since January 1, 2003 and cumulative expenses for each of our lead product candidates based on our internal records and estimated allocations of employee time and related expenses:


	Year Ended December 31,
Preclinical and Clinical Development:	2007		2006		2005		2004		2003		Total
	(In thousands)

AZ-004/104	$	15,524	$	6,073	$	3,187	$	119	$	—	$	24,903
AZ-001		8,163		9,535		6,369		8,640		5,514		38,221
AZ-002		3,795		3,094		3,803		1,930		490		13,112
AZ-003		1,474		3,687		5,021		1,706		936		12,824
AZ-007		8,214		2,384		—		—		—		10,598
Other preclinical programs		—		3,243		—		—		—		3,243

Total preclinical and clinical development		37,170		28,016		18,380		12,395		6,940		102,901
Research		8,475		8,478		7,855		2,752		4,547		40,217

Total research and development	$	45,645	$	36,494	$	26,235	$	15,147	$	11,487	$	143,118

Research and development expenses increased 25% to $45.6 million in 2007 from $36.5 million in 2006. The increases were due primarily to:


	•	increased spending on our AZ-004/104 and AZ-002 product candidates as we continued development of these product candidates under the Symphony Allegro agreement, including the launch of a Phase 2a clinical trial of AZ-104 at the end of the second quarter of 2007, and

	•	the increased spending on our AZ-007 product candidate.

These increased efforts were partially offset by decreased spending on:


	•	our AZ-001 product candidate due to the completion of the Phase 2b clinical trial in the first quarter of 2007,

	•	our AZ-003 product candidate, as we significantly reduced development on this program until we obtained a developmental partner, and

	•	our other preclinical development as we focused our efforts on our AZ-007 product candidate.

We expect to continue to devote substantial resources to research and development to support the continued development of our product candidates and core technology, and to expand our manufacturing development. We expect that research and development expenses for clinical trials will continue to increase as we conduct additional and later-stage clinical trials for our product candidates. We also expect that research and development expense for development for our multiple dose technology applicable to our AZ-003 program, which is partnered with Endo Pharmaceuticals, will increase in 2008 and 2009. In addition, we expect to incur additional non-cash stock-based compensation expense as future employee stock options granted are recorded at fair value and existing grants continue to be expensed.

General and Administrative Expenses. General and administrative expenses consist principally of salaries and related costs for personnel in executive, finance, accounting, business development, legal and human resources functions. Other general and administrative expenses include facility and information technology costs not otherwise included in research and development expenses, patent related costs and professional fees for legal, consulting and accounting services.

General and administrative expenses increased 49% to $14.9 million in 2007 from $10.0 million in 2006. The increase was primarily due to expanding legal and accounting staff, adding infrastructure and incurring additional costs related to operating as a public company, investor relations programs, increased director fees, increased professional fees and non-cash stock-based compensation expense.

We expect that our general and administrative expenses will increase as we continue to add infrastructure to support the expected increase in operations and as we continue to meet our obligations as a public company. In addition, we expect to incur additional non-cash stock-based compensation expense as future employee stock options granted are recorded at fair value and existing grants continue to be expensed.

Interest and Other Income, Net. Interest and other income, net, primarily represents income earned on our cash, cash equivalents, marketable securities balances, and marketable securities held by Symphony Allegro. Interest and other income, net was $5.6 million for 2007 and $2.7 million for 2006. The increase was primarily due to higher average cash, cash equivalent and marketable securities balances due to our public stock offering in May 2007, and the addition of investments held by Symphony Allegro, Inc in December 2006. We expect interest income to decrease in future periods as we expect our cash, cash equivalent and marketable securities balances to decrease as we continue to incur net losses, and we expect to earn lower interest rates on such balances due to current market conditions.

Interest Expense. Interest expense represents interest on our equipment loans and was $1.0 million in 2007 and $0.8 million in 2006. The increase was primarily due to increases in our equipment loan borrowings. We expect interest expense to continue to increase as we anticipate additional borrowings under our equipment financing agreements.

Loss Attributed to Noncontrolling Interest in Symphony Allegro. Pursuant to the agreements that we entered into with Symphony Allegro, Inc. in December 2006, we consolidate Symphony Allegro’s financial condition and results of operations in accordance with FASB Interpretation No. 46R, Consolidation of Variable Interest Entities an Interpretation of Accounting Research Bulletin No. 51 (“FIN 46R”). Accordingly, we have deducted the losses attributable to the noncontrolling interest from our net loss in the consolidated statement of operations, and we have also reduced the noncontrolling interest holders’ ownership interest in Symphony Allegro, Inc. in the consolidated balance sheet by the loss attributed to the noncontrolling interests in Symphony Allegro, Inc. The losses attributed to the noncontrolling interest holders was $10.8 million in 2007 and $1.7 million in 2006. The increase was primarily due to a full year of Symphony Allegro losses in 2007 compared to one month of losses in 2006 and the timing of expenses incurred on the AZ-004 and AZ-104 clinical trials.

Comparison of Years Ended December 31, 2006 and 2005

Revenue. Our revenue for 2006 and 2005 was $1.0 million and $2.2 million, respectively. In 2006, we recognized approximately $1.0 million of government grant revenue and $30,000 of revenue from drug compound feasibility screening. In 2005, we recognized approximately $2.0 million of government grant revenue and $155,000 of revenue from drug compound feasibility screening. The decrease of $1.0 million of government grant revenue was due to the expiration of existing government grants.

Operating Expenses

Research and Development Expenses. Research and development expenses increased 39% to $36.5 million in 2006 from $26.2 million in 2005. The increase was due primarily to increased spending on clinical trials for AZ-001 and AZ-004 product candidates, additional spending on new preclinical programs, increased staffing and other personnel related costs to support our preclinical studies and clinical trials and additional internal research efforts and increased share-based compensation expense.

General and Administrative Expenses. General and administrative expenses increased 3% to $10.0 million in 2006 from $9.7 million in 2005. Expenses in 2005 include $3.1 million related to the extinguishment of the officer notes and related taxes paid on behalf of the officers. Excluding this expense, general and administrative expenses increased $3.4 million (35%) which was primarily due to expanding legal and accounting staff, adding infrastructure and incurring additional costs related to operating as a public company, including directors’ and officers’ insurance, investor relations programs, increased director fees, increased professional fees and non-cash stock-based compensation expense. In 2005, we also incurred certain incremental charges resulting from the extinguishment of officer notes.

Interest and Other Income and Interest Expense, Net. Interest and other income and interest expense, primarily represents income earned on our cash, cash equivalents and marketable securities balances net of interest expense on our equipment loans. Interest and other income and interest expense, net was $1.9 million for 2006 and $1.3 million for 2005. This increase was primarily due to substantially increased average cash balances in 2006 due to the closing of our initial public offering in March 2006, to a lesser extent the additional interest income from Symphony Allegro cash and investment balances in December 2006, and higher interest rates earned on such balances.

Loss Attributed to Noncontrolling Interest in Symphony Allegro. For the year ended December 31, 2006, the losses attributed to the noncontrolling interest holders was $1.7 million. There were no such losses in 2005.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily through private placements and public offerings of equity securities, receiving aggregate net proceeds from such sales totaling $215.6 million, revenues primarily from government grants totaling $6.9 million and funding from Symphony Allegro. We have received additional funding from equipment financing obligations, interest earned on investments, as described below, and funds received upon exercises of stock options and exercises of purchase rights under our Employee Stock Purchase Plan. As of December 31, 2007, we had $69.4 million in cash, cash equivalents and marketable securities, $39.4 million of marketable securities held by Symphony Allegro, and $3.6 million available under an equipment financing line of credit. The marketable securities held by Symphony Allegro are used to fund the development of AZ-002, AZ-004 and AZ-104 and are not available for general corporate expenses. Our cash and marketable security balances are held in a variety of interest bearing instruments, including obligations of United States government agencies, high credit rating corporate borrowers and money market accounts. Investments held by Symphony Allegro consist of investments in a money market fund that invests primarily in domestic commercial paper, securities issued or guaranteed by the U.S. government or its agencies, U.S. and Yankee bank obligations and fully collateralized repurchase agreements. Cash in excess of immediate requirements is invested with regard to liquidity and capital preservation.

Net cash used in operating activities was $35.8 million, $33.3 million, and $22.0 million in 2007, 2006 and 2005, respectively. The net cash used in each of these periods primarily reflects net loss for these periods, offset in part by depreciation, non-cash stock-based compensation, loss attributed to noncontrolling interests, extinguishment of officer notes receivable and non-cash changes in operating assets and liabilities. In 2007, the large increase in other receivables was affected by a receivable of $10.0 million from Endo related to the license agreement signed in December 2007 and a $2.1 million receivable related to the reimbursement of leasehold improvements from the landlord of our Mountain View facility. In 2007, the increase in other liabilities is primarily due to $10.0 million of deferred revenues related to the Endo license agreement, and the effects of $14.3 million of leasehold improvement reimbursements from the Mountain View landlord in 2007 recorded as deferred rent in 2007.

Net cash provided by (used in) investing activities was $(20.0) million, $(61.4) million, and $15.9 million in 2007, 2006 and 2005, respectively. Investing activities consist primarily of purchases and maturities of marketable securities and capital purchases. During 2007 and 2006 we purchased $11.4 million and $2.9 million of marketable securities, net of maturities, respectively. In 2006, we also had net purchases of $50.0 million of investments by Symphony Allegro. In 2005 we sold $21.6 million of marketable securities, net of purchases. Purchases of property and equipment were $19.1 million, $8.1 million, and $5.6 million in 2007, 2006 and 2005, respectively, of which $16.5 million of property and equipment purchases in 2007 related to the build out of our leased facility in Mountain View, California. A significant portion of the increased purchase of property and equipment in 2005 related to our expansion into a second leased facility in Palo Alto, California. We expect to continue to make significant investments in the purchase of property and equipment to support our expanding operations; however, we expect overall purchase of property and equipment to be lower in 2008 as compared to 2007 as we do not expect to make any significant modification to our facilities in 2008.

Net cash provided by financing activities was $70.1 million, $94.9 million, and $4.1 million in 2007, 2006 and 2005, respectively. Financing activities consist primarily of proceeds from the sale of our common and preferred stock, issuance of a noncontrolling interest, and equipment financing arrangements. In 2007 and 2006, we received

net proceeds from the issuance of common stock of $67.8 million and $46.0 million, respectively. In 2006, we received net proceeds of $47.2 from purchase of noncontrolling interests by preferred shareholders in Symphony Allegro, net of fees. Proceeds from equipment financing arrangements, net of payments, were $2.3 million, $1.8 million, and $3.7 million during 2007, 2006 and 2005, respectively.


	•	expenditures related to continued preclinical and clinical development of our lead product candidates during this period within budgeted levels;

	•	the timing and amount of payments from Symphony Allegro;

	•	no unexpected costs related to the development of our manufacturing capability; and

	•	the hiring of a number of new employees at salary levels consistent with our estimates to support our continued growth during this period.

Our forecast of the period of time that our financial resources will be adequate to support operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed in “Risk Factors.” In light of the numerous risks and uncertainties associated with the development and commercialization of our product candidates and the extent to which we enter into strategic partnerships with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials. Our future funding requirements will depend on many factors, including:


	•	the scope, rate of progress, results and costs of our preclinical studies, clinical trials and other research and development activities;

	•	the terms and timing of any distribution, strategic partnerships or licensing agreements that we may establish;

	•	the cost, timing and outcomes of regulatory approvals;

	•	the number and characteristics of product candidates that we pursue;

	•	the cost and timing of establishing manufacturing, marketing and sales capabilities;

	•	the cost of establishing clinical and commercial supplies of our product candidates;

	•	the cost of preparing, filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and

	•	the extent to which we acquire or invest in businesses, products or technologies, although we currently have no commitments or agreements relating to any of these types of transactions.

We will need to raise additional funds to support our operations, and such funding may not be available to us on acceptable terms, or at all. If we are unable to raise additional funds when needed, we may not be able to continue development of our product candidates or we could be required to delay, scale back or eliminate some or all of our development programs and other operations. We may seek to raise additional funds through public or private financing, strategic partnerships or other arrangements. Any additional equity financing may be dilutive to stockholders and debt financing, if available, may involve restrictive covenants. If we raise funds through collaborative or licensing arrangements, we may be required to relinquish, on terms that are not favorable to us, rights to some of our technologies or product candidates that we would otherwise seek to develop or

commercialize ourselves. Our failure to raise capital when needed may harm our business, financial condition and results of operations.

Contractual Obligations

We lease two buildings with an aggregate of 106,894 square feet of manufacturing, office and laboratory facilities in Mountain View, California, which we began to occupy in the fourth quarter of 2007. We currently occupy 87,560 square feet of these facilities and will gain access to the remaining 19,334 square feet on or about June 1, 2008. The lease for both facilities expires on March 31, 2018, and we have two options to extend the lease for five years each. We lease two buildings with an aggregate of 65,143 square feet of office and laboratory facilities in Palo Alto, California. The lease on one facility expires on March 31, 2008, and the lease on the second facility expires on June 30, 2008.

We finance a portion of our equipment purchases through various equipment financing agreements. Under the agreements, equipment advances are to be repaid in 36 to 48 installments of principal and interest. The interest rate, which is fixed for each draw, is based on the U.S. Treasuries of comparable maturities and ranges from 9.2% to 10.6%. The equipment purchased under the equipment financing agreement is pledged as security.

Our future contractual obligations for equipment financing and operating leases, including financing costs, at December 31, 2007 were as follows:


	Payments Due by Period
			Less Than
Contractual Obligations	Total		1 Year		1-3 Years		3-5 Years		Thereafter
	(In thousands)

Equipment financing obligations	$	12,323	$	5,448	$	6,509	$	366	$	—
Operating lease obligations		49,991		4,424		9,627		10,253		25,687

Total	$	62,314	$	9,872	$	16,136	$	10,619	$	25,687

On November 2, 2007, we entered into a manufacturing and supply agreement, or the supply agreement, with Autoliv relating to the commercial supply of chemical heat packages that can be incorporated into our Staccato device. Autoliv had developed these chemical heat packages for us pursuant to a development agreement between Autoliv and us executed in October 2005. Under the terms of the supply agreement, Autoliv has agreed to manufacture, assemble and test the chemical heat packages solely for us in conformance with our specifications. We will pay Autoliv a specified purchase price, which varies based on annual quantities ordered by us, per chemical heat package delivered. The initial term of the supply agreement expires on December 31, 2012 and may be extended by written mutual consent.

On December 27, 2007, we entered into a license, development and supply agreement with Endo. Pursuant to the agreement, Endo obtained a license to develop and commercialize AZ-003 (Staccato fentanyl) in North America and to obtain a supply of AZ-003 from us. Endo is responsible for regulatory, pre-clinical and clinical development, and for commercializing the product. We are responsible for the development of the Staccato Electric Multiple Dose commercial device and we have the exclusive right to manufacture the product for clinical development and commercial supply. Both Alexza and Endo will be responsible for all internal costs and expenses incurred related to their area of responsibility.

Recent Accounting Pronouncements

Statement of Financial Accounting Standard No. 157

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact of the provisions of SFAS 157 on our financial position, results of operations and cash flows but do not believe the impact of the adoption will be material.

Statement of Financial Accounting Standard No. 159

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The provisions of SFAS 159 are effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of electing to adopt the provisions of SFAS 159 on our financial position, results of operations and cash flows and, the impact of adoption is unknown at this time.

Statement of Financial Accounting Standard No. 160

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 will require that noncontrolling interests in subsidiaries be reported as a component of stockholders’ equity in the consolidated balance sheet. SFAS 160 also requires that earnings or losses attributed to the noncontrolling interests be reported as part of consolidated earnings and not as a separate component of income or expense, as well as requires disclosure of the attribution of consolidated earnings to the controlling and noncontrolling interests on the face of the consolidated statement of operations. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact of SFAS 160 on our consolidated financial statements.

Emerging Issues Task Force Issue No. 07-1

In November 2007, the Emerging Issues Task Force (“EITF”) ratified EITF Issue No. 07-1 (“EITF 07-1”), Accounting for Collaborative Agreements Related to the Development and Commercialization of Intellectual Property. EITF 07-1 addresses the accounting for participants in collaborative arrangements that are conducted without the creation of a separate legal entity and requires participants in a collaboration to make separate disclosures regarding the nature and purpose of an arrangement, their rights and obligations under the arrangement, the accounting policy for the arrangement and the income statement classification and amounts arising from the arrangement between participants for each period a statement of operations is presented. The provisions of EITF 07-1 are effective for fiscal years beginning after December 15, 2008 We are currently evaluating the impact of the provisions of EITF 07-1 on our financial position, results of operations and cash flows.

Emerging Issues Task Force Issue No. 07-3

In June 2007, the EITF ratified EITF Issue No. 07-3 (“EITF 07-3”), Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities. The scope of EITF 07-3 is limited to nonrefundable advance payments for goods and services to be used or rendered in future research and development activities pursuant to an executory contractual arrangement. This issue provides that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the related goods are delivered or the related services are performed. EITF 07-3 is effective for fiscal years beginning after December 15, 2007 and earlier application is not permitted. We are currently evaluating the impact of the provisions of EITF 07-3 on our financial position, results of operations and cash flows but do not believe the impact of the adoption will be material.

FASB Interpretation No. 48

In July, 2006, FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it

has less than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Our adoption of the provisions of FIN 48 on January 1, 2007 did not have a material impact on our financial statements. We adopted the accounting policy that interest recognized in accordance with Paragraph 15 of FIN 48 and penalties recognized in accordance with Paragraph 16 of FIN 48 are classified as part of our income tax provision. We have not incurred any interest or penalties as of December 31, 2007. We do not anticipate any significant change within 12 months of this reporting date of our uncertain tax positions. We do not anticipate any events which could cause the change to these uncertainties. We are subject to taxation in the US and various states jurisdictions. There are no ongoing examinations by taxing authorities at this time. Our various tax years starting with 2000 to 2006 remain open in various taxing jurisdictions.

Off-Balance Sheet Arrangements

None.


Item 7A.	*Quantitative and Qualitative Disclosures About Market Risk*

Our exposure to market risk is confined to our cash, cash equivalents, which have maturities of less than three months, and marketable securities. The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of cash equivalents and marketable securities in a variety of securities of high credit quality. As of December 31, 2007, we had cash, cash equivalents and marketable securities of $69.4 million and investments held by Symphony Allegro of $39.4 million. The securities in our investment portfolio are not leveraged, are classified as available for sale and are, due to their very short-term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that an increase in market rates would have a material negative impact on the realized value of our investment portfolio. We actively monitor changes in interest rates. In the third and fourth quarters of 2007, we performed a review of our investment portfolio and believe we have minimal exposure related to mortgage and other asset backed securities and no exposure to auction rate securities.


Item 8.	*Financial Statements and Supplementary Data*

ALEXZA PHARMACEUTICALS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Report of Independent Registered Public Accounting Firm			65
Consolidated Balance Sheets as of December 31, 2007 and 2006			66
Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005 and for the period from December 19, 2000 (inception) to December 31, 2007			67
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the period from December 19, 2000 (inception) to December 31, 2007			68
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005 and for the period from December 19, 2000 (inception) to December 31, 2007			75
Notes to Consolidated Financial Statements			76

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Alexza Pharmaceuticals, Inc.

We have audited the accompanying consolidated balance sheets of Alexza Pharmaceuticals, Inc. (a development stage company) (the “Company”) as of December 31, 2007 and 2006 and the related consolidated statements of operations, convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2007 and for the period from December 19, 2000 (inception) to December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Alexza Pharmaceuticals, Inc. (a development stage company) at December 31, 2007 and 2006 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007 and for the period from December 19, 2000 (inception) to December 31, 2007, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for share-based compensation as of January 1, 2006.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Alexza Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 2008 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Palo Alto, California

March 11, 2008

ALEXZA PHARMACEUTICALS, INC
(a development stage company)

CONSOLIDATED BALANCE SHEETS


	December 31,
	2007			2006
	(In thousands, except share and per share amounts)

ASSETS
Current assets:
Cash and cash equivalents	$	31,337		$	17,032
Marketable securities		38,054			25,591
Investments held by Symphony Allegro, Inc.		39,449			49,956
Other receivables		12,055			—
Prepaid expenses and other current assets		1,377			1,263

Total current assets		122,272			93,842
Property and equipment, net		26,156			11,136
Restricted cash		604			604
Employee notes receivable, net of unamortized discount		—			83
Other assets		93			101

Total assets	$	149,125		$	105,766


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,206		$	5,933
Accrued clinical trial liabilities		1,301			1,641
Other accrued liabilities		5,087			3,849
Current portion of equipment financing obligations		4,586			2,770

Total current liabilities		16,180			14,193
Deferred rent		16,685			1,191
Deferred revenue		10,000			—
Noncurrent portion of equipment financing obligations		6,317			5,865
Non controlling interest in Symphony Allegro, Inc.		23,952			34,743
Commitments
Stockholders’ equity:
Preferred stock, $0.0001 par value, 5,000,000 shares authorized at December 31, 2007 and 2006; no shares issued and outstanding at December 31, 2007 or 2006		—			—
Common stock, $0.0001 par value; 100,000,000 shares authorized at December 31, 2007 and 2006; 31,137,851 and 23,819,313 shares issued and outstanding at December 31, 2007 and 2006, respectively		3			2
Additional paid-in capital		240,681			170,442
Deferred stock compensation		(739	)		(1,703	)
Other comprehensive income		141			9
Deficit accumulated during development stage		(164,095	)		(118,976	)

Total stockholders’ equity		75,991			49,774

Total liabilities and stockholders’ equity	$	149,125		$	105,766

See accompanying notes.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

CONSOLIDATED STATEMENTS OF OPERATIONS


										Period from
										December 19,
										2000 (Inception)
	Year Ended December 31,									to December 31,
	2007			2006			2005			2007
	(In thousands, except per share amounts)

Revenue	$	—		$	1,028		$	2,230		$	6,945
Operating expenses:
Research and development		45,645			36,494			26,235			143,118
General and administrative		14,888			9,969			9,654			45,063
Acquired in-process research and development		—			—			—			3,916

Total operating expenses		60,533			46,463			35,889			192,097

Loss from operations		(60,533	)		(45,435	)		(33,659	)		(185,152	)
Interest and other income, net		5,626			2,687			1,615			11,192
Interest expense		(1,003	)		(778	)		(358	)		(2,646	)

Loss before non controlling interest in Symphony Allegro, Inc.		(55,910	)		(43,526	)		(32,402	)		(176,606	)
Loss attributed to non controlling interest in Symphony Allegro, Inc.		10,791			1,720			—			12,511

Net loss	$	(45,119	)	$	(41,806	)	$	(32,402	)	$	(164,095	)

Basic and diluted net loss per common share	$	(1.58	)	$	(2.13	)	$	(18.98	)

Shares used to compute basic and diluted net loss per common share		28,605			19,584			1,707

See accompanying notes.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

CONSOLIDATED STATEMENT OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)


																					Deficit
																					Accumulated			Total
	Convertible												Additional		Stockholder		Deferred		Other		During the			Stockholders’
	Preferred Stock				Preferred Stock				Common Stock				Paid-In		Note		Stock		Comprehensive		Development			Equity
	Shares		Amount		Shares		Amount		Shares		Amount		Capital		Receivable		Compensation		(Loss) Income		Stage			(Deficit)
	(In thousands, except share and per share amounts)

Issuance of common stock to founders at $0.22 per share in December 2000 in exchange for technology and cash of $8		—	$	—		—	$	—		454,536	$	—	$	100	$	—	$	—	$	—	$	—		$	100
Issuance of Series A preferred stock for cash at $0.40 per share in July 2001, net of issuance costs of $9		2,500,000		991		—		—		—		—		—		—		—		—		—			—
Issuance of Series A1 preferred stock at $1.55 per share in December 2001, in connection with merger		1,610,250		2,496		—		—		—		—		—		—		—		—		—			—
Issuance of Series B preferred stock for cash at $1.40 per share in December 2001, net of issuance costs of $71		6,441,000		8,946		—		—		—		—		—		—		—		—		—			—
Issuance of common stock in connection with merger at $1.10 per share in December 2001		—		—		—		—		868,922		—		956		—		—		—		—			956
Warrants assumed in merger transaction		—		—		—		—		—		—		10		—		—		—		—			10
Issuance of common stock for cash at $0.22 per share upon exercise of options in December 2001		—		—		—		—		9,090		—		2		—		—		—		—			2
Compensation expense related to consultant stock options		—		—		—		—		—		—		3		—		—		—		—			3
Net loss and comprehensive loss		—		—		—		—		—		—		—		—		—		—		(5,652	)		(5,652	)

Balance at December 31, 2001 (carried forward)		10,551,250	$	12,433		—	$	—		1,332,548	$	—	$	1,071	$	—	$	—	$	—	$	(5,652	)	$	(4,581	)

See accompanying notes.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

CONSOLIDATED STATEMENT OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) — (Continued)


																								Deficit
																								Accumulated			Total
	Convertible													Additional			Stockholder			Deferred		Other		During the			Stockholders’
	Preferred Stock				Preferred Stock				Common Stock					Paid-In			Note			Stock		Comprehensive		Development			Equity
	Shares		Amount		Shares		Amount		Shares			Amount		Capital			Receivable			Compensation		(Loss) Income		Stage			(Deficit)
	(In thousands, except share and per share amounts)

Balance at December 31, 2001 (brought forward)		10,551,250	$	12,433		—	$	—		1,332,548		$	—	$	1,071		$	—		$	—	$	—	$	(5,652	)	$	(4,581	)
Issuance of common stock for cash at $0.22 per share upon exercise of options in February 2002		—		—		—		—		10,606			—		3			—			—		—		—			3
Issuance of warrants to purchase Series B preferred stock in March 2002, in connection with equipment financing loan		—		27		—		—		—			—		—			—			—		—		—			—
Issuance of common stock for cash at $0.22 per share upon exercise of options in July 2002		—		—		—		—		2,180			—		—			—			—		—		—			—
Issuance of common stock to stockholder at $0.99 per share in exchange for promissory note in July 2002		—		—		—		—		53,156			—		53			(53	)		—		—		—			—
Issuance of Series C preferred stock for cash at $1.56 per share in September 2002, net of issuance costs of $108		28,870,005		44,892		—		—		—			—		—			—			—		—		—			—
Repurchase of common stock for cash at $1.05 per share in October 2002		—		—		—		—		(2,634	)		—		(3	)		—			—		—		—			(3	)
Issuance of common stock for cash at $1.05 per share for services upon exercise of warrants in December 2002		—		—		—		—		9,368			—		10			—			—		—		—			10
Compensation expense related to consultant stock options		—		—		—		—		—			—		10			—			—		—		—			10
Unrealized gain on investments		—		—		—		—		—			—		—			—			—		51		—			51
Net loss		—		—		—		—		—			—		—			—			—		—		(8,163	)		(8,163	)

Comprehensive loss		—		—		—		—		—			—		—			—			—		—		—			(8,112	)

Balance at December 31, 2002 (carried forward)		39,421,255	$	57,352		—	$	—		1,405,224		$	—	$	1,144		$	(53	)	$	—	$	51	$	(13,815	)	$	(12,673	)

See accompanying notes.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

CONSOLIDATED STATEMENT OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) — (Continued)


																										Deficit
																										Accumulated			Total
	Convertible													Additional			Stockholder			Deferred			Other			During the			Stockholders’
	Preferred Stock				Preferred Stock				Common Stock					Paid-In			Note			Stock			Comprehensive			Development			Equity
	Shares		Amount		Shares		Amount		Shares			Amount		Capital			Receivable			Compensation			(Loss) Income			Stage			(Deficit)
	(In thousands, except share and per share amounts)

Balance at December 31, 2002 (brought forward)		39,421,255	$	57,352		—	$	—		1,405,224		$	—	$	1,144		$	(53	)	$	—		$	51		$	(13,815	)	$	(12,673	)
Issuance of common stock for cash at $0.22, $0.99 and $1.10 per share upon exercise of options		—		—		—		—		74,903			—		47			—			—			—			—			47
Issuance of warrants to purchase Series C preferred stock in connection with equipment financing loan in January 2003		—		35		—		—		—			—		—			—			—			—			—			—
Issuance of warrants to purchase Series C preferred stock in connection with equipment financing loan in September 2003		—		27		—		—		—			—		—			—			—			—			—			—
Repurchase of common stock for cash at $1.05 per share in January 2003		—		—		—		—		(1,172	)		—		(1	)		—			—			—			—			(1	)
Repurchase of common stock for cash at $0.22 per share in November 2003		—		—		—		—		(14,772	)		—		(3	)		—			—			—			—			(3	)
Compensation expense related to consultant stock options		—		—		—		—		—			—		31			—			—			—			—			31
Deferred stock compensation expense related to modification of consultant stock option		—		—		—		—		—			—		1			—			(1	)		—			—			—
Unrealized loss on investments		—		—		—		—		—			—		—			—			—			(55	)		—			(55	)
Net loss		—		—		—		—		—			—		—			—			—			—			(14,328	)		(14,328	)

Comprehensive loss		—		—		—		—		—			—		—			—			—			—			—			(14,383	)

Balance at December 31, 2003 (carried forward)		39,421,255	$	57,414		—	$	—		1,464,183		$	—	$	1,219		$	(53	)	$	(1	)	$	(4	)	$	(28,143	)	$	(26,982	)

See accompanying notes.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

CONSOLIDATED STATEMENT OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) — (Continued)


																										Deficit
																										Accumulated			Total
	Convertible													Additional			Stockholder			Deferred			Other			During the			Stockholders’
	Preferred Stock				Preferred Stock				Common Stock					Paid-In			Note			Stock			Comprehensive			Development			Equity
	Shares		Amount		Shares		Amount		Shares			Amount		Capital			Receivable			Compensation			(Loss) Income			Stage			(Deficit)
	(In thousands, except share and per share amounts)

Balance at December 31, 2003 (brought forward)		39,421,255	$	57,414		—	$	—		1,464,183		$	—	$	1,219		$	(53	)	$	(1	)	$	(4	)	$	(28,143	)	$	(26,982	)
Cancellation of unvested common stock at $0.99 per share in March 2004		—		—		—		—		(24,365	)		—		(24	)		24			—			—			—			—
Repayment of vested portion of stockholder note receivable for cash		—		—		—		—		—			—		—			29			—			—			—			29
Issuance of warrants to purchase Series C preferred stock in connection with equipment financing loan in April 2004		—		20		—		—		—			—		—			—			—			—			—			—
Issuance of common stock for cash at $0.22, $0.99 and $1.10 per share upon exercise of options		—		—		—		—		100,192			—		72			—			—			—			—			72
Repurchase of common stock for cash at $1.05 per share in September 2004		—		—		—		—		(404	)		—		—			—			—			—			—			—
Issuance of Series D preferred stock at $1.29 per share in November and December 2004, net of issuance costs of $2,239		40,435,448		49,760		—		—		—			—		—			—			—			—			—			—
Issuance of warrants to purchase common stock in connection with Series D financing in November 2004		—		—		—		—		—			—		91			—			—			—			—			91
Compensation expense related to consultant stock options		—		—		—		—		—			—		40			—			—			—			—			40
Compensation expense related to employee stock option modifications		—		—		—		—		—			—		19			—			—			—			—			19
Amortization of deferred stock compensation		—		—		—		—		—			—		—			—			1			—			—			1
Unrealized loss on investments		—		—		—		—		—			—		—			—			—			(41	)		—			(41	)
Net loss		—		—		—		—		—			—		—			—			—			—			(16,625	)		(16,625	)

Comprehensive loss		—		—		—		—		—			—		—			—			—			—			—			(16,666	)

Balance at December 31, 2004 (carried forward)		79,856,703	$	107,194		—	$	—		1,539,606		$	—	$	1,417		$	—		$	—		$	(45	)	$	(44,768	)	$	(43,396	)

See accompanying notes.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

CONSOLIDATED STATEMENT OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) — (Continued)


																							Deficit
																							Accumulated			Total
	Convertible												Additional		Stockholder		Deferred			Other			During the			Stockholders’
	Preferred Stock				Preferred Stock				Common Stock				Paid-In		Note		Stock			Comprehensive			Development			Equity
	Shares		Amount		Shares		Amount		Shares		Amount		Capital		Receivable		Compensation			(Loss) Income			Stage			(Deficit)
	(In thousands, except share and per share amounts)

Balance at December 31, 2004 (brought forward)		79,856,703	$	107,194		—	$	—		1,539,606	$	—	$	1,417	$	—	$	—		$	(45	)	$	(44,768	)	$	(43,396	)
Issuance of common stock upon exercise of options $0.22, $0.99, $1.10, per share		—		—		—		—		380,508		—		357		—		—			—			—			357
Compensation expense related to consultant stock options		—		—		—		—		—		—		195		—		—			—			—			195
Deferred stock compensation, net of $4 reversal in connection with employee terminations		—		—		—		—		—		—		3,329		—		(3,329	)		—			—			—
Amortization of deferred stock compensation,		—		—		—		—		—		—		—		—		404			—			—			404
Variable compensation expense		—		—		—		—		—		—		442		—		—			—			—			442
Unrealized gain on investments		—		—		—		—		—		—		—		—		—			15			—			15
Net loss		—		—		—		—		—		—		—		—		—			—			(32,402	)		(32,402	)

Comprehensive loss		—		—		—		—		—		—		—		—		—			—			—			(32,387	)

Balance at December 31, 2005		79,856,703	$	107,194		—	$	—		1,920,114	$	—	$	5,740	$	—	$	(2,925	)	$	(30	)	$	(77,170	)	$	(74,385	)

See accompanying notes.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

CONSOLIDATED STATEMENT OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) — (Continued)


																										Deficit
																										Accumulated			Total
	Convertible														Additional			Stockholder		Deferred			Other			During the			Stockholders’
	Preferred Stock						Preferred Stock				Common Stock				Paid-In			Note		Stock			Comprehensive			Development			Equity
	Shares			Amount			Shares		Amount		Shares		Amount		Capital			Receivable		Compensation			(Loss) Income			Stage			(Deficit)
	(In thousands, except share and per share amounts)

Balance at December 31, 2005 (brought forward)		79,856,703		$	107,194			—	$	—		1,920,114	$	—	$	5,740		$	—	$	(2,925	)	$	(30	)	$	(77,170	)	$	(74,385	)
Issuance of common stock for cash and shares upon exercise of options at a weighted average price of $1.28 per share		—			—			—		—		159,446		—		195			—		—			—			—			195
Issuance of common stock for cash under the Company’s Employee Stock Purchase Plan		—			—			—		—		131,682		—		896			—		—			—			—			896
Issuance of common stock for shares upon exercise of warrant		—			—			—		—		85,359		—		—			—		—			—			—			—
Issuance of common stock for cash, net of offering costs of $2,156		—			—			—		—		6,325,000		1		44,901			—		—			—			—			44,902
Conversion of convertible preferred stock into common stock		(79,856,703	)		(107,194	)		—		—		15,197,712		1		107,193			—		—			—			—			107,194
Compensation expense related to consultant stock options		—			—			—		—		—		—		145			—		—			—			—			145
Compensation expense related to fair value of employee share based awards issued after January 1, 2006		—			—			—		—		—		—		1,601			—		—			—			—			1,601
Amortization of deferred stock compensation		—			—			—		—		—		—		—			—		727			—			—			727
Reversal of deferred stock compensation in connection with employee terminations		—			—			—		—		—		—		(495	)		—		495			—			—			—
Variable compensation expense		—			—			—		—		—		—		(442	)		—		—			—			—			(442	)
Issuance of warrant to Symphony Allegro Holdings LLC		—			—			—		—		—		—		10,708			—		—			—			10,708
Unrealized gain on investments		—			—			—		—		—		—		—			—		—			39			—			39
Net loss		—			—			—		—		—		—		—			—		—			—			(41,806	)		(41,806	)

Comprehensive loss		—			—			—		—		—		—		—			—		—			—			—			(41,767	)

Balance at December 31, 2006		—		$	—			—	$	—		23,819,313	$	2	$	170,442		$	—	$	(1,703	)	$	9		$	(118,976	)	$	49,774

See accompanying notes.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

CONSOLIDATED STATEMENT OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) — (Continued)


																							Deficit
																							Accumulated			Total
	Convertible												Additional			Stockholder		Deferred			Other		During the			Stockholders’
	Preferred Stock				Preferred Stock				Common Stock				Paid-In			Note		Stock			Comprehensive		Development			Equity
	Shares		Amount		Shares		Amount		Shares		Amount		Capital			Receivable		Compensation			(Loss) Income		Stage			(Deficit)
	(In thousands, except share and per share amounts)

Balance at December 31, 2006 (brought forward)		—	$	—		—	$	—		23,819,313	$	2	$	170,442		$	—	$	(1,703	)	$	9	$	(118,976	)	$	49,774
Issuance of common stock for cash and shares upon exercise of options at a weighted average price of $1.28 per share		—		—		—		—		204,423		—		432			—		—			—		—			432
Issuance of common stock for cash under the Company’s Employee Stock Purchase Plan		—		—		—		—		205,870		—		1,405			—		—			—		—
Issuance of common stock upon vesting of restricted stock units		—		—		—		—		8,245		—		—			—		—			—		—			—
Issuance of common stock for cash, net of offering costs of $4,743		—		—		—		—		6,900,000		1		65,981			—		—			—		—			65,982
Compensation expense related to consultant stock options		—		—		—		—		—		—		75			—		—			—		—			75
Compensation expense related to fair value of employee share based awards issued after January 1, 2006		—		—		—		—		—		—		2,733			—		—			—		—			2,733
Amortization of deferred stock compensation		—		—		—		—		—		—		—			—		577			—		—			577
Reversal of deferred stock compensation in connection with employee terminations		—		—		—		—		—		—		(387	)		—		387			—		—			—
Unrealized gain on investments		—		—		—		—		—		—		—			—		—			132		—			132
Net loss		—		—		—		—		—		—		—			—		—			—		(45,119	)		(45,119	)

Comprehensive loss		—		—		—		—		—		—		—			—		—			—		—			(44,987	)

Balance at December 31, 2007		—	$	—		—	$	—		31,137,851	$	3	$	240,681		$	—	$	(739	)	$	141	$	(164,095	)	$	75,991

See accompanying notes.

ALEXZA PHARMACEUTICALS, INC
(a development stage company)

CONSOLIDATED STATEMENTS OF CASH FLOWS


										Period From
										December 19,
										2000
	Year Ended									(Inception) to
	December 31,									December 31,
	2007			2006			2005			2007
	(In thousands)

Cash flows from operating activities:
Net loss	$	(45,119	)	$	(41,806	)	$	(32,402	)	$	(164,095	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss attributed to noncontrolling interests		(10,791	)		(1,720	)		—			(12,511	)
Stock compensation expense — consultants		75			145			195			500
Stock compensation expense — employees		2,733			1,345			442			4,539
Extinguishment of officer notes receivable		—			—			2,300			2,300
Amortization of deferred stock compensation		577			727			404			1,708
Issuance of common stock for intellectual property		—			—			—			92
Charge for acquired in-process research and development		—			—			—			3,916
Amortization of assembled workforce		—			—			—			222
Amortization of debt discount and deferred interest		49			35			47			324
Amortization of premium/(discount) on available-for-sale securities		(929	)		(1,035	)		444			70
Depreciation		4,016			3,677			2,082			11,465
Loss on disposal of property and equipment		23			28			6			66
Changes in operating assets and liabilities:
Receivables		(12,055	)		35			292			(12,055	)
Prepaid expenses and other current assets		(114	)		534			(1,001	)		(1,371	)
Other assets		42			7			(148	)		(2,601	)
Accounts payable		(727	)		3,009			1,994			5,077
Accrued clinical trial expense and other accrued expenses		898			505			251			2,688
Deferred revenues		10,000			—			—			10,000
Other liabilities		15,494			1,191			3,138			20,075

Net cash used in operating activities		(35,828	)		(33,323	)		(21,956	)		(129,591	)

Cash flows from investing activities:
Purchase of available-for-sale securities		(62,466	)		(72,129	)		(39,074	)		(277,802	)
Maturities of available-for-sale securities		51,064			69,194			60,639			239,820
Purchase of available-for-sale securities held by Symphony Allegro, Inc.		—			(49,975	)		—			(49,975	)
Maturities of available-for-sale securities held by Symphony Allegro, Inc.		10,507			19			—			10,526
Decrease (increase) in restricted cash		—			(400	)		(19	)		(604	)
Purchases of property and equipment		(19,059	)		(8,067	)		(5,609	)		(37,425	)
Proceeds from disposal of property and equipment		—			—			—			3
Cash paid for merger		—			—			—			(250	)

Net cash provided by (used in) investing activities		(19,954	)		(61,358	)		15,937			(115,707	)

Cash flows from financing activities:
Proceeds from issuance of common stock and exercise of stock options and stock purchase rights		67,819			45,993			357			114,312
Repurchase of common stock		—			—			—			(8	)
Proceeds from issuance of convertible preferred stock		—			—			—			104,681
Proceeds from repayment of stockholder note receivable		—			—			—			29
Proceeds from equipment term loans		5,814			3,997			4,923			18,932
Payments of equipment term loans and leases		(3,546	)		(2,235	)		(1,192	)		(8,482	)
Proceeds from purchase of non controlling interest by preferred shareholders in Symphony Allegro, Inc., net of fees		—			47,171			—			47,171

Net cash provided by financing activities		70,087			94,926			4,088			276,635

Net increase (decrease) in cash and cash equivalents		14,305			245			(1,931	)		31,337
Cash and cash equivalents at beginning of period		17,032			16,787			18,718			—

Cash and cash equivalents at end of period	$	31,337		$	17,032		$	16,787		$	31,337

Supplemental disclosures of cash flow information
Cash paid for interest	$	1,003		$	728		$	285		$	2,330

Non cash investing and financing activities:
Conversion of convertible preferred stock to common stock	$	—		$	107,194		$	—		$	107,194

Warrant issued in conjunction with Symphony Allegro transaction	$	—		$	10,708		$	—		$	10,708

See accompanying notes.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	The Company and Basis of Presentation

Business

Alexza Pharmaceuticals, Inc. (“Alexza” or the “Company”), was incorporated in the state of Delaware on December 19, 2000 as FaxMed, Inc. In June 2001, the Company changed its name to Alexza Corporation and in December 2001 became Alexza Molecular Delivery Corporation. In July 2005, the Company changed its name to Alexza Pharmaceuticals, Inc.

The Company is an emerging pharmaceutical company focused on the development and commercialization of novel, proprietary products for the treatment of acute and intermittent conditions. The Company’s primary activities since incorporation have been establishing its offices, recruiting personnel, conducting research and development, conducting preclinical studies and clinical trials, performing business and financial planning, and raising capital. Accordingly, the Company is considered to be in the development stage and operates in one business segment.

Basis of Consolidation

The consolidated financial statements include the accounts of Alexza and its variable interest entity, Symphony Allegro, Inc., for which Alexza is the primary beneficiary as defined in Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised 2003), Consolidation of Variable Interest Entities (“FIN 46R”). All significant intercompany balances and transactions have been eliminated.

Reverse Stock Split

In February 2006, the Company’s Board of Directors and stockholders approved a one-for-five and one-half reverse stock split. A Certificate of Amendment to the Company’s Restated Certificate of Incorporation was filed on February 27, 2006 effecting the one-for-five and one-half reverse stock split. All common share and per share amounts retroactively reflect the one-for-five and one-half reverse stock split.

Public Offerings

In March 2006, the Company completed its initial public offering of 6,325,000 shares of its common stock, including the full underwriters’ over-allotment option, at a public offering price of $8.00 per share. Net cash proceeds from the initial public offering were approximately $44.9 million, after deducting underwriting discounts and commissions and other offering expenses. In connection with the closing of the initial public offering, all of the Company’s shares of convertible preferred stock outstanding at the time of the offering were automatically converted into 15,197,712 shares of common stock.

In May 2007, the Company completed a public offering of 6,900,000 shares of its common stock, including the full underwriters’ over-allotment option, at a public offering price of $10.25 per share. Net cash proceeds from the public offering were approximately $66.0 million, after deducting underwriting discounts and commissions and other offering expenses


2.	Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fair Value of Financial Instruments

The Company carries cash, cash equivalents and available for sale marketable securities at fair value. The Company’s other financial instruments, including accounts payable and accrued liabilities, are carried at cost, which management believes approximates fair value given their short-term nature.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk consist of cash, cash equivalents and marketable securities and restricted cash to the extent of the amounts recorded on the balance sheets. The Company’s cash, cash equivalents, marketable securities and restricted cash are placed with high credit-quality financial institutions and issuers. All cash, cash equivalents, marketable securities and investments held by Symphony Allegro, Inc. are maintained with financial institutions that the Company’s management believes are high credit-quality. Marketable securities held by Symphony Allegro, Inc. consist of investments in a money market fund that invests primarily in domestic commercial paper, securities issued or guaranteed by the U.S. government or its agencies, U.S. and Yankee bank obligations and fully collateralized repurchase agreements. The Company believes that its established guidelines for investment of its excess cash maintain liquidity through its policies on diversification and investment maturity.

Cash Equivalents and Marketable Securities

Management determines the appropriate classification of its investments at the time of purchase. These securities are recorded as either cash equivalents or marketable securities.

The Company considers all highly liquid investments with original maturities of three months or less from date of purchase to be cash equivalents. Cash equivalents consist of interest-bearing instruments including obligations of U.S. government agencies, high credit rating corporate borrowers and money market funds, which are carried at market value.

All other investments are classified as available for sale marketable securities. The Company views its available for sale investments as available for use in current operations. Accordingly, the Company has classified all investments as short-term marketable securities, even though the stated maturity date may be one year or more beyond the current balance sheet date. Marketable securities are carried at estimated fair value with unrealized gains or losses included in accumulated other comprehensive income (loss) in stockholders’ equity. The fair value of marketable securities is based on quoted market prices.

The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest and other income (expense), net. Realized gains and losses are also included in interest and other income (expense), net. The cost of all securities sold is based on the specific-identification method. Interest and dividends are included in interest income.

The Company reviews its investments for other than temporary decreases in market value on a quarterly basis. Through December 31, 2007, the Company has not recorded an other than temporary impairment.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Property and equipment are depreciated using the straight-line method over the estimated life of the asset, generally three years for computer equipment and five years for laboratory equipment and furniture. Leasehold improvements are amortized over the estimated useful life or the remaining lease term, whichever is shorter.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Restricted Cash

Under the Company’s facility lease agreements and an agreement with its utilities provider, the Company must maintain letters of credit as security for performance under these agreements. The letters of credit are secured by certificates of deposits in amounts equal to the letters of credit, which are classified as restricted cash, a non-current asset. At December 31, 2007 and 2006 the Company maintained the following letters of credit and restricted cash balances (in thousands):


	December 31,
	2007		2006

Mt. View facility	$	400	$	400
Palo Alto facilities		163		163
Palo Alto utility account		41		41

	$	604	$	604

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The impairment loss, if recognized, would be based on the excess of the carrying value of the impaired asset over its respective fair value. Impairment, if any, is assessed using discounted cash flows.

Revenue Recognition

The Company recognizes revenue in accordance with the Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements (SAB 101), as amended by Staff Accounting Bulletin No. 104, Revision of Topic 13 (SAB 104).

Revenue has consisted primarily of amounts earned under research grants with the National Institutes of Health. The Company’s federal government research grants provided for the reimbursement of qualified expenses for research and development as defined under the terms of each grant. Equipment purchased specifically for grant programs was recorded at cost and depreciated over the grant period. Revenue under grants was recognized when the related qualified research and development expenses were incurred up to the limit of the approval funding amounts.

In determining the accounting for collaboration agreements, the Company follows the provisions of Emerging Issues Task Force (EITF) Issue 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21). EITF 00-21 provides guidance on whether an arrangement involves multiple revenue-generating deliverables that should be accounted for as a single unit of accounting or divided into separate units of accounting for revenue recognition purposes and, if this division is required, how the arrangement consideration should be allocated among the separate units of accounting. If the arrangement represents a single unit of accounting, the revenue recognition policy and the performance obligation period must be determined (if not already contractually defined) for the entire arrangement. If the arrangement represents separate units of accounting according to the EITF’s separation criteria, a revenue recognition policy must be determined for each unit. Revenues for non-refundable upfront license fee payments will be recognized on a straight line basis as Collaboration Revenue over the estimated performance period.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Research and Development

Research and development expenses include personnel and facility-related expenses, outside contracted services including clinical trial costs, manufacturing and process development costs, research costs and other consulting services. Research and development costs are expensed as incurred.

Clinical development costs are a significant component of research and development expenses. The Company has a history of contracting with third parties that perform various clinical trial activities on its behalf in the ongoing development of its product candidates. The financial terms of these contracts are subject to negotiations and may vary from contract to contract and may result in uneven payment flow. The Company accrues and expenses costs for clinical trial activities performed by third parties based upon estimates of the percentage of work completed over the life of the individual study in accordance with agreements established with contract research organizations and clinical trial sites.

Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.

The Company’s adoption of the provisions of FIN 48 on January 1, 2007 did not have a material impact on the Company’s financial statements. The Company adopted the accounting policy that interest recognized in accordance with Paragraph 15 of FIN 48 and penalties recognized in accordance with Paragraph 16 of FIN 48 are classified as part of its income tax provision.

Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net loss and unrealized gains (losses) on marketable securities. Total comprehensive income (loss) for all periods presented has been disclosed in the Company’s Consolidated Statement of Convertible Preferred Stock and Stockholders’ Equity (Deficit).

Share-Based Compensation

In December 2004, the FASB issued Statement of Financial Accounting Standards 123R (“SFAS 123R”), Share-Based Payment. This revised standard addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. Under SFAS 123R, companies are no longer able to account for share-based compensation transactions using the intrinsic-value method, the Company’s previous accounting method, in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”). Instead,

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

companies are required to account for such transactions using a fair-value method and recognize the expense in the statement of operations.

On January 1, 2006, the Company adopted SFAS 123R using the prospective transition method, as required by the statement. Under this transition method, beginning January 1, 2006, employee share-based compensation cost recognized includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested, as of December 31, 2005 for (i) employees using the intrinsic value in accordance with the provisions of APB 25 and (ii) non-employees using the fair value in accordance with the provisions of SFAS 123, and (b) compensation cost for all share-based payments granted or modified subsequent to December 31, 2005, based on the fair value estimated in accordance with the provisions of SFAS 123R.

All share-based payment awards are amortized on a ratable basis over the requisite service periods of the awards, which are generally the vesting periods.

Employee Share-Based Awards Granted Prior to January 1, 2006

Compensation cost for employee stock options granted prior to January 1, 2006, the date the Company adopted SFAS 123R, are accounted for using the option’s intrinsic value. The Company recorded the total valuation of these options as a component of stockholders’ equity (deficit), which will be amortized over the vesting period of the applicable option on a straight line basis. During the years ended December 31, 2007 and 2006, the Company reversed $387,000 and $495,000, respectively, of deferred stock-based compensation related to unvested options cancelled as a result of employee terminations. The Company had no such reversals in the year ended December 31, 2005. At December 31, 2007, the expected future amortization expense related to employee options granted prior to January 1, 2006 is as follows (in thousands):


2008		471
2009		268

	$	739

Employee Share-Based Awards Granted On or Subsequent to January 1, 2006

Compensation cost for employee share-based awards granted on or after January 1, 2006, the date the Company adopted SFAS 123R, is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R and will be recognized over the vesting period of the applicable award on a straight-line basis. During the years ended December 31, 2007 and 2006 the Company issued employee share-based awards in the form of stock options and restricted stock units under the Company’s equity incentive plans and stock purchase rights under the Company’s employee stock purchase plan.

Stock Options, Stock Purchase Rights and Restricted Stock Units

During the years ended December 31, 2007 and 2006, the weighted average fair value of the employee stock options granted was $6.22 and $5.50, respectively, the weighted average fair value of stock purchase rights granted was $3.44 and $3.23, respectively, and the weighted average fair value of restricted stock units granted was $8.89 and $7.00, respectively.

The estimated fair value of restricted stock unit awards is calculated based on the market price of Alexza’s common stock on the date of grant, reduced by the present value of dividends expected to be paid on Alexza common stock prior to vesting of the restricted stock unit. The Company’s estimate assumes no dividends will be paid prior to the vesting of the restricted stock unit.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The estimated grant date fair values of the stock options and stock purchase rights were calculated using the Black-Scholes valuation model, and the following assumptions:


	Year Ended December 31,
	2007			2006

Stock Option Plans
Weighted-average expected term		6.1 years			6.1 years
Expected volatility		73	%		80	%
Risk-free interest rate		4.72	%		4.71	%
Dividend yield		0	%		0	%
Employee Stock Purchase Plan
Weighted-average expected term		1.42 years			1.4 years
Expected volatility		53	%		53	%
Risk-free interest rate		4.31	%		4.77	%
Dividend yield		0	%		0	%

Weighted-Average Expected Life. Under the stock option plans, the expected term of options granted is determined using the “shortcut” method, as illustrated in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107 (“SAB 107”). Under this approach, the expected term is presumed to be the average of the vesting term and the contractual term of the option.

Under the Employee Stock Purchase Plan, the expected term of employee stock purchase plan shares is the average of the remaining purchase periods under each offering period at the time of an employee’s enrollment.

Volatility. Since the Company has been operating as a public entity for a period that is significantly shorter than it estimated option life, the expected volatility used for fiscal 2007 and 2006 is based on volatility of similar entities (referred to as “guideline” companies). In evaluating similarity, the Company considered factors such as industry, stage of life cycle, size, and financial leverage.

Risk-Free Interest Rate. The risk-free rate that the Company uses in the Black-Scholes option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options or purchase rights on the date of grant.

Dividend Yield. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.

Forfeiture Rate. SFAS 123R also requires the Company to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. The Company’s estimated forfeiture rate is approximately 5.9%.

As of December 31, 2007, there was $7,364,000, $650,000 and $1,640,000 total unrecognized compensation costs related to non-vested stock option awards issued after January 1, 2006, non-vested restricted stock units and stock purchase rights, respectively, which are expected to be recognized over a weighted average period of 3.1 years, 3.4 years and 1.2 years, respectively.

Nonemployee Stock Option Awards

During 2007, the Company had unvested options to purchase shares of common stock to nonemployees with exercise prices ranging from $1.10 to $11.70. The Company used the Black-Scholes valuation model, using estimated volatility rates ranging from 53% to 80%, an expected life representing the remaining contractual life,

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

which ranged from 1.25 to 10 years, an expected dividend yield of 0% and a weighted average risk-free interest rate ranging from 4.62% to 4.83%. As of December 31, 2007, stock options to acquire 4,443 shares are subject to remeasurement of fair value. The stock compensation costs of these options granted to nonemployees are remeasured over the vesting terms as earned, and the resulting value is recognized as an expense over the period of service received.

Settlement and Modification of Stock Option Awards

In December 2005, the Company extinguished housing loans that were made to three executive officers, the Chief Executive Officer, Senior Vice President of Corporate and Business Development, and Senior Vice President of Research and Development, having an aggregate principal value of $2.3 million and agreed to pay $1.7 million of taxes related to the extinguishment on the officers’ behalf. In connection with the loan extinguishment agreements, the Company entered into a commitment with the officers to settle the loan extinguishment, prior to the closing of the Company’s initial public offering, by reducing the aggregate intrinsic value of certain stock option awards to acquire up to 490,908 common shares.

On March 7, 2006 (“the Settlement Date”), in settlement for the extinguishment of the officer housing loans, the Company increased the exercise price on the above mentioned stock option awards held by these officers from $1.10 per share to $8.00 per share, the initial public offering price, which reduced the aggregate intrinsic value of these options by $3.4 million. These options were accounted for as variable awards. As a result of changes in the Company’s stock price, the Company recorded a $442,000 reduction in compensation expense in 2006. In 2005, the Company recorded share-based compensation expense of $442,000 related to these options and did not incur such an expense in 2004. As the exercise price was fixed in March 2006, the contingency was resolved and variable accounting for these options ceased.

Also on the Settlement Date, the Company entered into amended loan extinguishment agreements with the above mentioned officers, whereby the Company was given the right to increase the exercise price of selected options to $8.00 per share, resulting in an additional reduction in aggregate intrinsic value of $0.6 million. This modification was accounted for under SFAS 123R, and resulted in no additional share-based compensation expense.

There was no share-based compensation capitalized as of December 31, 2007.

Recent Accounting Pronouncements

Statement of Financial Accounting Standard No. 157

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management is currently evaluating the impact of the provisions of SFAS 157 on its financial position, results of operations and cash flows but does not believe the impact of the adoption will be material.

Statement of Financial Accounting Standard No. 159

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The provisions of SFAS 159 are effective for financial statements issued for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact of electing to adopt the

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

provisions of SFAS 159 on its financial position, results of operations and cash flows, and therefore, the impact of adoption is unknown at this time.

Statement of Financial Accounting Standard No. 160

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 will require that noncontrolling interests in subsidiaries be reported as a component of stockholders’ equity in the consolidated balance sheet. SFAS 160 also requires that earnings or losses attributed to the noncontrolling interests be reported as part of consolidated earnings and not as a separate component of income or expense, as well as requires disclosure of the attribution of consolidated earnings to the controlling and noncontrolling interests on the face of the consolidated statement of operations. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of SFAS 160 on its consolidated financial statements.

Emerging Issues Task Force Issue No. 07-1

In November 2007, the Emerging Issue Task Force (“EITF”) ratified EITF Issue No. 07-1 (“EITF 07-1”), Accounting for Collaborative Agreements Related to the Development and Commercialization of Intellectual Property. EITF 07-1 addresses the accounting for participants in collaborative arrangements that are conducted without the creation of a separate legal entity and requires participants in collaboration to make separate disclosures regarding the nature and purpose of an arrangement, their rights and obligations under the arrangement, the accounting policy for the arrangement and the income statement classification and amounts arising from the arrangement between participants for each period a statement of operations is presented. The provisions of EITF 07-1 are effective for fiscal years beginning after December 15, 2008 The Company is currently evaluating the impact of the provisions of EITF 07-1 on its financial position, results of operations and cash flows.

Emerging Issues Task Force Issue No. 07-3

In June 2007, the EITF ratified EITF Issue No. 07-3 (“EITF 07-3”), Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities. The scope of EITF 07-3 is limited to nonrefundable advance payments for goods and services to be used or rendered in future research and development activities pursuant to an executory contractual arrangement. This issue provides that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the related goods are delivered or the related services are performed. EITF 07-3 is effective for fiscal years beginning after December 15, 2007 and earlier application is not permitted. The Company is currently evaluating the impact of the provisions of EITF 07-3 on its financial position, results of operations and cash flows but does not believe the impact of the adoption will be material.


3.	Net Loss per Share

Basic and diluted net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period less weighted average shares subject to repurchase, of which there were none in 2007, 2006 or 2005. Outstanding stock options, warrants, unvested restricted stock units, and shares to be issued upon conversion of outstanding convertible preferred stock, if any, are not included in the net loss per share calculation for the years ended December 31, 2007, 2006 and 2005 because the inclusion of such shares would have had an anti-dilutive effect.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Potentially dilutive securities include the following (in thousands):


	Year Ended December 31,
	2007		2006		2005

Outstanding stock options		3,207		2,611		2,008
Unvested restricted stock units		93		34		—
Warrants to purchase common stock		2,016		2,016		178
Convertible preferred stock		—		—		79,857


4.	Cash, Cash Equivalents, Marketable Securities and Restricted Cash

Cash, cash equivalents, marketable securities and restricted cash consisted of:


	December 31,
	2007		2006
	(In thousands)

Cash	$	327	$	401
Money market accounts		17,527		16,631
Certificates of deposit		604		604
Commercial paper		14,928		—
Government securities		5,998		—
Corporate debt securities		29,121		25,591
Asset-backed securities		1,490		—

	$	69,995	$	43,227

Reported as:
Cash and cash equivalents	$	31,337	$	17,032
Marketable securities		38,054		25,591
Restricted cash		604		604

	$	69,995	$	43,227

At December 31, 2007, all securities had a maturity date of less than one year.

Fair values of cash equivalents and marketable securities approximate cost primarily due to the short-term maturities of the investments and the low incidence of changes in security credit ratings. Unrealized gains on available-for-sale securities of $132,000 were reported as a component of stockholders’ equity.

Investments held by Symphony Allegro, Inc. consist of investments in a money market fund that invests primarily in domestic commercial paper, securities issued or guaranteed by the U.S. government or its agencies, U.S. and Yankee bank obligations and fully collateralized repurchase agreements. The marketable securities held by Symphony Allegro are used to fund the development of AZ-002, AZ-004 and AZ-104 and are not available for general corporate expenses.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


5.	Property and Equipment

Property and equipment consisted of the following:


	December 31,
	2007			2006
	(In thousands)

Lab equipment	$	10,628		$	9,490
Computer equipment and software		4,763			4,175
Furniture		996			609
Leasehold improvements		20,687			4,231

		37,074			18,505
Less: accumulated depreciation		(10,918	)		(7,369	)

	$	26,156		$	11,136

Property and equipment also includes equipment that secures the Company’s equipment financing agreements of $16,036,000 and $13,653,000 at December 31, 2007 and 2006, respectively. Accumulated depreciation related to assets under the equipment financing loans was $9,190,000 and $6,090,000 at December 31, 2007 and 2006, respectively. Amortization of property and equipment under equipment financing agreements is included in depreciation and amortization expense in the statement of cash flows.


6.	Other Accrued Liabilities

Accrued liabilities consisted of the following:


	December 31,
	2007		2006
	(In thousands)

Accrued compensation	$	3,532	$	2,856
Accrued professional fees		555		349
Other		1,000		644

	$	5,087	$	3,849


7.	Commitments

Equipment Financing Obligations

The Company finances a portion of its fixed asset acquisitions through equipment financing agreements. Loans drawn from the equipment financing agreement are secured by certain fixed assets of the Company. Fixed asset purchases used to secure draws on the equipment financing agreement are recorded on the Company’s balance sheet at cost. A liability is recorded upon the Company making a draw on the agreements.

In May 2005, the Company consolidated $2,714,000 of borrowings under an equipment financing agreement into one term loan with 48 equal monthly installments and a fixed interest rate of 7.25%.

In May 2005, the Company entered into an equipment financing agreement with a second lender for up to $8,100,000. The agreement was amended in 2006 to increase the available credit to $8,700,000. Advances are to be repaid in 48 installments of principal and interest. The interest rate, which is fixed for each draw, is based on the U.S. Treasuries of comparable maturities and has ranged from 9.2% to 9.98%. The equipment purchased under the

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

equipment financing agreement is pledged as security. No additional borrowings are available under this agreement as of December 31, 2006.

In December 2006, the Company entered into an equipment financing agreement with two lenders for up to $12,000,000. Advances are to be repaid in 36 — 48 monthly installments of principal and interest. The interest rate, which is fixed for each draw, is based on the U.S. Treasuries of comparable maturities. The equipment purchased under the equipment financing agreement is pledged as security. The funding period under the agreement terminated on December 31, 2007. In February 2008, the Company signed a proposal from the lender to allow the Company to borrow up to $3,600,000 between the extension date and February 28, 2009.

Future principal payments under the equipment financing agreements as of December 31, 2007 are as follows (in thousands):


2008	$	4,586
2009		4,048
2010		1,916
2011		353

Total	$	10,903

Operating Leases

The Company leases two buildings with an aggregate of 106,894 square feet of manufacturing, office and laboratory facilities in Mountain View, California, which the Company began to occupy in the fourth quarter of 2007. The Company currently occupies 87,560 square feet of these facilities and will gain access to the remaining 19,334 square feet on or about June 1, 2008. The lease included a provision for the Company to obtain access to the facilities prior to the commencement of rental payments and includes scheduled annual rent increases. The Company recognizes rental expense on the facility on a straight line basis over the initial term of the lease. Differences between the straight line rent expense and rent payments are classified as deferred rent liability on the balance sheet. The lease for both facilities expires on March 31, 2018, and the Company has two options to extend the lease for five years each.

The Mountain View lease, as amended, included $15,964,000 of tenant improvement reimbursements from the landlord. As of December 31, 2007, $1,310,000 remains available for reimbursement from the landlord. The Company has recorded all tenant improvements as additions to property and equipment and is amortizing the improvements over the shorter of the estimated useful life of the improvement or the remaining life of the lease. The reimbursements received from the landlord are included in deferred rent liability and amortized over the life of the lease as a contra-expense. At December 31, 2007, the Company recorded a $2,055,000 receivable for tenant improvement reimbursements due from the landlord. This amount is included in Other Receivables in the balance sheet.

The Company also leased (but did not occupy) premises in Pleasanton, California. This lease was initiated by Molecular Delivery Corporation prior to its merger with the Company. This lease expired in July 2005. The Company sublet this facility to a third party under a non-cancelable sublease through July 2005, the end of the lease.

The Company’s leases of its two facilities with an aggregate of 65,143 square feet of office and laboratory facilities in Palo Alto, California are due to expire in March 2008 and June 2008.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Future minimum lease payments under non-cancelable operating leases at December 31, 2007 were as follows (in thousands):


2008	$	4,424
2009		4,685
2010		4,942
2011		5,064
2012		5,189
Thereafter		25,687

Total minimum payments	$	49,991

Rental expense was $5,402,000, $2,514,000, $1,194,000, and $11,143,000, for the years ended December 31, 2007, 2006 and 2005, and for the period from December 19, 2000 (inception) to December 31, 2007, respectively. Rental income from the sublease agreement was $72,000, and $125,000 for the year ended December 31, 2005 and for the period from December 19, 2000 (inception) to December 31, 2007, respectively. The Company received no rental income in the years ended December 31, 2007 and 2006.


8.	License Agreements

Symphony Allegro, Inc.

On December 1, 2006 (the “Closing Date”), the Company entered into a series of related agreements with Symphony Capital LLC (“Symphony Capital”), Symphony Allegro Holdings LLC (“Holdings”) and Holdings’ wholly owned subsidiary Symphony Allegro, Inc., (“Allegro”) providing for the financing of the clinical development of its AZ-002, Staccato alprazolam, and the AZ-004/104, Staccato loxapine, product candidates (the “Programs”). The material agreements included the: (i) Purchase Option Agreement by and among Holdings and Allegro and Alexza (the “Purchase Option Agreement”); (ii) Warrant Purchase Agreement between Holdings and Alexza (the “Warrant Purchase Agreement”); (iii) Warrant to Purchase shares of Common Stock issued to Holdings (the “Warrant”); (iv) Amended and Restated Research and Development Agreement by and among Holdings and Allegro and Alexza (the “R&D Agreement”); and (v) Novated and Restated Technology License Agreement by and among Holdings and Allegro and Alexza (the “License Agreement”). Symphony Capital and other investors (“Symphony”) invested $50 million in Holdings, which then invested the $50 million in Allegro. Pursuant to the agreements, Allegro agreed to invest up to the full $50 million to fund the clinical development of the Programs, and the Company licensed to Allegro certain intellectual property rights related to these Programs.

Pursuant to the agreements, the Company continues to be primarily responsible for all preclinical, clinical and device development efforts, as well as maintenance of the intellectual property portfolio for the Programs. The Company and Allegro have established a Development Committee to oversee the Programs. The Company participates in the Development Committee and has the right to appoint one of the five members of the board of directors of Allegro.

Pursuant to the agreements, the Company has no further obligation beyond the items described above and the Company has no obligation to the creditors of Allegro as a result of our involvement with Allegro. The investments held by Allegro are to be used to fund the development of the Programs, and are not available for general corporate expenses.

Pursuant to the Warrant Agreement, the Company issued to Holdings a five-year warrant to purchase 2,000,000 shares of the Company’s common stock at $9.91 per share. The Warrant, issued upon closing, was assigned a value of $10.7 million using the Black-Scholes valuation model and has been recorded in additional paid in capital.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In consideration for the Warrant, the Company received an exclusive purchase option (the “Purchase Option”) that gives the Company the right, but not the obligation, to acquire all, but not less than all, of the equity of Allegro, thereby allowing the Company to reacquire all of the Programs. This Purchase Option is exercisable at any time from December 1, 2007 to December 1, 2010, at predetermined prices that increase over time and range from $67.5 million starting December 31, 2007 to $122.5 million through November 30, 2010. The Purchase Option exercise price may be paid for in cash or in a combination of cash and the Company’s common stock, at the Company’s sole discretion, provided that the common stock portion may not exceed 40% of the Purchase Option exercise price, or 10% of our common stock issued and outstanding as of the purchase option closing date.

The Company determined, pursuant to the guidance in FIN 46R, that Allegro is a variable interest entity and the Company is the primary beneficiary. As a result, the Company has included the financial position and results of operations of Allegro in its consolidated financial statements from the date of Allegro’s formation in December 2006. The noncontrolling interest in Symphony Allegro, Inc., as presented on the consolidated balance sheets, represents Symphony’s equity investment in Allegro of $50.0 million equity reduced by $10.7 million for the value of the Purchase Option, and by $2.85 million for a structuring fee and related expenses that the Company paid to Symphony Capital in connection with the closing of the Allegro transaction, resulting in the recording of a net noncontrolling interest of $36.5 million on the effective date. The Company has charged the losses incurred by Allegro to the noncontrolling interest in the determination of the Company’s net loss in the consolidated statements of operations and the Company also reduced the noncontrolling interest in the consolidated balance sheets by Allegro’s losses. For the years ended December 31, 2007 and 2006, the net losses of Allegro charged to the noncontrolling interest were $10.8 million and $1.7 million, respectively. The Company will charge losses to the noncontrolling interest up to an aggregate of $36.5 million, the amount classified as noncontrolling interest on the effective date. After the Company charges $36.5 million of losses to the noncontrolling interest, the Company will be required to absorb the losses of Allegro.

Endo Pharmaceuticals, Inc.

On December 27, 2007, the effective date, the Company entered into a license, development and supply agreement, or the license agreement, with Endo Pharmaceuticals, Inc. (“Endo”) for AZ-003 (Staccato fentanyl) and the fentanyl class of molecules for North America. Under the terms of the license agreement, Endo owed the Company a $10 million upfront fee on the effective date of the license agreement. This amount was included in Other Receivables as of December 31, 2007 and was subsequently received by the Company. Endo will pay potential additional milestone payments of up to $40 million upon achievement of predetermined regulatory and clinical milestones. Endo will also pay royalties to the Company on net sales of the product, from which the Company will pay for the cost of goods for the manufacture of the commercial version of the product.

The Company has primary responsibility for the development and costs of the Staccato Electronic Multiple Dose device and the exclusive right to manufacture the product for clinical development and commercial supply. The Company and Endo have established a Joint Steering Committee and a Joint Development Committee to oversee the development of AZ-003. The Company has the right but not the obligation to participate on each of the committees. Endo has responsibility for future pre-clinical, clinical and regulatory development, and, if AZ-003 is approved for marketing, for commercializing the product in North America. Each party will be responsible for all internal costs and expenses incurred related to the respective area of responsibility. Generally speaking, each party will also be responsible for external development costs incurred related to the respective area of responsibility, but the Company agreed to pay certain external development costs incurred by Endo in excess of an agreed upon threshold, with a maximum expense to the Company of $20 million. The Company will recognize expenses related to the agreement when incurred.

The Company retains all rights outside of North America. Endo has the right to terminate the license agreement upon 90 days written notice. Upon such termination, all rights to the product, including regulatory

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

filings, data and clinical and non-clinical data for use with the product will revert to Alexza. The Company recorded the $10 million upfront fee as deferred revenue as of December 31, 2007.


9.	Related Party Transactions

Chief Executive Officer Note Receivable

In June 2003, in connection with a new home purchase associated with relocation to the San Francisco Bay Area, the Company loaned its chief executive officer (“CEO”) $1,200,000 pursuant to a secured, non-interest bearing promissory note. The note was due and payable upon certain conditions, including the filing of a registration statement in connection with an initial public offering.

In January 2005, the Company amended the loan agreement, CEO note and stock option agreement. The amendment provided that, prior to the filing of a registration statement in connection with an initial public offering, the Company had the right to repurchase a portion of the stock option or shares underlying the stock option having a value determined by the board of directors up to $1,200,000 plus applicable taxes incurred by the CEO. The vesting of the stock option may be accelerated to the extent necessary for the Company to repurchase the portion of the stock option or shares underlying the stock option it elects to repurchase. The amendment also provided that in the event the stock option shares or shares underlying the stock option are repurchased, the Company would grant the CEO a new stock option for the number of shares repurchased at the then fair market value of common stock.

The Company recorded $58,000 of interest income and compensation expense during the year ended December 31, 2005.

Senior Vice President of Corporate and Business Development Notes Receivable

In April 2004, in connection with a new home purchase associated with relocation to the San Francisco Bay Area, the Company loaned its senior vice president of corporate and business development (“Senior VP”) $1,000,000 in the form of two secured promissory notes in the amount of $500,000 each. The first promissory note was temporary, carried interest at a rate of 5.00% per annum, and was due and payable to the Company no later than December 31, 2004. The second note was non-interest bearing and was due and payable upon certain conditions, including the filing of a registration in connection with an initial public offering. In October 2004, the Senior VP made a $455,000 principal payment on the first, temporary promissory note.

In April 2005, the Company amended the second Senior VP note and stock option agreement and loaned the Senior VP an additional $100,000 pursuant to a third secured promissory note. The third note was non-interest bearing. The officer used $58,000 of the proceeds to pay the remaining principal and interest on the first promissory note. The third note was due and payable upon certain conditions, including the filing of a registration statement in connection with an initial public offering.

The amendment provided that prior to the filing of a registration statement in connection with an initial public offering, the Company had the right to repurchase a portion of the stock option having a value determined by the board of directors up to $600,000 plus applicable taxes incurred by the Senior VP. The vesting of the stock option may be accelerated to the extent necessary for the Company to repurchase the portion of the stock option or shares underlying the stock option it elects to repurchase. The amendment also provided that in the event the stock option or shares underlying the stock option are repurchased, the Company would grant the Senior VP a new stock option for the number of shares repurchased at the then fair market value of common stock.

During the year ended December 31, 2005 the Company recorded $31,000 of interest income and compensation expense, respectively, related to the Senior VP’s notes.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Senior Vice President of Research and Development Note Receivable

In December 2004, in connection with a new home purchase associated with relocation to the San Francisco Bay Area, the Company loaned its senior vice president of research and development (“Senior VP of R&D”) $500,000 pursuant to a secured, non-interest bearing promissory note. The note was secured by a stock option agreement with the Senior VP of R&D for the purchase of 109,090 shares of common stock. The note was due and payable upon certain conditions, including the filing of a registration statement in connection with an initial public offering. Prior to the filing of a registration statement in connection with an initial public offering, the Company had the right to repurchase a portion of the stock option or shares underlying the stock option having a value determined by the board of directors up to $500,000 plus applicable taxes incurred by the Senior VP of R&D. The vesting of the stock option may be accelerated to the extent necessary for the Company to repurchase the portion of the stock option or shares underlying the stock option it elects to repurchase. The amendment also provided that in the event the stock option or shares underlying the stock option are repurchased, the Company would grant the Senior VP of R&D a new stock option for the number of shares repurchased at the then fair market value of common stock.

During the year ended December 31, 2005, the Company recorded $30,000 of interest income and compensation expense, respectively, related to the Senior VP of R&D’s note.

Extinguishment of Officer Notes

In December 2005, the Company extinguished the housing loans that were made to three executive officers, the Chief Executive Officer, Senior Vice President of Corporate and Business Development, and Senior Vice President of Research and Development, having an aggregate principal value of $2.3 million and agreed to pay $1.7 million of taxes related to the extinguishment on the officers’ behalf. In connection with the loan extinguishment agreements, the Company entered into a commitment with the officers to settle the loan extinguishment, prior to the closing of the Company’s initial public offering, by reducing the aggregate intrinsic value of certain stock option awards to acquire up to 490,908 common shares. As a result, variable stock-based compensation expense in the statement of operations and accrued stock compensation expense on the balance sheet were reduced from $4.5 million to $442,000, which reflects a reduction equal to the $4.0 million loan extinguishment and related taxes.

The remaining accrued stock compensation expense liability was reclassified to additional paid-in-capital on the balance sheet upon extinguishment. The remaining unamortized discount on officer notes receivable of $60,000 was offset against deferred compensation at the time of the officer note extinguishments.

On March 7, 2006 (“the Settlement Date”), in settlement for the extinguishment of the officer housing loans, the Company increased the exercise price on the above mentioned stock option awards held by these officers from $1.10 per share to $8.00 per share, the initial public offering price, which reduced the aggregate intrinsic value of these options by $3.4 million. These options were accounted for as variable awards. As a result of changes in the Company’s stock price, the Company recorded a $442,000 reduction in share-based compensation expense during the three months ended March 31, 2006. As the exercise price was fixed in March 2006, the contingency was resolved and variable accounting for these options ceased.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Employee Loan

In May 2005, the Company entered into a secured, non-interest bearing promissory note with an employee, the proceeds of which were used to assist with the purchase of a new home. The promissory note was in the amount of $100,000 and was due and payable in May 2010. Since there was no established exchange price or ready market for the employee note, the Company estimated the note’s present value using a 5.87% interest rate, resulting in a total note receivable discount and a deferred charge of $25,000. The discount on the note receivable and the deferred charge were being amortized to compensation expense over the five year term. During the years ended December 31, 2007, 2006 and 2005, the Company recorded $1,000, $5,000 and $3,000 of compensation expense and interest income, respectively. In 2007, the note was repaid in full.


10.	Common Stock

The Company had reserved shares of common stock for future issuances as of December 31, 2007 as follows:


Stock options outstanding			3,206,864
Unvested restricted stock units outstanding			93,125
2005 Equity Incentive Plan and 2005 Non Employee Director Stock Option Plan — shares available for issuance			339,250
Employee Stock Purchase Plan — shares available for issuance			400,641
Warrants outstanding			2,015,720

Total			6,055,600


11.	Warrants

In March 2002, in connection with an equipment financing agreement, the Company issued immediately exercisable and fully vested warrants to purchase 21,429 shares of Series B preferred stock at a per share price of $1.40. The warrants expire on the later of March 20, 2012 or seven years after the date of the Company’s initial public offering. The Company recorded a deferred financing cost of $27,000 related to the issuance of these warrants. The Company valued these warrants using the Black-Scholes valuation model, assuming an exercise price and fair value of $1.40, an expected volatility of 100%, an expected life of 10 years, an expected dividend yield of 0%, and a risk-free interest rate of 4.61%. The estimated fair value of the warrants is recorded as debt discount. This amount is amortized to interest expense over the commitment term of the equipment financing agreement. In 2006, the warrant was converted to purchase 4,116 shares of common stock at a price of $7.29 per share. As of December 31, 2007, this warrant remained outstanding.

In January and September 2003, in connection with the modifications of an equipment financing agreement, the Company issued immediately exercisable and fully vested warrants to purchase 24,058 and 19,247 shares of Series C preferred stock, respectively, at a per share price of $1.56. The warrants expire at the earlier of seven years after the date of the Company’s initial public offering or January 27, 2013 and September 19, 2013, respectively. The Company valued these warrants using the Black-Scholes valuation model, assuming an exercise price and fair value of $1.56, an expected volatility of 100%, an expected life of 10 years, an expected dividend yield of 0%, and risk-free interest rate of 4.05% and 4.45%, respectively. The estimated fair values of $35,000 and $27,000, respectively, are recorded as debt discount and are being amortized to interest expense over the remaining commitment term of the financing agreement. In 2006, these warrants were converted into warrants to purchase 4,852 shares and 3,882 shares of common stock, both at a price of $7.74 shares. As of December 31, 2007, both of these warrants remained outstanding.

In March 2004, in connection with the modifications of an equipment financing agreement, the Company issued immediately exercisable and fully vested warrants to purchase 14,232 shares of Series C preferred stock at a

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

per share price of $1.56. The warrants expire at the earlier of seven years after the date of the Company’s initial public offering or April 9, 2014. The Company valued these warrants using the Black-Scholes valuation model, assuming an exercise price and fair value of $1.56, an expected volatility of 100%, an expected life of 10 years, an expected dividend yield of 0%, and risk-free interest rate of 4.35%. The estimated fair value of $20,000 was recorded as debt discount and amortized to interest expense over the remaining commitment term of the financing agreement. In 2006, the warrant was converted into a warrant to purchase 2,870 shares of common stock at a price of $7.74. As of December 31, 2007, these warrants remained outstanding.

In December 2006, in connection with the Symphony Allegro transaction (see Note 8), the Company issued to Holdings a five-year warrant to purchase 2,000,000 shares of the Company’s common stock at $9.91 per share. The warrants issued upon closing were assigned a value of $10.7 million in accordance with the Black-Scholes option valuation methodology assuming an exercise price of $9.91, an expected volatility of 80%, an expected life of 5 years, an expected dividend yield of 0% and risk-free interest rate of 4.45%. This fair value has been recorded as a reduction to the noncontrolling interest in Symphony Allegro. This warrant remains outstanding at December 31, 2007.


12.	Equity Incentive Plans

2005 Equity Incentive Plan

In December 2005, the Company’s Board of Directors adopted the 2005 Equity Incentive Plan (the “2005 Plan”) and authorized for issuance thereunder 1,088,785 shares of common stock. The 2005 Plan became effective upon the closing of the Company’s initial public offering on March 8, 2006. The 2005 Plan is an amendment and restatement of the Company’s previous stock option plans. Stock options issued under the 2005 Plan generally vest over 4 years, vesting is generally based on service time, and have a maximum contractual term of 10 years.

In the third quarter of 2006, the Company began issuing restricted stock units to non-officer employees. Restricted stock units generally vest over a four-year period from the grant date. Prior to vesting, restricted stock units do not have dividend equivalent rights, do not have voting rights and the shares underlying the restricted units are not considered issued and outstanding. Shares are issued on the date the restricted stock units vest.

The 2005 Plan provides for annual reserve increases on the first day of each fiscal year commencing on January 1, 2007 and ending on January 1, 2015. The annual reserve increases will be equal to the lesser of (i) 2% of the total number of shares of the Company’s common stock outstanding on December 31 of the preceding calendar year, or (ii) 1,000,000 shares of common stock. The Company’s Board of Directors has the authority to designate a smaller number of shares by which the authorized number of shares of common stock will be increased prior to the last day of any calendar year.

2005 Non-Employee Directors’ Stock Option Plan

In December 2005, the Company’s Board of Directors adopted the 2005 Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”) and authorized for issuance thereunder 250,000 shares of common stock. The Directors’ Plan became effective immediately upon the closing of the Company’s initial public offering on March 8, 2006. The Directors’ Plan provides for the automatic grant of nonstatutory stock options to purchase shares of common stock to the Company’s non-employee directors, which vest over four years and have a term of 10 years. The Directors’ Plan provides for an annual reserve increase to be added on the first day of each fiscal year, commencing on January 1, 2007 and ending on January 1, 2015. The annual reserve increases will be equal to the number of shares subject to options granted during the preceding fiscal year less the number of shares that revert back to the share reserve during the preceding fiscal year. The Company’s Board of Directors has the authority to designate a smaller number of shares by which the authorized number of shares of common stock will be increased prior to the last day of any calendar year.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table sets forth the summary of stock option activity under the Equity Incentive Plans:


	Outstanding Options
	Number of			Weighted Average
	Shares			Exercise Price

Options granted		298,351		$	0.34
Options exercised		(9,090	)	$	0.22

Balance as of December 31, 2001		289,261		$	0.34
Options granted		210,777		$	1.03
Options exercised		(65,942	)	$	0.84
Options forfeited		(10,909	)	$	0.22

Balance as of December 31, 2002		423,187		$	0.61
Options granted		703,486		$	1.10
Options exercised		(74,904	)	$	0.60
Options forfeited		(50,092	)	$	0.57

Balance as of December 31, 2003		1,001,677		$	0.95
Options granted		893,952		$	1.10
Options exercised		(100,192	)	$	0.74
Options forfeited		(132,641	)	$	1.08

Balance as of December 31, 2004		1,662,796		$	1.04
Options granted		824,035		$	2.86
Options exercised		(380,501	)	$	0.94
Options forfeited		(98,310	)	$	1.08

Balance as of December 31, 2005		2,008,020		$	1.80
Options granted		848,075		$	7.71
Options exercised		(160,662	)	$	1.28
Options forfeited		(82,938	)	$	2.00
Options cancelled		(1,453	)	$	8.64

Balance as of December 31, 2006		2,611,042		$	5.23
Options granted		1,054,656		$	9.10
Options exercised		(204,423	)	$	2.11
Options forfeited		(249,536	)	$	6.98
Options cancelled		(4,875	)	$	6.60

Balance as of December 31, 2007		3,206,864		$	6.56

Options exercisable at:
December 31, 2005		470,990		$	1.42
December 31, 2006		901,425		$	4.74
December 31, 2007		1,365,538		$	5.54

The total intrinsic value of options exercised during the years ended December 31, 2007, 2006 and 2005 was $1,662,000, $1,003,000, and $556,000, respectively. None of the Company’s options have expired.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information regarding the stock options outstanding at December 31, 2007 is summarized below:


	Outstanding						Exercisable
			Remaining						Remaining
			Contractual		Aggregate				Contractual		Aggregate
	Number		Life		Intrinsic		Number		Life		Intrinsic
Exercise Price	of Shares		(In Years)		Value		of Shares		(In Years)		Value

$1.10 - 1.10		472,766		6.65	$	3,305,000		307,542		6.53	$	2,150,000
1.38 - 3.30		338,595		7.52		2,071,000		188,143		7.49		1,156,000
6.88 - 7.84		563,196		8.57		541,000		224,193		8.38		232,000
8.00 - 8.00		707,549		6.59		64,000		565,158		6.28		51,000
8.01 - 8.76		258,500		9.26		4,000		28,929		8.83		1,000
8.89 - 8.89		419,720		9.56		—		—		—		—
8.91 - 11.70		446,538		9.18		—		51,393		8.74		—

		3,206,864		8.01	$	5,985,000		1,365,538		6.99	$	3,590,000

The intrinsic value is calculated as the difference between the market value as of December 31, 2007 and the exercise price of the shares. The market value as of December 31, 2007 was $8.09 as reported by the NASDAQ Stock Market.

Information with respect to nonvested share units (restricted stock units) as of December 31, 2007 is as follows:


				Weighted
	Number			Average
	of			Grant-Date
	Shares			Fair Value

Outstanding at December 31, 2005		—		$	—
Granted		34,680			7.00
Released		—			—
Forfeited		(600	)		7.00

Outstanding at December 31, 2006		34,080			7.00
Granted		74,575			8.89
Released		(8,245	)		7.00
Forfeited		(7,285	)		7.71

Outstanding at December 31, 2007		93,125			8.42

The Company authorized shares of common stock for issuance under the Plans as follows.


Year	Number of Shares

2001		363,636
2002		770,732
2003		454,545
2004		1,000,000
2005		25,544
2006		1,327,990
2007		676,386

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of December 31, 2007, 339,250 shares remained available for issuance under the 2005 Plan and the Directors’ Plan.

On January 1, 2008 an additional 674,840 shares were authorized for issuance under the evergreen provisions of the 2005 Plan and the Directors’ Plan.

2005 Employee Stock Purchase Plan

In December 2005, the Company’s Board of Directors adopted the 2005 Employee Stock Purchase Plan (“ESPP”) and authorized for issuance thereunder 500,000 shares of common stock. The ESPP allows eligible employee participants to purchase shares of the Company’s common stock at a discount through payroll deductions. The ESPP consists of a fixed offering period, generally twenty-four months with four purchase periods within each offering period. Purchases are generally made on the last trading day of each October and April. The initial offering period began March 8, 2006 and will end on April 30, 2008. Employees purchase shares at each purchase date at 85% of the market value of our common stock on their enrollment date or the end of the purchase period, whichever price is lower. The Company issued 205,870 shares at a weighted average price of $6.83 per share in 2007 and issued 131,682 shares at a price of $6.80 per share in 2006.

The ESPP provides for annual reserve increases on the first day of each fiscal year commencing on January 1, 2007 and ending on January 1, 2015. The annual reserve increases will be equal to the lesser of (i) 1% of the total number of shares of the Company’s common stock outstanding on December 31 of the preceding calendar year, or (ii) 250,000 shares of common stock. The Company’s Board of Directors has the authority to designate a smaller number of shares by which the authorized number of shares of common stock will be increased prior to the last day of any calendar year. On January 1, 2007 an additional 238,193 shares were reserved for issuance under this provision. At December 31, 2007, 400,641 shares are available for issuance under the ESPP.

On January 1, 2008 an additional 250,000 shares were reserved for issuance under the ESPP.


13.	401(k) Plan

The Company sponsors a 401(k) Plan that stipulates that eligible employees can elect to contribute to the 401(k) Plan, subject to certain limitations. Pursuant to the 401(k) Plan, the Company does not match any employee contributions.


14.	Government Research Grants

The Company has been awarded grants from the National Institute of Health (“NIH”) for various research and development projects. The Company’s federal government research grants provide for the reimbursement of qualified expenses for research and development as defined under the terms of each grant. As of December 31, 2007 and 2006, the Company had no NIH grants in place.


15.	Income Taxes

There is no provision for income taxes because the Company has incurred operating losses since inception.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The reported amount of income tax expense attributable to operations for the year differs from the amount that would result from applying domestic federal statutory tax rates to loss before income taxes from operations as summarized below (in thousands):


	Year Ended December 31,
	2007			2006			2005
	(In thousands)

Federal tax benefit at statutory rate	$	(15,321	)	$	(14,214	)	$	(11,017	)
State tax benefit net of federal effect		(2,629	)		(2,436	)		(1,889	)
Research and development credits		(3,538	)		(1,189	)		(865	)
Other permanent differences		20			17			9
Officer loan deduction for tax		—			—			(1,602	)
Share-based compensation		274			543			1,939
Change in valuation allowance		21,193			17,317			14,761
Other		1			(38	)		(1,336	)

Total	$	—		$	—		$	—

Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. The deferred tax asset was calculated using an effective tax rate of 40%. Significant components of the Company’s deferred tax assets are as follows:


	December 31,
	2007			2006
	(In thousands)

Federal and state net operating loss carryforwards	$	60,516		$	43,217
Federal and state research and development credit carryforwards		7,093			3,349
Accrued liabilities		287			517
Other		1,507			1,473

Total deferred tax assets		69,403			48,556
Valuation allowance		(69,403	)		(48,556	)

Net deferred tax assets	$	—		$	—

The Company’s accounting for deferred taxes under SFAS No. 109, Accounting for Income Taxes, involves the evaluation of a number of factors concerning the realizability of the Company’s net deferred tax assets. The Company primarily considered such factors as the Company’s history of operating losses, the nature of the Company’s deferred tax assets and the timing, likelihood and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible. At present, the Company does not believe that it is more likely than not that the deferred tax assets will be realized; accordingly, a full valuation allowance has been established and no deferred tax asset is shown in the accompanying balance sheets. The valuation allowance increased by approximately $20,847,000 and $17,317,000 during the years ended December 31, 2007 and 2006, respectively.

As of December 31, 2007, the Company had federal net operating loss carryforwards of approximately $154,802,000. The Company also had federal research and development tax credit carryforwards of approximately $4,039,000. The net operating loss and tax credit carryforwards will expire at various dates beginning in 2020, if not utilized.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of December 31, 2007, the Company had state net operating loss carryforwards of approximately $144,208,000, which will begin to expire in 2012. The Company also had state research and development tax credit carryforwards of approximately $2,698,000, which have no expiration, and a Manufacturer’s Investment Credit of $78,000, which will begin to expire in 2009, if not utilized.

As of December 31, 2007, approximately $524,000 of deferred tax assets is attributable to certain employee stock option deductions and the federal and state net operating loss carryforward has been adjusted accordingly. When realized, the benefit of the tax deduction related to these options will be accounted for as a credit to stockholders’ equity rather than as a reduction of the income tax provision.

Utilization of the net operating loss carryforwards and credits may be subject to an annual limitation with substantial effect, due to the ownership change limitations provided by the Internal Revenue Code that are applicable if the Company experiences an “ownership change”. That may occur, for example, as a result of the initial public offering aggregated with certain other sales of our stock.

The Company recognized a $985,000 for federal and a $649,000 state (net of federal effect) to increase the deferred tax assets in 2007, to decrease its reserve for unrecognized tax benefits as a result of the implementation of FIN 48. Because of the correlative reduction in the Company’s full valuation allowance, this adjustment did not result in a credit to deficit accumulated during development stage.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


Balance at January 1, 2007	$	1,635
Additions based on tax positions taken during a prior period		—
Reductions based on tax positions taken during a prior period		—
Additions based on tax positions taken during the current period		611
Reductions based on tax positions taken during the current period		—
Reductions related to settlement of tax matters		—
Reductions related to a lapse of applicable statute of limitations		—

Balance at December 31, 2007	$	2,246

The Company has not incurred any interest or penalties as of December 31, 2007. The Company does not anticipate any significant change within 12 months of this reporting date of its uncertain tax positions. The Company does not anticipate any events which could cause the change to these uncertainties. The Company is subject to taxation in the US and various states jurisdictions. There are no ongoing examinations by taxing authorities at this time. The Company’s various tax years starting with 2000 to 2006 remain open in various taxing jurisdictions.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


16.	Development Agreement

In October 2005, the Company entered into a development agreement with Autoliv ASP, Inc. (“Autoliv”) for the development of heat packages that can be incorporated into the Company’s proprietary single dose drug delivery device for sale by the Company. Under the terms of the development agreement, Autoliv and the Company agreed to contribute $2,500,000 each toward the development efforts. The Company’s contribution was expected to include approximately $1,750,000 for purchases of equipment and $750,000 for co-development efforts. Equipment purchased by the Company is owned by the Company. In 2007 and 2006 the Company paid $334,000 and $333,000, respectively, to Autoliv for co-development fees under the agreement, the Company did not make payments under the agreement in 2005.

On November 2, 2007, the Company entered into a Manufacturing and Supply Agreement, (“Supply Agreement”), with Autoliv ASP, Inc. relating to the commercial supply of heat packages that can be incorporated into its Staccato device, the Chemical Heat Packages. Under the terms of the Supply Agreement, Autoliv will develop a manufacturing line capable of producing 10 million Chemical Heat packages a year. The Company will pay Autoliv $12 million upon the earlier of December 31, 2011 or 60 days after the approval by the Food and Drug Administration of a new drug application filed by the Company. If the Supply agreement is terminated by either party, the Company will be required to reimburse Autoliv up to $12 million for certain expenses related to the equipment and tooling used in the production and testing of the Chemical Heat Packages. Upon payment by the Company Autoliv will be required to transfer possession and ownership of such equipment and tooling to the Company. No such costs had been incurred as of December 31, 2007.

Autoliv has agreed to manufacture, assemble and test the Chemical Heat Packages solely for the Company in conformance with the Company’s specifications. The Company will pay Autoliv a specified purchase price, which varies based on annual quantities ordered by the Company, per Chemical Heat Package delivered. The initial term of the Supply Agreement expires on December 31, 2012 and may be extended by mutual written consent. The Supply Agreement provides that during the term of the Supply Agreement, Autoliv will be the Company’s exclusive supplier of the Chemical Heat Packages. In addition, the Supply Agreement grants Autoliv the right to negotiate for the right to supply commercially any second generation chemical heat package (a “Second Generation Product”) and provides that the Company will pay Autoliv certain royalty payments if the Company manufactures Second Generation Products itself or if the Company obtain Second Generation Products from a third party manufacturer. Upon the expiration or termination of the Supply Agreement the Company will be required, on an ongoing basis, to pay Autoliv certain royalty payments related to the manufacture of the Chemical Heat Packages by the Company or third party manufacturers.

ALEXZA PHARMACEUTICALS, INC.
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


17.	Quarterly Results (Unaudited)

The following table is in thousands, except per share amounts:


	Quarter Ended
	March 31			June 30			September 30			December 31

Fiscal 2007
Loss from operations	$	(13,820	)	$	(14,159	)	$	(15,136	)	$	(17,418	)
Loss before noncontrolling interest in Symphony Allegro, Inc.		(12,998	)		(12,922	)		(13,717	)		(16,273	)
Net loss		(10,916	)		(10,278	)		(10,752	)		(13,173	)
Basic and diluted net loss per share		(0.46	)		(0.36	)		(0.35	)		(0.42	)
Shares used in computation of basic and diluted net loss per share		23,869			28,480			30,975			31,097
Fiscal 2006
Revenues	$	160		$	539		$	329		$	—
Loss from operations		(8,663	)		(11,181	)		(11,738	)		(13,853	)
Loss before noncontrolling interest in Symphony Allegro, Inc.		(8,431	)		(10,578	)		(11,190	)		(13,327	)
Net loss		(8,431	)		(10,578	)		(11,190	)		(11,607	)
Basic and diluted net loss per share		(1.15	)		(0.45	)		(0.47	)		(0.49	)
Shares used in computation of basic and diluted net loss per share		7,316			23,629			23,638			23,752


Item 9.	*Changes in and Disagreements With Accountants on Accounting and Financial Disclosure*

Not Applicable.


Item 9A.	*Controls and Procedures*

Evaluation of Disclosure Controls and Procedures:

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of December 31, 2007, the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Management’s Annual Report on Internal Control Over Financial Reporting:

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2007 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2007. Our independent registered public accounting firm, Ernst &Young LLP, audited the consolidated financial statements included in this Annual Report on Form 10-K and have issued an audit report on our internal control over financial reporting. The report on the audit of internal control over financial reporting appears below.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Alexza Pharmaceuticals, Inc.

We have audited Alexza Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Alexza Pharmaceuticals, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the

100

assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Alexza Pharmaceuticals, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Alexza Pharmaceuticals, Inc. (a development stage company) as of December 31, 2007 and 2006, and the related consolidated statements of operations, convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2007 and for the period from December 19, 2000 (inception) to December 31, 2007 of Alexza Pharmaceuticals, Inc. and our report dated March 11, 2008, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Palo Alto, California

March 11, 2008

Changes in Internal Control Over Financial Reporting:

There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


Item 9B.	*Other Information*

None.

PART III


Item 10.	*Directors and Executive Officers of the Registrant*

The information required by this Item concerning our directors is incorporated by reference to the information to be set forth in the sections entitled “Proposal 1 — Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement for the 2008 Annual Meeting of Stockholders to be filed within 120 days after the end of the Registrant’s fiscal year ended December 31, 2007, or the Proxy Statement. The information required by this Item concerning our executive officers is incorporated by reference to the information to be set forth in the section of the Proxy Statement entitled “Executive Officers.” Information regarding compliance with Section 16(a) of the Exchange Act, our code of business conduct and ethics and certain information related to the Company’s Audit Committee and Ethics Committee is set forth under the heading

101

“Information Regarding the Board of Directors and Corporate Governance” in our Proxy Statement, and is incorporated herein by reference thereto.


Item 11.	*Executive Compensation*

The information required by this Item 11 is incorporated by reference to the information under the caption “Executive Compensation” in the Proxy Statement to be filed with the Securities and Exchange Commission no later than 120 days from the end of the Company’s last fiscal year.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item 12 with respect to stock ownership of certain beneficial owners and management and securities authorized for issuance under equity compensation plans are incorporated by reference to the information under the captions “Stock Ownership of Management and Certain Beneficial Owners” and “Securities Authorized For Issuance Under Equity Compensation Plans” in the Proxy Statement.

Item 13. Certain Relationships and Related Transactions and Director Independence

The information required in this Item 13 is incorporated by reference to the information under the caption “Certain Relationships and Related Transactions and Director Independence” in the Proxy Statement.


Item 14.	*Principal Accountant Fees and Services*

The information required by this Item 14 is incorporated by reference to the information in the Proxy Statement.

PART IV


Item 15.	*Exhibits and Financial Statement Schedules*

(a) 1. Financial Statements

See Index to Financial Statements under Item 8 on page 64

(a) 2. Financial Statement Schedules

All schedules are omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Financial Statements or notes thereto.

(a) 3. Exhibits

102

EXHIBIT INDEX


Exhibit
Number			Description of Document

	3	.5	Restated Certificate of Incorporation(1)
	3	.7	Amended and Restated Bylaws(1)
	3	.8u	Amendment to Amended and Restated Bylaws
	4	.1	Specimen Common Stock Certificate(1)
	4	.2	Second Amended and Restated Investors’ Rights Agreement between Registrant and certain holders of Preferred Stock dated November 5, 2004(1)
	10	.1	2005 Bonus Program(1)*
	10	.2	Form of Director/Officer Indemnification Agreement entered into between Registrant and each of its directors and officers(1)*
	10	.3	Form of Change of Control Agreement(1)*
	10	.4	2005 Equity Incentive Plan(1)*
	10	.5	Form of Option Grant Notice, Form of Option Agreement and Form of Notice of Exercise to 2005 Equity Incentive Plan(1)*
	10	.6	2005 Non-Employee Directors’ Stock Option Plan(1)
	10	.7	Form of Option Grant Notice, Form of Option Agreement and Form of Notice of Exercise to 2005 Non-Employee Directors’ Stock Option Plan(1)
	10	.8	2005 Employee Stock Purchase Plan(1)*
	10	.9	Form of Offering Document to 2005 Employee Stock Purchase Plan(1)*
	10	.10	Lease between Registrant and California Pacific Commercial Corporation dated March 20, 2002(1)
	10	.11	First Amendment to Lease between Registrant and California Pacific Commercial Corporation dated May 8, 2003(1)
	10	.12	Second Amendment to Lease between Registrant and California Pacific Commercial Corporation dated February 11, 2005(1)
	10	.13	Development Agreement between Registrant and Autoliv ASP, Inc. dated October 3, 2005(1)
	10	.14	Loan and Security Agreement between Registrant and Silicon Valley Bank dated March 20, 2002, as amended on January 7, 2003, September 3, 2003, March 18, 2004 and May 16, 2005(1)
	10	.15	Master Security Agreement between Registrant and General Electric Capital Corporation dated May 17, 2005, as amended on May 18, 2005(1)
	10	.16	Promissory Note between Registrant and General Electric Capital Corporation dated June 15, 2005(1)
	10	.17	Promissory Note between Registrant and General Electric Capital Corporation dated August 24, 2005(1)
	10	.20	Warrant to Purchase shares of Series B Preferred Stock issued to Silicon Valley Bank dated March 20, 2002(1)
	10	.21	Warrant to Purchase shares of Series C Preferred Stock issued to Silicon Valley Bank dated January 7, 2003, as amended on March 4, 2003(1)
	10	.22	Warrant to Purchase shares of Series C Preferred Stock issued to Silicon Valley Bank dated September 19, 2003(1)
	10	.23	Warrant to Purchase shares of Series C Preferred Stock issued to Silicon Valley Bank dated April 7, 2004(1)
	10	.24	Lease Agreement between the Brittania, LLC and the Registrant dated August 25, 2006(2)
	10	.26†	Purchase Option Agreement by and among Symphony Allegro Holdings LLC and Symphony Allegro, Inc. and Registrant dated December 1, 2006(2)
	10	.27	Warrant Purchase Agreement between Symphony Allegro Holdings LLC and Registrant dated December 1, 2006(2)
	10	.28	Warrant to Purchase shares of Common Stock issued to Symphony Allegro Holdings LLC dated December 1, 2006(2)

103


Exhibit
Number			Description of Document

	10	.29†	Amended and Restated Research and Development Agreement by and among Symphony Allegro Holdings LLC and Symphony Allegro, Inc. and Registrant dated December 1, 2006(2)
	10	.30	Registration Rights Agreement between Symphony Allegro Holdings LLC and Registrant dated December 1, 2006(2)
	10	.31†	Novated and Restated Technology License Agreement by and among Symphony Allegro Holdings LLC and Symphony Allegro, Inc. and Registrant dated December 1, 2006(2)
	10	.32	Confidentiality Agreement by and among Symphony Allegro Holdings LLC and Symphony Allegro, Inc. and Registrant dated December 1, 2006(2)
	10	.33	2007 Performance Bonus Program*(2)
	10	.34	First Amendment to Lease between Britannia Hacienda VIII LLC and the Registrant dated May 4, 2007(3)
	10	.35†	Second Amendment to Lease between Britannia Hacienda VIII LLC and the Registrant dated August 28, 2007(4)
	10	.36u††	Manufacturing and Supply Agreement between Registrant and Autoliv ASP, Inc., dated November 2, 2007
	10	.37u††	License, Development and Supply Agreement between Registrant and Endo Pharmaceuticals, Inc., dated December 27, 2007
	10	.38u	Offer Letter between the Registrant and Michael Simms, dated January 23, 2008.
	14	.1	Alexza Pharmaceuticals, Inc. Code of Business Conduct for Employees, Executive Officers and Directors(2)
	23	.1u	Consent of Independent Registered Public Accounting Firm
	24	.1u	Power of Attorney included on the signature pages hereto
	31	.1u	Section 302 Certification of CEO.
	31	.2u	Section 302 Certification of CFO.
	32	.1u	Section 906 Certifications of CEO and CFO.


*		Management contract or compensation plan or arrangement.

u		Filed herein


†		Confidential treatment has been granted with respect to certain portions of this exhibit. This exhibit omits the information subject to this confidentiality request. Omitted portions have been filed separately with the SEC.


††		Confidential treatment has been requested with respect to certain portions of this exhibit. This exhibit omits the information subject to this confidentiality request. Omitted portions have been filed separately with the SEC.

(1)		Incorporated by reference to exhibits to our Registration Statement on Form S-1 filed on December 22, 2005, as amended (File No. 333-130644)

(2)		Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 29, 2007.

(3)		Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on August 13, 2007

(4)		Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on November 1, 2007

104

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ALEXZA PHARMACEUTICALS, INC.


	By:	/s/ THOMAS B. KING

Thomas B. King

President and Chief Executive Officer

Dated: March 17, 2008

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Thomas B. King and August J. Moretti, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 17th, 2008.


Signature				Title


/s/ THOMAS B. KING Thomas B. King				President, Chief Executive Officer and Director (Principal Executive Officer)

/s/ AUGUST J. MORETTI August J. Moretti				Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

/s/ HAL V. BARRON Hal V. Barron				Director

/s/ SAMUEL D. COLELLA Samuel D. Colella				Director

/s/ ALAN D. FRAZIER Alan D. Frazier				Director

Deepika R. Pakianathan				Director

105


Signature				Title


/s/ J. LEIGHTON READ J. Leighton Read				Director

/s/ GORDON RINGOLD Gordon Ringold				Director

/s/ ISAAC STEIN Isaac Stein				Director

/s/ ALEJANDRO A. ZAFFARONI Alejandro A. Zaffaroni				Director

106

EXHIBIT INDEX


Exhibit
Number			Description of Document

	3	.5	Restated Certificate of Incorporation(1)
	3	.7	Amended and Restated Bylaws(1)
	3	.8u	Amendment to Amended and Restated Bylaws
	4	.1	Specimen Common Stock Certificate(1)
	4	.2	Second Amended and Restated Investors’ Rights Agreement between Registrant and certain holders of Preferred Stock dated November 5, 2004(1)
	10	.1	2005 Bonus Program(1)*
	10	.2	Form of Director/Officer Indemnification Agreement entered into between Registrant and each of its directors and officers(1)*
	10	.3	Form of Change of Control Agreement(1)*
	10	.4	2005 Equity Incentive Plan(1)*
	10	.5	Form of Option Grant Notice, Form of Option Agreement and Form of Notice of Exercise to 2005 Equity Incentive Plan(1)*
	10	.6	2005 Non-Employee Directors’ Stock Option Plan(1)
	10	.7	Form of Option Grant Notice, Form of Option Agreement and Form of Notice of Exercise to 2005 Non-Employee Directors’ Stock Option Plan(1)
	10	.8	2005 Employee Stock Purchase Plan(1)*
	10	.9	Form of Offering Document to 2005 Employee Stock Purchase Plan(1)*
	10	.10	Lease between Registrant and California Pacific Commercial Corporation dated March 20, 2002(1)
	10	.11	First Amendment to Lease between Registrant and California Pacific Commercial Corporation dated May 8, 2003(1)
	10	.12	Second Amendment to Lease between Registrant and California Pacific Commercial Corporation dated February 11, 2005(1)
	10	.13	Development Agreement between Registrant and Autoliv ASP, Inc. dated October 3, 2005(1)
	10	.14	Loan and Security Agreement between Registrant and Silicon Valley Bank dated March 20, 2002, as amended on January 7, 2003, September 3, 2003, March 18, 2004 and May 16, 2005(1)
	10	.15	Master Security Agreement between Registrant and General Electric Capital Corporation dated May 17, 2005, as amended on May 18, 2005(1)
	10	.16	Promissory Note between Registrant and General Electric Capital Corporation dated June 15, 2005(1)
	10	.17	Promissory Note between Registrant and General Electric Capital Corporation dated August 24, 2005(1)
	10	.20	Warrant to Purchase shares of Series B Preferred Stock issued to Silicon Valley Bank dated March 20, 2002(1)
	10	.21	Warrant to Purchase shares of Series C Preferred Stock issued to Silicon Valley Bank dated January 7, 2003, as amended on March 4, 2003(1)
	10	.22	Warrant to Purchase shares of Series C Preferred Stock issued to Silicon Valley Bank dated September 19, 2003(1)
	10	.23	Warrant to Purchase shares of Series C Preferred Stock issued to Silicon Valley Bank dated April 7, 2004(1)
	10	.24	Lease Agreement between the Brittania, LLC and the Registrant dated August 25, 2006(2)
	10	.26†	Purchase Option Agreement by and among Symphony Allegro Holdings LLC and Symphony Allegro, Inc. and Registrant dated December 1, 2006(2)
	10	.27	Warrant Purchase Agreement between Symphony Allegro Holdings LLC and Registrant dated December 1, 2006(2)
	10	.28	Warrant to Purchase shares of Common Stock issued to Symphony Allegro Holdings LLC dated December 1, 2006(2)

107


Exhibit
Number			Description of Document

	10	.29†	Amended and Restated Research and Development Agreement by and among Symphony Allegro Holdings LLC and Symphony Allegro, Inc. and Registrant dated December 1, 2006(2)
	10	.30	Registration Rights Agreement between Symphony Allegro Holdings LLC and Registrant dated December 1, 2006(2)
	10	.31†	Novated and Restated Technology License Agreement by and among Symphony Allegro Holdings LLC and Symphony Allegro, Inc. and Registrant dated December 1, 2006(2)
	10	.32	Confidentiality Agreement by and among Symphony Allegro Holdings LLC and Symphony Allegro, Inc. and Registrant dated December 1, 2006(2)
	10	.33	2007 Performance Bonus Program*(2)
	10	.34	First Amendment to Lease between Britannia Hacienda VIII LLC and the Registrant dated May 4, 2007(3)
	10	.35†	Second Amendment to Lease between Britannia Hacienda VIII LLC and the Registrant dated August 28, 2007(4)
	10	.36u††	Manufacturing and Supply Agreement between Registrant and Autoliv ASP, Inc., dated November 2, 2007
	10	.37u††	License, Development and Supply Agreement between Registrant and Endo Pharmaceuticals, Inc., dated December 27, 2007
	10	.38u	Offer Letter between the Registrant and Michael Simms, dated January 23, 2008.
	14	.1	Alexza Pharmaceuticals, Inc. Code of Business Conduct for Employees, Executive Officers and Directors(2)
	23	.1u	Consent of Independent Registered Public Accounting Firm
	24	.1u	Power of Attorney included on the signature pages hereto
	31	.1u	Section 302 Certification of CEO.
	31	.2u	Section 302 Certification of CFO.
	32	.1u	Section 906 Certifications of CEO and CFO.


*		Management contract or compensation plan or arrangement.

u		Filed herein

†		Confidential treatment has been granted with respect to certain portions of this exhibit. This exhibit omits the information subject to this confidentiality request. Omitted portions have been filed separately with the SEC.

††		Confidential treatment has been requested with respect to certain portions of this exhibit. This exhibit omits the information subject to this confidentiality request. Omitted portions have been filed separately with the SEC.

(1)		Incorporated by reference to exhibits to our Registration Statement on Form S-1 filed on December 22, 2005, as amended (File No. 333-130644)

(2)		Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 29, 2007.

(3)		Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on August 13, 2007

(4)		Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on November 1, 2007

108

EX-3.8 2 f39029exv3w8.htm EXHIBIT 3.8 exv3w8

Exhibit 3.8

AMENDMENT TO THE

AMENDED AND RESTATED BYLAWS
OF
ALEXZA PHARMACEUTICALS, INC.
(A DELAWARE CORPORATION)

Approved February 6, 2007

“Section 35. Form And Execution Of Certificates.

The shares of the corporation shall be represented by certificates, or shall be uncertificated. Certificates for the shares of stock, if any, shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock represented by certificate in the corporation shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman of the Board of Directors, or the President or any Vice President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the corporation. Any or all of the signatures on the certificate may be facsimiles. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue.”

“Section 37 Transfers.

(a) Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and, in the case of stock represented by certificate, upon the surrender of a properly endorsed certificate or certificates for a like number of shares.

(b) The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the DGCL.”

EX-10.36 3 f39029exv10w36.htm EXHIBIT 10.36 exv10w36

Exhibit 10.36

Manufacturing and Supply Agreement

This Manufacturing and Supply Agreement (the “Agreement”), effective as of November 2, 2007 (the “Effective Date”), is made by and between Alexza Pharmaceuticals, Inc. of 1020 East Meadow Circle, Palo Alto, CA 94303 (“Alexza”), and Autoliv ASP, Inc. of 3350 Airport Road, Ogden, UT 84405 (“Autoliv”).

Recitals

A. Under a Development Agreement between the parties dated October 3, 2005 (“Development Agreement”), Autoliv developed a chemical heat package for Alexza; and

B. Autoliv and Alexza desire that Autoliv manufacture such chemical heat packages for Alexza; subject to the terms and conditions set forth herein.

In consideration of the respective covenants, representations, warranties and agreements set forth herein, and intending to be legally bound, the parties hereby agree as follows:

ARTICLE 1
Definitions

As used in this Agreement, capitalized terms will have the meanings set forth below.

1.1 “Affiliate” means with respect to an entity, a person, corporation or other entity that, directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with that entity. For Autoliv, this Agreement binds only Autoliv ASP, Inc.

1.2 “Alexza Field” means the areas of prevention, treatment, management, monitoring or diagnosis of illness or disease through the use of devices incorporating a chemical heat package, including subsequent generations or similar devices used to aerosolize drugs.

1.3 “Alexza Indemnitees” has the meaning given to such term in Section 11.2.

1.4 “Alexza IP” has the meaning given to such term in Section 9.4.

1.5 “Annual Purchase Order” has the meaning given to such term in Section 3.3.

1.6 “Autoliv Field” means the areas outside the Healthcare Field.

1.7 “Autoliv Indemnitees” has the meaning given to such term in Section 11.1.

1.8 “Autoliv IP” has the meaning given to such term in Section 9.3.


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

1.9 “Autoliv Patents” means all patents and patent applications listed on Exhibit F and all Foreign Counterparts continuations, continuations-in-part, requests for continuing examination (RCEs), divisionals, substitutions, re-examinations, reissues, extensions, registrations and supplementary or complementary certificates of such patents and patent applications and any patents that issue therefrom.

1.10 “Background Technology” has the meaning given to such term in Section 9.1.

1.11 “Build Forecast” has the meaning given to such term in Section 3.4.

1.12 “Chemical Heat Package” means Alexza’s proprietary CPD (Commercial Product Development) heat pack that consists of a chemical heat source sealed within an inert, stainless steel substrate and is further described on Exhibit A attached hereto or subsequent mutually agreed revisions thereto, but excluding any subsequent generations of the Chemical Heat Package.

1.13 “Confidential Information” means all information disclosed by a party hereto to the other party pursuant to the Development Agreement, the Consultant Services Agreement, the Mutual CDA or this Agreement. In particular, Confidential Information of Alexza shall be deemed to include, but is not limited to, the Alexza IP, information relating to the Specifications, the process used by Autoliv to manufacture the Chemical Heat Packages, and Alexza’s research and development programs and results, prototypes and products, clinical and preclinical data, trade secrets, business strategy, patent applications, licenses, suppliers’ and manufacturers’ identities, product and marketing strategy, customers, market data, personnel and consultants, and other technical or business information.

1.14 “Consultant Services Agreement” means the Consultant Services Agreement between the parties dated as of December 17, 2004.

1.15 “Development Agreement” has the meaning given to such term in the recitals.

1.16 “Disclosing Party” has the meaning given to such term in Section 12.2.

1.17 “ECR” has the meaning given to such term in Section 6.1.

1.18 “Finished Product” means a device containing a Chemical Heat Package manufactured by Autoliv and delivered by Autoliv to Alexza pursuant to this Agreement.

1.19 “Foreign Counterparts” means foreign applications or issued foreign patents, which claim priority from, or share common priority with, an identified United States patent or patent application, and the inventions covered thereby.

1.20 “Healthcare Field” means the areas of prevention, treatment, management, monitoring or diagnosis of illness or disease.

1.21 “Healthcare Product” has the meaning given to such term in Section 2.5(b).

1.22 “Initial Term” means the period beginning on the Effective Date and ending on December 31, 2012.


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

1.23 “Intellectual Property Rights” means all present and future worldwide trade secrets, patents, patent applications, copyrights, mask works or other proprietary or property rights.

1.24 “Joint IP” has the meaning given to such term in Section 9.5.

1.25 “Key Personnel” has the meaning given to such term in Section 2.3(a).

1.26 “Mandatory Engineering Change” means any change to the Specifications that is necessary to ensure the safety of the Chemical Heat Packages and/or the conformance of the Chemical Heat Packages with all applicable laws and regulations of any country, including laws (a) in effect as of the date of delivery of the Chemical Heat Packages to Alexza, and (b) that require Alexza to replace the Chemical Heat Packages in Finished Products already sold to distributors or customers.

1.27 “Mutual CDA” means the Mutual Confidential Disclosure Agreement between the parties dated as of November 3, 2004.

1.28 “New Discoveries” means inventions, developments, improvements, enhancements or modifications, whether or not patentable, that are conceived or developed or reduced to practice by Alexza or Autoliv arising out of or in connection with Alexza or Autoliv’s performance under this Agreement.

1.29 “Operations Representative” has the meaning given to such term in Section 2.3(b).

1.30 “Optional Engineering Change” means any change to the Specifications that is not a Mandatory Engineering Change.

1.31 “Pilot Production Line” means the low volume production line for the manufacture of the Chemical Heat Packages that is located at Autoliv’s manufacturing site as of the Effective Date and all post-Effective Date modifications thereof.

1.32 “Purchase Date” means the date that is earliest of (a) December 31, 2011, (b) sixty (60) days after the approval by the FDA of a New Drug Application filed by Alexza, or (c) sixty (60) days after the effective date of termination of this Agreement pursuant to Section 10.2

1.33 “Quality Terms” has the meaning given to such term in Section 7.1.

1.34 “Receiving Party” has the meaning given to such term in Section 12.2.

1.35 “Release” or “Actual Order” shall mean a firm order or demand issued by Alexza to Autoliv specifying the quantity of Chemical Heat Packages ordered, delivery dates and delivery destination.

1.36 “Second Generation Agreement” has the meaning given to such term in Section 2.6.


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

1.37 “Second Generation Package” means a heating substrate for the vaporization of a drug that: (a) consists of a chemical heat source sealed within an inert, stainless steel substrate and (b) is based upon and represents an improvement to, or modification of, the Chemical Heat Package such that it does not conform with description set forth in Exhibit A or subsequent mutually agreed revisions thereto.

1.38 “Specifications” means the minimum specifications for the Chemical Heat Packages set forth in Exhibit B attached hereto, as may be amended from time to time in accordance with Article 6.

1.39 “Strategic Forecast” has the meaning given to such term in Section 3.2.

1.40 “Third Party” means any party other than Alexza, Autoliv or an Affiliate of Alexza or Autoliv.

ARTICLE 2
Manufacturing

2.1 Manufacture. The parties agree that Autoliv shall manufacture, assemble, and test, the Chemical Heat Packages in conformance with the Specifications and in compliance with the terms and conditions of this Agreement (including the Quality Terms), for sale solely to Alexza. Such manufacture, assembly and testing shall be performed solely in one of Autoliv’s Northern Utah facilities unless (a) the parties agree upon an alternative Autoliv location or (b) Autoliv closes all of its Northern Utah facilities after at least three (3) years written notice to Alexza, which notice shall specify the location at which Autoliv plans to perform such activities after such closure, and Alexza does not terminate this Agreement in accordance with Section 10.4(c)(iii). Autoliv will provide all of the manufacturing equipment necessary to manufacture the Chemical Heat Packages in accordance with the Specifications and the terms and conditions of this Agreement (including the Quality Terms).

2.2 Non-delegable Responsibility. Each party’s rights and obligations under this Agreement may not be subcontracted to any Third Party, without the prior written consent of the other party.

2.3 Autoliv Personnel

(a) Key Personnel. The names, positions, and roles of Autoliv’s key personnel who will be involved in the manufacture, assembly, or testing of the Chemical Heat Packages are set forth in Exhibit D (“Key Personnel”). Autoliv shall provide any information reasonably requested by Alexza with respect to such Key Personnel and their duties. If Autoliv removes or reassigns any Key Personnel, Autoliv shall promptly notify Alexza.

(b) Operations Representative. Exhibit D sets forth the name of Autoliv’s project representative who shall have overall responsibility for the Pilot Production Line and the manufacture, assembly, and testing of the Chemical Heat Packages provided under this Agreement (“Operations Representative”).


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

2.4 Meetings. The parties shall meet at least annually, or whenever necessary by mutual agreement, to discuss issues related to this Agreement including design, performance, quality, changes and delivery. The topics may include, for example, Autoliv’s compliance or non-compliance with any Specifications, adherence to delivery schedule, Pilot Production Line or any other production line issues or modifications, capacity plans, forecasts, or other requirements of this Agreement (including the Quality Terms). The parties shall sign the meeting minutes to confirm their respective agreements, commitments, approvals, and obligations related to specific items or issues.

2.5 Exclusivity.

(a) During the Initial Term and any extension(s) of the term of this Agreement by mutual written agreement, Alexza shall not, either alone or with or through any Affiliate or Third Party, manufacture, have manufactured or purchase Chemical Heat Packages from any Third Party, provided that Autoliv has not materially breached any term or condition of this Agreement, including the requirement that the Chemical Heat Packages conform to the Specifications and the quality conditions set forth in the Quality Terms. Autoliv agrees that Alexza shall not be in breach of the foregoing sentence if Alexza (i) Alexza engages a Third Party manufacturer to manufacture and test Chemical Heat Packages, so long as such Third Party manufacturer does not sell Chemical Heat Packages to Alexza during the exclusivity period set forth in the preceding sentence, or (ii) discloses Autoliv IP, Joint IP or Intellectual Property rights owned by Autoliv pursuant to the Development Agreement (“Development IP”) to a Third Party manufacturer that is reasonably necessary for such Third Party to manufacture and test the Chemical Heat Packages, so long as such Third Party Manufacturer agrees not to exploit the Autoliv IP, Joint IP or Development IP outside the Healthcare Field or in any other way inconsistent with this Agreement

(b) During the Initial Term and any extension(s) of the term of this Agreement by mutual written agreement, provided that Alexza has not materially breached any term or condition of this Agreement, Autoliv shall not, either alone or with or through any Affiliate or Third Party, manufacture or commercialize Chemical Heat Packages (except for Autoliv’s manufacture, assembly and testing of Chemical Heat Packages for sale to Alexza pursuant to this Agreement) or any other device or component for use in the Healthcare Field that utilizes any Alexza IP, as defined in this Agreement, unless Alexza provides prior written consent for such activities. If Autoliv wishes to develop, manufacture and commercialize a product in the Healthcare Field (a “Healthcare Product”) that does not utilize any Alexza IP, it may do so, provided that the Healthcare Product is not competitive with the Chemical Heat Packages or Finished Products or any other products that Alexza is then marketing or then has in clinical or pre-clinical development.

2.6 Right of Negotiation. Prior to engaging a Third Party to assist Alexza in the commercial manufacture of a Second Generation Package, Alexza shall notify Autoliv in writing and offer Autoliv the opportunity to negotiate the terms and conditions of a separate agreement (the “Second Generation Agreement”) whereby Autoliv would supply such Second Generation Package. If Autoliv notifies Alexza in writing within thirty (30) days of Alexza’s notice that Autoliv is interested in commercially supplying such Second Generation Package, the parties shall promptly initiate good faith negotiations regarding the terms and conditions of the Second


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Generation Agreement with the goal of entering into the Second Generation Agreement within ninety (90) days of Autoliv’s notice. If the parties fail to agree on the terms for the Second Generation Agreement, Alexza may execute an agreement with a Third Party to commercially manufacture the Second Generation Package and Alexza shall make the payments set forth in Section 5.6(a). For clarity, this Section 2.6 does not apply to or affect Alexza’s right to manufacture for itself any and all Second Generation Packages.

ARTICLE 3
Chemical Heat Package Forecasting and Ordering

3.1 Purchase Right. Autoliv agrees to sell and Alexza agrees to purchase the Chemical Heat Packages in accordance with the terms of this Agreement.

3.2 Strategic Forecast. On a quarterly basis, Alexza shall provide Autoliv with a written rolling forecast of Alexza’s anticipated need for Chemical Heat Packages for each calendar quarter during the following three (3) calendar years (“Strategic Forecast”). The Strategic Forecast is not binding on Alexza and is provided by Alexza solely for capacity planning purposes. However, to the extent Autoliv must order or commit to long-lead time materials, equipment, tooling or components in order to have the ability to supply to Alexza the number of Chemical Heat Packages specified in the Strategic Forecast, Alexza shall reimburse Autoliv, on the timetable agreed upon by the parties when the items are determined to be unused, for any such unused materials, equipment, tooling or components, provided that (a) Alexza approved the purchase thereof in writing (which approval may be in meeting minutes signed by Alexza) and (b) on account of Alexza’s commitments in Section 5.4, Alexza shall not have any obligation pursuant to this Section 3.2 to reimburse Autoliv for equipment and tooling needed to supply up to ten million (10,000,000) Chemical Heat Packages per year. Upon reimbursement by Alexza to Autoliv pursuant to this Section 3.2, Autoliv shall transfer to Alexza sole ownership of all such materials, equipment, tooling or components.

3.3 Annual Purchase Order. At least thirty (30) days before the beginning of each calendar year, Alexza shall provide Autoliv with a written purchase order (“Annual Purchase Order”) that specifies (i) the number of units of Chemical Heat Packages Alexza will purchase from Autoliv during such calendar year; (ii) the fixed unit purchase price for such Chemical Heat Packages as set forth on Exhibit C; (iii) the billing and ship-to addresses; and (iv) any special instructions or other pertinent requirements. Alexza may update the billing and ship-to addresses during the course of such year by written notice to Autoliv. Autoliv must accept or reject each Annual Purchase Order within thirty (30) days after the receipt thereof, provided that it may not reject any Annual Purchase Order unless (a) such Annual Purchase Order does not comply with the terms set forth in subsections (i)-(iii) of this Section 3.3, or (b) the quantity ordered on such Annual Purchase Order is a material increase over the quantities set forth for such calendar year in the then-current Strategic Forecast. Upon Autoliv’s acceptance, each Annual Purchase Order shall be binding on the parties, provided that Alexza is not obligated to accept more than 80% of the quantity specified on such Annual Purchase Order.

3.4 Build Forecast. On a weekly basis, Alexza shall provide Autoliv with a written or electronic rolling forecast of Alexza’s anticipated weekly needs for Chemical Heat Packages for the following thirteen (13) weeks (“Build Forecast”). The Build Forecast shall be binding


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

on Alexza solely to the extent specified in Section 3.3. The parties shall cooperate in issuing manufacturing releases reflecting level loading at their respective plants. The parties agree to exert all reasonable efforts to minimize excessive variations in volume demand. However, if a Release issued by Alexza pursuant to Section 3.5 exceeds the relevant portion of the then current Build Forecast by more than 20%, Autoliv shall be entitled to reasonable reimbursement, subject to mutual agreement, for higher costs related to overtime, premium freight, expedited tooling/equipment, scrap, labor inefficiencies, etc. required to manufacture such excess (i.e. beyond 20%) quantities of Chemical Heat Packages. The piece price shall not be affected.

3.5 Releases. Alexza shall issue periodic Releases, binding on the parties, electronically or in writing for Chemical Heat Packages that specify the quantity of units ordered, delivery dates (provided no delivery date shall be less than 10 days after the issuance of any Release), destination, and any other relevant information.

ARTICLE 4
Delivery

4.1 Delivery Schedule. Autoliv will deliver to Alexza the quantity of Chemical Heat Packages specified in the applicable Release by the delivery date specified in the applicable Release. A delivery will be considered on-time if it is delivered within plus or minus one (1) day after the delivery date specified in the Release. In the event of any delays in the delivery of Chemical Heat Packages, and without limiting Alexza’s other rights and remedies hereunder, Autoliv will notify Alexza of such delay and work diligently to remedy such delay immediately. In the event of a delay in delivery of more than one (1) day for reasons other than force majeure, Alexza may, at its sole discretion, cancel, reschedule, or require fulfillment of the affected Release, provided that if Alexza requires fulfillment of such Release, Autoliv shall (a) express deliver (at Autoliv’s expense) the Chemical Heat Packages ordered under such Annual Purchase Order, and (b) reimburse Alexza for any and all costs it incurred as a result of such delay. All deliveries shall be DDU (Incoterms 2000) the ship-to address specified in the Annual Purchase Order. Autoliv will comply with Alexza’s requested means of shipping the Chemical Heat Packages and will not separately charge Alexza (in addition to the purchase price specified in Section 5.1) for any shipping, handling or other transportation-related costs incurred by Autoliv for delivery of Chemical Heat Packages within the continental United States. Autoliv will not send partial or incomplete shipments of any Release except with Alexza’s prior written consent. Chemical Heat Packages shipped to Alexza more than two (2) days in advance of the applicable delivery date, or any partial or incomplete shipments sent without Alexza’s prior written consent, may be returned to Autoliv at Autoliv’s expense. No payment or other obligations of Alexza will accrue on Chemical Heat Packages before the applicable delivery date for deliveries made by Autoliv in advance of such delivery date, or on partial or incomplete shipments, unless Alexza has accepted the Chemical Heat Packages.

4.2 Packaging Requirements. All Chemical Heat Packages delivered by Autoliv shall be in packaging that complies with specifications set forth in Drawing Number 6088341 and subsequent written, mutually agreed modifications thereto.


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

ARTICLE 5
Purchase Prices; Royalties; Payment

5.1 Purchase Prices.

(a) Purchase Prices During the Initial Term. Subject to the terms and conditions of this Agreement including without limitation Section 5.2, for each Chemical Heat Package delivered by Autoliv pursuant to Section 4.1, Alexza will, during the Initial Term, pay Autoliv the purchase price for such Chemical Heat Package specified in Exhibit C.

(b) Purchase Prices After the Initial Term. For each calendar year after the Initial Term, the parties will initiate negotiations three (3) years in advance of such calendar year, to mutually agree, in writing and within six (6) months after such initiation of negotiations, upon the purchase prices for the Chemical Heat Packages for such calendar year. The parties will reflect their agreement by modifying Exhibit C. All such negotiations will be conducted in good faith. Subject to the terms and conditions of this Agreement, Alexza will, for each calendar year after the Initial Term for which the parties have agreed upon a purchase price in accordance with this Section, pay Autoliv the agreed purchase price for such calendar year for Chemical Heat Packages delivered by Autoliv pursuant to Section 4.1 in such calendar year.

5.2 Purchase of Pilot Production Line. Autoliv acknowledges that, as of the Effective Date, the Pilot Production Line is jointly owned by the parties. Autoliv shall purchase Alexza’s rights, title, and interest in and to the Pilot Production Line by providing the first one hundred thousand (100,000) units of the Chemical Heat Packages delivered to and accepted by Alexza pursuant to this Agreement at no charge to Alexza. Chemical Heat Packages delivered to Alexza under this Agreement shall only count toward such total if they meet the Specifications and the other terms and conditions of this Agreement and were delivered pursuant to Actual Orders submitted by Alexza. Such Chemical Heat Packages shall be included in the total number of Chemical Heat Packages purchased by Alexza in the applicable calendar year when determining the per unit purchase price of other Chemical Heat Packages delivered to Alexza during such calendar year. Notwithstanding anything contained in this Section 5.2, Alexza’s rights, title, and interest in and to the Pilot Production Line shall not be considered assigned or transferred to Autoliv until Autoliv has delivered one hundred thousand (100,000) units of the Chemical Heat Packages to Alexza without charge in accordance with this Section 5.2.

5.3 Purchase Price Payments. Autoliv shall invoice Alexza for all units of the Chemical Heat Packages ordered pursuant to a Release only after actual delivery of such Chemical Heat Packages to Alexza. Alexza will pay Autoliv the undisputed amount for such Chemical Heat Packages within forty-five (45) days after receipt of Autoliv’s applicable invoice, provided that the parties will attempt, in good faith, to resolve any disputed invoices within 30 days of the original date when the payment was due. Within thirty (30) days after the end of each calendar year, the parties will review the number of units of Chemical Heat Packages actually ordered in such calendar year pursuant to Releases (or as required pursuant to Section 3.3) and make any payment necessary for the per-unit purchase price paid by Alexza to be the price that corresponds with such number of units.


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

5.4 Expense Reimbursement. The parties acknowledge that Autoliv has made a substantial commitment pursuant to the terms of the Development Agreement and will make a substantial investment in capital equipment, personnel and facilities to provide one or more production lines with a total capacity of ten million (10,000,000) Chemical Heat Packages per year pursuant to the terms of this Agreement. Upon the Purchase Date, Alexza will pay Autoliv twelve million dollars ($12,000,000), provided that (i) if prior to the Purchase Date Alexza has terminated this Agreement pursuant to Section 10.4(a) or 10.4(c), Alexza shall instead pay Autoliv on the Purchase Date the then depreciated book value of the equipment and tooling of Autoliv used in the production of up to ten million (10,000,000) Chemical Heat Packages per year and (ii) if prior to the Purchase Date Autoliv has terminated this Agreement pursuant to Section 10.4(a) or 10.4(b), Alexza shall instead pay Autoliv on the Purchase Date an amount equal to Autoliv’s cost for equipment and tooling of Autoliv used in the production of up to ten million (10,000,000) Chemical Heat Packages per year plus a reasonable charge for Autoliv’s employees and facilities dedicated to such production of Heat Packages, which amount shall not exceed twelve million dollars ($12,000,000). At least thirty (30) days before the Purchase Date, Autoliv shall notify Alexza in writing of the amount payable by Alexza to Autoliv under sub-clause (i) or (ii), as applicable. Upon payment of the applicable amount set forth above, Alexza shall own all right, title and interest in all of Autoliv’s equipment and tooling used in the production and testing of Chemical Heat Packages, including the equipment and tooling related to the Pilot Production Line, free and clear of any and all encumbrances, liens and security interests.

5.5 Taxes. The purchase price for the Chemical Heat Packages shall be inclusive of, and Autoliv agrees to pay, and will indemnify and hold Alexza harmless from the payment of, all sales, use, excise, value added or similar tax, as well as the collection or withholding thereof, including penalties and interest and all government permits or license fees and all customs, duty, tariff and similar fees levied upon the delivery of the Chemical Heat Packages to Alexza, and any costs associated with the collection of any of the foregoing items, provided that Alexza provides Autoliv with copies of any applicable tax exemption certificates.

5.6 Royalty Payments and Reports.

(a) If Alexza manufactures Second Generation Packages or, subject to Section 2.6, executes an agreement with a Third Party to manufacture Second Generation Packages, Alexza shall pay Autoliv the following amounts, as applicable, within sixty (60) days of the end of each calendar quarter: (i) [ * ] of the direct costs (as defined below) for Alexza’s manufacture of Second Generation Packages or (ii) [ * ] of the purchase price (not including any taxes, shipping costs or handling fees) Alexza pays to a Third Party manufacturer for supplying the Second Generation Packages. For the purpose of this Section 5.6(a), “direct costs” shall mean Alexza’s costs of direct labor, bill of materials, and consumables needed to produce and approve for use Second Generation Packages.

(b) Any tax which Alexza is required to pay or withhold from royalty payments to be made to Autoliv shall be deducted from the amount otherwise due, provided that, in regard to any such deduction, Alexza shall give Autoliv such assistance as may be reasonably necessary to enable or assist Autoliv to claim exemption therefrom or a reduction thereof and shall provide Autoliv with an official tax certificate as soon as reasonably possible.


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

5.7 Currency. All references to “dollars” or “$” means the legal currency of the United States. All payments made pursuant to this Agreement will be in U.S. dollars, unless otherwise mutually agreed in advance by the parties in writing.

5.8 Audits.

(a) Alexza, will have the right, during normal business hours and upon at least thirty (30) days prior notice, to have an independent audit firm selected by Alexza and reasonably acceptable to Autoliv, audit Autoliv’s records for the preceding three (3) years relating to Autoliv’s activities pursuant to this Agreement in order to verify the amount for which Alexza must (i) reimburse Autoliv in accordance with Section 3.2 or pay Autoliv in accordance with Section 5.4(i) or (ii), as applicable. In addition, Alexza will have the right to conduct quality reviews in accordance with the terms and conditions of the Quality Terms

(b) Autoliv, will have the right, during normal business hours and upon at least thirty (30) days prior notice, to have an independent audit firm selected by Autoliv and reasonably acceptable to Alexza, audit Alexza’s records for the preceding three (3) years relating to Alexza’s manufacture or purchase of Second Generation Packages or Chemical Heat Packages in order to verify the accuracy of Alexza’s royalty payments provided pursuant to Section 5.6(a) or 10.5(b).

(c) The party whose records are being inspected shall make those records available for inspection by the auditor during regular business hours, solely for the verification purposes specified in this Section 5.8. Records covering any particular period may be inspected or audited only once. The report prepared by such independent accountant, a copy of which shall be sent or otherwise provided to the audited party at the same time it is sent or otherwise provided to the party requesting the audit, shall contain the conclusions of such independent accountant regarding the audit and will specify that the amounts paid were correct, or, if incorrect, the amount of any underpayment or overpayment. If such report shows any underpayment or overpayment, then, within thirty (30) days after the parties’ receipt of such report, the appropriate party shall remit to the other party the amount needed to eliminate such underpayment or overpayment. The audit will be conducted at the auditing party’s expense unless the audit reveals a discrepancy of five percent (5%) or more of the amount previously reported by the audited party to the other party for the audited period, in which case the audited party shall pay the reasonable costs for such audit.

(d) Any confidential or proprietary information of the audited party disclosed to auditing party in the course of the inspection or audit shall be subject to auditing party’s confidentiality obligations under this Agreement. Any confidential or proprietary information of audited party disclosed to the independent audit firm in the course of the audit will be subject to a confidentiality agreement reasonably acceptable to the auditing party to be signed by the audited and such independent audit firm.


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

ARTICLE 6
Change Orders

6.1 Optional Chemical Heat Package Changes. Optional Engineering Change orders may be initiated from time to time in accordance with this Section 6.1. If Alexza proposes an Optional Engineering Change, Alexza will prepare and submit to Autoliv an Engineering Change Request (“ECR”) detailing the changes in the Chemical Heat Package desired by Alexza. Within thirty (30) days after receipt of an ECR, Autoliv will prepare a written response to such ECR detailing at a minimum: (i) the technical specifications for the proposed change; (ii) the purchase price for the modified Chemical Heat Package; (iii) the amount of time required to implement such change; and (iv) any anticipated changes to the lead time associated with purchasing the modified Chemical Heat Package. Autoliv may also propose Optional Engineering Changes to Alexza in writing, detailing the same information required above. If Alexza determines, following receipt of Autoliv’s proposal or response, as applicable, that the proposed Optional Engineering Change order is not acceptable, then Autoliv shall not make the Optional Engineering Change. If Alexza determines, following receipt of Autoliv’s proposal or response, as applicable, that the proposed Optional Engineering Change order is acceptable, then Autoliv shall make the Optional Engineering Change and Alexza shall pay the mutually agreed purchase price for Chemical Heat Packages manufactured with such Option Engineering Change.

6.2 Mandatory Engineering Change. In the event that Autoliv or Alexza become aware of the necessity to implement a Mandatory Engineering Change, such party shall immediately notify the other party in writing, specifying the cause for the Mandatory Engineering Change and the specific changes to the Chemical Heat Package necessary to implement the Mandatory Engineering Change. Autoliv shall promptly provide Alexza with a reasonable schedule to implement the Mandatory Engineering Change and the reasonable purchase price for the modified Chemical Heat Package, provided that any increases in purchase price shall only reflect the additional costs that Autoliv incurs that are specifically related to making the Mandatory Engineering Change. The parties shall jointly assess the impact on prior or future deliveries of Chemical Heat Packages. Based on that assessment, the parties shall negotiate the schedule for incorporating any Mandatory Engineering Change as well as any changes in delivery schedules, prices, etc. If a dispute arises between the parties with respect to a Mandatory Engineering Change, senior officers of the parties shall attempt, in good faith, to resolve the dispute in a reasonable period of time. If such attempts are not successful, either party may submit the dispute to a competent court for resolution in accordance with Section 13.9.

ARTICLE 7
Quality Terms; Improvements; Failure Analysis; Disaster Recovery

7.1 Quality Terms. The parties shall apply and be bound by the quality procedures for all Chemical Heat Packages delivered pursuant to this Agreement as set forth in Exhibit E (“Quality Terms”).

7.2 Failure Analysis. Autoliv shall, at no additional cost to Alexza conduct a failure analysis as set forth in the Quality Terms on all defective Chemical Heat Packages returned by Alexza to Autoliv, to determine the cause of failure, if any.

7.3 Disaster Recovery Plans. Autoliv shall promptly (but in no event later than seventy-two (72) hours after its occurrence) notify Alexza in writing of any disaster or event that


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

may adversely affect the quality or delivery to Alexza of the Chemical Heat Packages. Without limiting the foregoing, upon Alexza’s request, Autoliv will provide to Alexza its Disaster Recovery Plan or equivalent.

ARTICLE 8
Representations and Warranties

8.1 Mutual Representations and Warranties. Each party hereby represents and warrants:

(a) Corporate Power. Such party is duly organized and validly existing under the laws of the state or nation of its incorporation and has full corporate power and authority to enter into this Agreement and to carry out the provisions hereof.

(b) Due Authorization. Such party is duly authorized to execute and deliver this Agreement and to perform its obligations hereunder.

(c) Binding Agreement. This Agreement is a legal and valid obligation binding upon it and is enforceable in accordance with its terms. The execution, delivery and performance of this Agreement by such party does not conflict with any agreement, instrument or understanding, oral or written, to which it is a party or by which it may be bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having authority over it.

8.2 Representations and Warranties Concerning Chemical Heat Packages. Autoliv represents and warrants to Alexza that each Chemical Heat Package supplied to Alexza under this Agreement will (a) be new and unused and be free from any security interest or any other lien, claim or other encumbrance; (b) conform to the Specifications; and (c) be manufactured and packaged in compliance with this Agreement, the Quality Terms and the TS16949 certification. Without limiting any other rights or remedies of Alexza under this Agreement, Autoliv will, at Autoliv’s option, either (i) repair the affected Chemical Heat Package to conform to the warranty; (ii) replace such Chemical Heat Package with a conforming Chemical Heat Package; or (iii) provide a credit or refund to Alexza of the payment made by Alexza for such Chemical Heat Package, in each case at Autoliv’s expense. Unless Autoliv reasonably demonstrates that a returned Chemical Heat Package was conforming when originally delivered to Alexza, Autoliv shall pay the costs of all shipping and insurance of the item (including, upon repair or replacement, return of the same or replacement item to the original location) and assume the risk of loss during shipping. All replaced or repaired Chemical Heat Packages under this Section 8.2 shall be subject to the same warranties as provided herein and all replacement Chemical Heat Packages shall be new.

8.3 Representations and Warranties Concerning Intellectual Property Rights. Autoliv represents and warrants to Alexza that:

(a) Autoliv is the sole owner of the Autoliv Patents and Autoliv IP and has the right to grant the licenses set forth in Section 9.8; and

(b) The patents and patent applications set forth on Exhibit F, together with


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

the Foreign Counterparts of such patents and patent applications, comprise all patents and patent applications owned or controlled by Autoliv or its Affiliates as of the Effective Date that are necessary to make Chemical Heat Packages.

8.4 Disclaimer. THE EXPRESS WARRANTIES IN THIS ARTICLE 8 AND SECTION 11.4 ARE IN LIEU OF ALL OTHER WARRANTIES, WHETHER EXPRESS, IMPLIED, OR STATUTORY, REGARDING THE CHEMICAL HEAT PACKAGES INCLUDING ANY WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. EACH PARTY ACKNOWLEDGES THAT IT HAS RELIED ON NO WARRANTIES OTHER THAN THE EXPRESS WARRANTIES IN THIS ARTICLE 8 AND SECTION 11.4.

ARTICLE 9
Intellectual Property

9.1 Background Technology. Each party shall retain ownership and control of its respective inventions, know-how, information, data and related Intellectual Property Rights existing as of the Effective Date or generated outside this Agreement (collectively, a party’s “Background Technology”). Except as otherwise set forth in this Agreement, nothing herein shall grant or imply any license or right of use to any Background Technology of either party to the other party, except as necessary for the performance of this Agreement.

9.2 Inventorship. Inventorship of New Discoveries shall be determined in accordance with the patent laws of the United States of America.

9.3 Autoliv Inventions. Autoliv shall solely own all Intellectual Property Rights in and to all New Discoveries made, conceived, reduced to practice or generated by Autoliv alone. (the “Autoliv IP”).

9.4 Alexza Inventions. Alexza shall solely own all Intellectual Property Rights in and to all New Discoveries made, conceived, reduced to practice or generated by Alexza alone (collectively, “Alexza IP”).

9.5 Joint Inventions. Alexza and Autoliv shall jointly and equally own all Intellectual Property Rights in and to all New Discoveries made, conceived, reduced to practice or generated by the parties jointly (collectively, “Joint IP”), provided that (a) Autoliv may use, and grant licenses to third parties to, the Joint IP, in all fields other than the Alexza Field without compensation or accounting to or consent of Alexza, and (b) Alexza may use, and grant licenses to third parties to, the Joint IP, solely in the Healthcare Field without compensation or accounting to or consent of Autoliv. The parties shall consult each other and shall mutually decide if it is appropriate to apply for a patent for the applicable Joint IP, and if so, who will apply for a patent and in which countries patent protection shall be applied for. Without limiting the foregoing, (i) Autoliv shall consult with Alexza with respect to each claim in a Joint IP patent application prosecuted by Autoliv that may relate to the Healthcare Field, and (ii) Alexza shall consult with Autoliv with respect to each claim in a Joint IP patent application prosecuted by Alexza that may relate to the Autoliv Field or any portion of the Healthcare Field other than the Alexza Field. All costs for prosecuting and maintaining patents and patent applications covering


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Joint IP shall be equally shared by the parties unless the parties agree in writing upon an alternate allocation of such costs. All decisions about the handling of Joint IP shall be documented. As between the parties, Autoliv will have the first right to initiate legal proceedings against or take other action against any Third Party that is infringing in the Autoliv Field any patent that claims Joint IP. As between the parties, Alexza will have the first right to initiate legal proceedings or take other action against any Third Party that is infringing in the Healthcare Field any patent that claims Joint IP. If the party with the first right does not initiate such legal proceedings or otherwise address such infringement within 6 months after the other party’s written request, then the other party shall have the right to do so. The initiating party shall be entitled to retain all proceeds from such legal proceedings or other actions provided that such infringement was limited to the relevant field.

9.6 Patent Applications. Subject to Section 9.5, each party shall have the right, but not the obligation, to file, prosecute, maintain, enforce and defend any patents which claim New Discoveries which such party owns pursuant to this Article 9.

9.7 Licenses to Autoliv. Subject to the terms and conditions of this Agreement, Alexza hereby grants to Autoliv: (a) a non-exclusive, royalty-free, non-transferable, non-sublicensable license under all Background Technology owned by Alexza and all Alexza IP in each case that is necessary or useful to manufacture or test the Chemical Heat Packages, solely for the purposes of manufacturing and testing Chemical Heat Packages for Alexza in accordance with the terms and conditions of this Agreement, and (b) an exclusive, worldwide, royalty-free, fully paid, perpetual, irrevocable, and sublicensable license to practice all Alexza IP solely in the Autoliv Field.

9.8 Licenses to Alexza. Subject to the terms of this Agreement, Autoliv hereby grants to Alexza: (a) a nonexclusive, worldwide, royalty-free, fully paid, perpetual, irrevocable (unless Autoliv terminates this Agreement pursuant to Section 10.4(a)) and sublicensable license, under all Autoliv Patents and other Background Technology owned by Autoliv, to develop, make, use, import, offer for sale and sell Finished Products, (b) a nonexclusive, worldwide, royalty-bearing (as set forth in Section 10.5(b)), perpetual, irrevocable (unless Autoliv terminates this Agreement pursuant to Section 10.4(a)) and sublicensable license, under all Autoliv Patents and other Background Technology owned by Autoliv, to manufacture and have manufactured Chemical Heat Packages and to develop, make, use, import, offer for sale and sell products incorporating such Chemical Heat Packages, (c) a nonexclusive, worldwide, royalty-bearing (as set forth in Section 5.6(a)), perpetual, irrevocable (unless Autoliv terminates this Agreement pursuant to Section 10.4(a)) and sublicensable license, under all Autoliv Patents and other Background Technology owned by Autoliv, to manufacture and have manufactured Second Generation Packages and to develop, make, use, import, offer for sale and sell products incorporating Second Generation Packages, (d) a non-exclusive, royalty-bearing (as set forth in Section 5.6(a)), perpetual, irrevocable (unless Autoliv terminates this Agreement pursuant to Section 10.4(a)) and sublicensable license to practice all Autoliv IP solely in the Alexza Field, and (e) an exclusive, fully paid, perpetual, irrevocable (unless Autoliv terminates this Agreement pursuant to Section 10.4(a)) and sublicensable license, under Autoliv’s interest in the Joint IP, to practice the Joint IP solely in the Alexza Field. Alexza acknowledges that the foregoing licenses are limited to Intellectual Property Rights that are owned or controlled by Autoliv and do not include licenses to Intellectual Property Rights that are owned or controlled by Affiliates of


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Autoliv. Alexza may only practice the license set forth in subsection (b) of this Section 9.8 after the termination of this Agreement or in accordance with Section 2.5(a).

ARTICLE 10
Term; Termination

10.1 Term. The term of this Agreement shall begin on the Effective Date and will continue until the earlier of (a) the effective date of any termination of this Agreement in accordance with this Article 10, or (b) December 31, 2012. Thereafter, the term of the Agreement may be extended by written mutual agreement.

10.2 Termination for Convenience. Either party may terminate this Agreement upon thirty-six (36) months prior written notice to the other party for any reason, subject to Article 10.5

10.3 Termination For Failure to Agree Upon Price. Either party may terminate this Agreement upon thirty (30) months prior written notice to the other Party if the parties fail to agree upon the purchase price for Chemical Heat Packages pursuant to 5.1(b).

10.4 Termination for Cause.

(a) Either party may terminate this Agreement upon written notice to the other party in the event of a material breach by the other party, which breach remains uncured for thirty (30) days after written notice of such breach is provided to the breaching party. In the event of Autoliv’s termination of this Agreement under this Section 10.4(a), the licenses granted under Section 9.8 shall terminate.

(b) Autoliv may terminate this Agreement for cause upon written notice to Alexza if Alexza does not comply with the then-applicable NASDAQ Global Market listing maintenance requirements within thirty (30) days after Autoliv’s written notice of such non-compliance.

(c) Alexza may terminate this Agreement upon written notice if Autoliv (i) breaches its representations and warranties in Section 8.2 by delivering (over the course of one or more deliveries) ten thousand (10,000) units or more containing one percent (1%) or more of the same or substantially similar defects, (ii) makes three (3) or more deliveries of Chemical Heat Packages within any consecutive three (3) month period more than five (5) days after the delivery date specified in the applicable Release, or (iii) Autoliv closes all of its Northern Utah facilities and Alexza does not approve of the new location at which Autoliv plans to perform its activities hereunder. However, Alexza’s right to terminate for defects and/or delivery issues under Section 10.4 (c)(i) or (c)(ii) shall expire 90 days after Alexza knew of or should have known of such defects or delays.

10.5 Consequences of Termination.

(a) Upon expiration of this Agreement pursuant to Section 10.1 or termination of this Agreement by either party pursuant to Section 10.2, 10.3 or 10.4: (i) Alexza shall reimburse Autoliv for any unused materials, equipment, tooling or components for which Alexza


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

has not fully reimbursed Autoliv in accordance with Section 3.2, (ii) Autoliv shall transfer to Alexza possession and ownership of all such materials and components, which shall be in good condition when transferred, (iii) Autoliv shall transfer to Alexza possession and ownership of all equipment and tools used by Autoliv in the manufacture and testing of the Chemical Heat Packages, which shall be in good working order when transferred, and (iv) the parties shall cooperate in good faith and arrange for an orderly transition of the manufacturing process to Alexza or its designee.

(b) Upon expiration of this Agreement pursuant to Section 10.1 or termination of this Agreement by either party pursuant to Section 10.2, 10.3 or 10.4 (unless Autoliv terminates this Agreement pursuant to Section 10.4(a)), Alexza shall pay Autoliv the following amounts, within sixty (60) days of the end of each calendar quarter: (i) [ * ] of the direct cost (as defined below) for Alexza’s manufacture of Chemical Heat Packages, or (ii) [ * ] of the purchase price (not including any taxes, shipping costs or handling fees) Alexza pays to a Third Party manufacturer for supplying the Chemical Heat Packages. For the purpose of this Section 10.5(b), “direct costs” shall mean Alexza’s costs of direct labor, bill of materials, and consumables needed to produce and approve for use Chemical Heat Packages.

(c) Except as otherwise set forth in this Agreement, any termination or expiration of this Agreement shall not relieve either party of any obligation which has accrued prior to the effective date of such termination or expiration, which obligations shall remain in full force and effect for the period provided therein.

(d) At Alexza’s written request at any time after termination of this Agreement (other than a termination of the Agreement by Autoliv under Section 10.4(a)), Autoliv shall disclose and transfer to Alexza including, without limitation, through visitation to and observation of the Autoliv facility where the Pilot Production Line or any other production line for Chemical Heat Packages is located, all data, know-how, technology and other information reasonably necessary for Alexza to understand and duplicate the processes employed by Autoliv in the manufacture of the Chemical Heat Packages in accordance with the Specifications, and provide Alexza with access to Autoliv personnel as reasonably required to enable Alexza to assume manufacturing activities for the Chemical Heat Packages, including setting up of a production line for such manufacture. Alexza will, within forty-five (45) days after receipt of Autoliv’s applicable invoice, pay Autoliv’s reasonable full-time equivalent costs for each Autoliv personnel who assists Alexza with assuming manufacturing activities as described in this Section and other reasonable costs incurred for such assistance. In any event, Autoliv shall not be obligated to provide more than reasonable hours of assistance, not to exceed two thousand (2,000) hours.

(e) The remedies set forth in this Section 10.5 are not the sole remedies available to either party in the event of breach of this Agreement by the other party.

(f) The terms of Sections 5.3 (solely with respect to conforming Chemical Heat Packages delivered prior to termination), 5.4, 5.6, 5.8, 7.2 and 10.5, Articles 8, 9, 11, 12 and 13, and Paragraphs 11, 13, 15 and 16 of the Quality Terms shall survive any termination or expiration of this Agreement.


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ARTICLE 11
Indemnification; Insurance Coverage

11.1 Indemnification by Alexza. Alexza hereby agrees to indemnify, hold harmless and defend Autoliv and its Affiliates and their respective employees, officers, directors and agents (the “Autoliv Indemnitees”) against any and all expenses, costs of defense (including without limitation attorneys’ fees, witness fees, damages, judgments, fines and amounts paid in settlement) and any amounts any Autoliv Indemnitee becomes legally obligated to pay because of any Third Party claim or claims against it to the extent that such claim or claims (a) arise out of the breach or alleged breach of any representation or warranty by Alexza hereunder, or (b) arise from a Third Party claim of injury or death or damage to property resulting from such Third Party’s use of the Finished Product and not caused by Autoliv’s negligence or misconduct in the performance of its obligations under this Agreement, or (c) are due to the negligence or misconduct of Alexza in the promotion, marketing or sale of the Finished Product; provided that such indemnification obligation shall not apply to the extent such claims are covered by Autoliv’s indemnity set forth in Section 11.2 below.

11.2 Indemnification by Autoliv. Autoliv shall indemnify, hold harmless and defend Alexza and its Affiliates and their respective employees, officers, directors and agents (the “Alexza Indemnitees”) against any and all expenses, costs of defense (including attorneys’ fees, witness fees, damages, judgments, fines and amounts paid in settlement) and any amounts any Alexza Indemnitee becomes legally obligated to pay because of: (a) the injury or death of a Third Party or damage to property of a Third Party judicially determined to have been caused by Autoliv’s breach of its warranty in Section 8.2(b); or (b) Autoliv’s breach of its warranties in Section 8.3. Autoliv shall only be liable under this Section 11.2(a) up to a maximum of $1 million for each individual matter.

11.3 Procedure. Each party’s agreement to indemnify, defend and hold the other harmless under Sections 11.1 and 11.2 is conditioned on the indemnified party (a) providing written notice to the indemnifying party of any claim arising out of the indemnified activities within thirty (30) days after the indemnified party has knowledge of such claim; (b) permitting the indemnifying party to assume full responsibility to investigate, prepare for and defend against any such claim; (c) assisting the indemnifying party, at the indemnifying party’s reasonable expense, in the investigation of, preparation for and defense of any claim; and (d) not compromising or settling such claim with the indemnifying party’s written consent. In the event that the parties cannot agree as to the application of Sections 11.1 and 11.2 above to any particular loss or claim, the parties may conduct separate defenses of such claim. Each party further reserves the right to claim indemnity from the other in accordance with Section 11.1 and 11.2 above upon resolution of the underlying claim, notwithstanding subsection (b) above.

11.4 Insurance Coverage. Subject to Autoliv’s right to self-insure, each party represents and warrants that it is covered and will continue to be covered by a comprehensive insurance program which covers all of each party’s activities and obligations hereunder. Each party shall provide the other party with written notice at least fifteen (15) days prior to any cancellation or material change in such insurance program that reduces coverage thereunder. Each party shall maintain such insurance program, or other program with comparable coverage, beyond the expiration or termination of this Agreement during (i) the period that any Chemical


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Heat Package produced pursuant to this agreement is intended to be used in a Finished Product for clinical trials or commercial sales and (ii) a commercially reasonable period thereafter.

ARTICLE 12
Confidentiality

12.1 Nondisclosure of Confidential Information. The parties agree that during the Term and for a period of seven (7) years thereafter, each party will (a) use commercially reasonable efforts to maintain in confidence the Confidential Information of the other party (but not less than those efforts as such party uses to maintain in confidence its own proprietary industrial information of similar kind and value) and not to disclose such Confidential Information to any Third Party without prior written consent of the other party, except for disclosures made in confidence to any Third Party under terms consistent with this Agreement and made in furtherance of this Agreement or of rights granted to a party hereunder, and (b) not use such other party’s Confidential Information for any purpose except those permitted by this Agreement (it being understood that this subsection (b) shall not create or imply any rights or licenses not expressly granted under Article 9. In any event, the parties agree to take all reasonable action to avoid disclosure of Confidential Information except as permitted hereunder.

12.2 Exceptions. The obligations in Section 12.1 shall not apply with respect to any portion of the Confidential Information of a party (the “Disclosing Party”) that the other party (the “Receiving Party”) can show by competent written proof:

(a) is publicly disclosed by the Disclosing Party, either before or after it is disclosed to the Receiving Party hereunder; or

(b) was known to the Receiving Party or any of its Affiliates, without obligation to keep it confidential, prior to disclosure by the Disclosing Party; or

(c) is subsequently disclosed to the Receiving Party or any of its Affiliates by a Third Party lawfully in possession thereof and without obligation to keep it confidential; or

(d) is published by a Third Party or otherwise becomes publicly available or enters the public domain, either before or after it is disclosed to the Receiving Party; or

(e) has been independently developed by employees or contractors of the Receiving Party or any of its Affiliates without the aid, application or use of Confidential Information.

12.3 Authorized Disclosure.

(a) A party may disclose the Confidential Information belonging to the other party to the extent such disclosure is required by law or regulation or by the order of a court or similar judicial or administrative body, provided such party gives prompt prior written notice to the other party and cooperates with the other party to obtain, at the other party’s reasonable expense, a protective order requiring that the Confidential Information so disclosed be used only for the purposes for which the law or regulation requires or the order was issued.


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

(b) In addition, Alexza may disclose the Confidential Information of Autoliv (i) to contract manufacturers (but only prior to termination to the extent allowed by Section 2.5(a) or after termination to enable such contract manufacturers to assume Chemical Heat Package manufacturing activities transferred to Alexza pursuant to Section 10.5(d)), bona fide potential and actual corporate partners, licensees and sublicensees, financial underwriters, and prospective investors, lenders, acquirers and merger partners, and other parties with a need to know such information, or (ii) to the extent such information is necessary to file or prosecute patent applications, obtain regulatory approval for the Finished Products, prosecute or defend litigation, or establish rights or enforce obligations under this Agreement.

12.4 Terms of Agreement. The parties agree that the terms of this Agreement and the Development Agreement will be considered Confidential Information of both parties. Such terms may be disclosed (a) by either party to its investment bankers, employees, consultants and agents and its potential or actual investors, lenders, acquirers and merger partners, (however, neither party shall publicly announce or disclose in any annual report to shareholders or other shareholder information, unless legally required to do so or upon prior mutual agreement or approval), (b) by Alexza to its bona fide potential and actual corporate partners, licensees and sublicensees, or (c) by either party to regulators or other parties for filing or prosecuting patent applications, prosecuting or defending any litigation, or establishing or enforcing obligations under this Agreement. Prior to any disclosure, any entity receiving such confidential information must be bound in writing by similar obligations of confidentiality and non-use at least equivalent in scope to those set forth in this Article 12. In addition, a copy of this Agreement may be filed by either party with the Securities and Exchange Commission. In connection with any such filing, such party shall endeavor to obtain confidential treatment of economic and trade secret information.

12.5 Termination of Prior Agreements. This Agreement terminates the Mutual CDA. All Information exchanged between the parties under such earlier agreement shall be deemed Confidential Information and shall be subject to the terms of this Article 12.

ARTICLE 13
Miscellaneous

13.1 Assignment. Except as otherwise provided herein, neither this Agreement nor any interest hereunder will be assignable in part or in whole by any party without the prior written consent of the other; provided, however, that either party may assign this Agreement to any of its Affiliates or to any successor by merger or sale of all or substantially all of its business assets to which this Agreement relates in a manner such that the assignor will remain liable and responsible for the performance and observance of all its duties and obligations hereunder. This Agreement will be binding upon the successors and permitted assigns of the parties and the name of a party herein will be deemed to include the names of such party’s successors and permitted assigns to the extent necessary to carry out the intent of this Agreement. Any assignment which is not in accordance with this Section 13.1 will be void.

13.2 Agency. Neither party is, nor will be deemed to be, an employee, agent or legal representative of the other party for any purpose. Neither party will be entitled to enter into any contracts in the name of, or on behalf of the other party, nor will a party be entitled to pledge the


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

credit of the other party in any way or hold itself out as having authority to do so. This Agreement is an arm’s-length agreement between the parties and shall not constitute or be construed as a joint venture.

13.3 Employees. Autoliv and Alexza shall have a written agreement with each of its employees and consultants requiring them to comply with obligations with respect to ownership set forth in Article 9 and confidentiality set forth in Article 12. Either party shall be permitted to solicit the services of, or offer employment to, any person who is or was an employee of the other party, upon the other party’s written consent.

13.4 Amendment. No amendment or modification hereof shall be valid or binding upon the parties unless made in writing and signed by both parties.

13.5 Notices. Any notice or other communication required or permitted to be given to either party hereto shall be in writing unless otherwise specified and shall be deemed to have been properly given and to be effective on the date of delivery if delivered in person or by facsimile or overnight courier, or three (3) days after mailing by registered or certified mail, postage paid, to the other party at the following address:

In the case of Alexza:

Alexza Pharmaceuticals, Inc.
Attention: President and CEO and separate copy to CFO
1020 E. Meadow Circle
Palo Alto, CA 94303
Telephone: (650) 687-3000
Facsimile Number: (650) 687-3999

In the case of Autoliv:

Autoliv North America
Attention: President
3350 Airport Road
Ogden, UT 84405
Telephone: (801) 625-8214
Facsimile Number: (801) 625-8211

Either party may change its address for communications by a notice to the other party in accordance with this Section.

13.6 Force Majeure. Any prevention, delay or interruption of performance by any party under this Agreement shall not be considered a breach of this Agreement if and to the extent caused by occurrences beyond the reasonable control of the party affected, including but not limited to acts of God, embargoes, strikes or other concerted acts of workers, fire, flood, earthquake, explosion, riots, wars, civil disorder, rebellion or sabotage. The party suffering such occurrence shall immediately notify the other party and any time for performance hereunder shall be extended by the actual time of prevention, delay, or interruption caused by the


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occurrence. For the purposes of this Agreement, delays by Autoliv’s subcontractor(s) shall be deemed to be within Autoliv’s reasonable control, unless caused by one of the foregoing reasons. The party asserting force majeure shall mitigate its effects.

13.7 Export Control. This Agreement is made subject to any restrictions concerning the export of products or technical information from the United States of America or other countries that may be imposed upon or related to Alexza or Autoliv from time to time. Each party agrees that it will comply with all applicable export laws and regulations in connection with its activities under this Agreement.

13.8 Severability. If any term, condition or provision of this Agreement is held to be unenforceable for any reason, it shall, if possible, be interpreted, to achieve the intent of the parties to this Agreement to the extent possible rather than voided. If not capable of such interpretation, the parties shall in good faith seek to agree on an alternative provision reflecting the intent of the parties which is enforceable. In any event, all other terms, conditions and provision of this Agreement shall be deemed valid and enforceable to the full extent.

13.9 Governing Law and Venue. The validity, construction and performance of this Agreement shall be governed by the substantive law of the State of New York, and the United States of America, without giving effect to conflicts of law principles that would require the application of the law of a different jurisdiction. Any action or proceeding brought by Alexza to enforce the terms of this Agreement shall be brought in the County of Salt Lake, State of Utah (if under State law) or the District Court of Utah (if under Federal Law). Any action or proceeding brought by Autoliv to enforce the terms of’ this Agreement shall be brought in the County of Santa Clara, State of California (if under State law) or the District Court for the Northern District of California (if under Federal Law). The parties consent to personal jurisdiction before such courts.

13.10 Construction. The headings of Articles and Sections of this Agreement are for convenience and are not to be used in interpreting this Agreement. As used in this Agreement, the word “including” means “including but not limited to.”

13.11 Cumulative Rights. The rights, powers and remedies hereunder shall be in addition to, and not in limitation of, all rights, powers and remedies provided at law or in equity, or under any other agreement between the parties. All of such rights, powers and remedies shall be cumulative, and may be exercised successively or cumulatively.

13.12 Waiver. No waiver by either party hereto on any breach or default of any of the covenants or agreements herein set forth shall be deemed a waiver as to any subsequent or similar breach or default.

13.13 Entire Agreement. This Agreement (including any Exhibits hereto) constitutes the entire agreement between the parties with respect to the subject matter hereof, and no oral or written statement may be used to interpret or vary the meaning of the terms and conditions hereof. This Agreement supersedes any prior or contemporaneous agreements and understandings, whether written or oral, between the parties with respect to the subject matter hereof. In the event of any conflict or inconsistency between the terms of this Agreement and


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

the Quality Terms, the terms of this Agreement shall prevail. For clarity, the Development Agreement is terminated as of the Effective Date of this Agreement. Notwithstanding Section 5.7 of the Development Agreement, the following provisions of the Development Agreement shall survive: Sections 5.5 (first sentence only), 5.6, 6.1, 6.2, 6.3, 6.4, 6.5 (first sentence only), 6.7 and 6.8 and Articles 7, 9, and 10.

13.14 Counterparts. This Agreement may be executed in one or more counterpart copies, each of which shall be deemed an original and all of which taken together shall be deemed to constitute one and the same instrument. This Agreement shall become binding when one or more counterparts taken together shall have been executed and delivered by the parties.

13.15 Further Assurances. Each party shall execute such other instruments, give such further assurances and perform such acts that are or may become necessary or appropriate to effectuate and carry out the provisions of this Agreement.

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the Effective Date by their officers thereunto duly authorized.


Alexza Pharmaceuticals, Inc.		Autoliv ASP, Inc.

/s/ Thomas B. King Signature		/s/ Michael J. Ward Signature
Thomas B. King Name		Michael J. Ward Name
President & CEO Title		President, Autoliv ASP Title

November 2, 2007 Date		November 2, 2007 Date

List of Exhibits

A.		Chemical Heat Package Drawing No. PNR002119, “Chemical Heat Package”

B.		Technical Requirements for Chemical Heat Packages, SPS 002002

C.		Purchase Price

D.		Key Personnel; Operations Representative

E.		Quality Terms

F.		Autoliv Patents and Patent Applications

+++++++++++++++++++++++++++++++++++


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Exhibit A
Chemical Heat Package Description
[ * ]


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Exhibit B

Technical requirements for Chemical Heat Packages, SPS 002002


		Released For:		101168 Rev. 01
		MASTER FILE
		Technical Requirements for Chemical Heat Package

1.0		PURPOSE

		• This document lists requirements that the chemical heat package (PNR002119, Heat Package, Seam Weld, Binder Free) needs to meet when supplied to Alexza Pharmaceuticals.

2.0		SCOPE

		• This document defines requirements which apply to the CPD chemical heat package. It is controlled and maintained within Alexza Pharmaceutical’s document control system. All changes will be made under the Alexza Change Control System.

3.0		RESPONSIBILITIES

		• It is the responsibility of those organizations noted below to read and understand this document.

		• It is the responsibility of the Project Leader to generate and maintain this document.


Product Research and Development		Review and approve the 101168
Manufacturing		Review and approve the 101168
Quality Assurance		Review and approve the 101168
Supply Chain Management		Review and approve the 101168

4.0		REFERENCES

		• ISTA procedure 3A, Packaged-Products for Parcel Delivery System Shipment 70kg (150 lb) or Less.

		IEC/EN 60068-2-27, Basic environmental testing procedures — Part 2: Tests; test Ea and guidance: Shock

		IEC/EN 60068-2-64, Environmental testing — Part 2: Test methods — Test Fh: Vibration, broad-band random (digital control) and guidance


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

		IEC/EN 60068-2-6, Environmental testing — Part 2: Tests; test Fc: Vibration (sinusoidal)

	•		ALXSPSD-0010, Thermal Testing of Heat Packages

	•		ALXSPSD-0023, Leak Check and Electrical Check

5.0

DEFINITIONS AND ACRONYMS


Cpk		Type of process capability index. Normally expressed as the minimum of [(upper specifications limit – mean)/3s , (mean – lower specification limit)/3s ]

Header		Component of heat package.

Heat shield		Component of heat package.

HP		Heat Package

IEC		International Electrochemical Commission

ISO		International Organization for Standardization

ISTA		International Safe Transit Association

Lid		Component of heat package

µ		Micron

µm		Micrometer

ms		Milliseconds

Multiple initiations		The reaction of reactant coated on the inside of the heat package starts at multiple locations.

NMT		Not more than

Normal heat package		Heat package meets all the performance requirements as specified in section 7.0 of this document.

Propagation time		Time from actuation (reactant on surface is actuated) until the heating reaction is complete (all reactant has reacted).

RSD		Relative Standard Deviation

s		Standard deviation

T250		Average surface temperature measured 250 ms after actuation.

TBD		To be determined

Tray		Component of heat package


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

6.0

OVERALL DESCRIPTION

	6.1		The Chemical Heat Package (PNR002119)

			• The heat package assembly consists of a lid and tray coated on one side with reactant, a header with a welded bridge wire and starter material, and a heat shield. The heat package is seam welded along the edges of the lid and tray flanges and the header is sealed with UV curable adhesive.

Figure 1 — Exploded View of a Heat Package

7.0		PERFORMANCE REQUIREMENTS

		During lot acceptance testing, heat packages should be verified to meet requirements 1, 2, 3, 4, 6, 7 and 12. Requirements 1, 2, 3, 4 and 6 are destructive tests and should therefore be verified for a representative sample of heat packages from a particular lot.


	Testing
Attribute	Method	Requirement
1. Temperature	ALXSPSD-0010	[ * ]
2. Temperature uniformity	ALXSPSD-0010	[ * ]
3. Multiple initiations	ALXSPSD-0010	[ * ]
4. Propagation time	ALXSPSD-0010	[ * ]
5. Pressure inside HP	ALXSPSD-0010	[ * ]
6. Heat package weld and metal integrity	ALXSPSD-0011	[ * ]


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


	Testing
Attribute	Method	Requirement
7. He leak rate before actuation	ALXSPSD-0023	[ * ]
8. He leak rate after actuation – use environment, temperature	ALXSPSD-0023	[ * ]
9.He leak rate after actuation, – use environment, altitude	ALXSPSD-0023	[ * ]
10. Actuation reliability, — use environment temperature	ALXSPSD-0010	[ * ]
11. Actuation reliability, — use environment altitude	ALXSPSD-0010	[ * ]
12. Header resistance before actuation	ALXSPSD-0023	[ * ]
13. Header resistance after actuation	ALXSPSD-0023	[ * ]
14. Shelf life	N/A	[ * ]
15. Shelf life	N/A	[ * ]
16. Shipping requirement	N/A	[ * ]
17. Mechanical Shock	N/A	[ * ]
18. Sinusoidal Vibration	N/A	[ * ]
19. Random Vibration (broad band)	N/A	[ * ]
20. Orientation	TBD	[ * ]

+++++++++++++++++++++++++++++++


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Exhibit C

Purchase Price

During the Initial Term, the purchase price for the Chemical Heat Packages will be as set forth below corresponding to the annual (calendar year) quantities set forth below:


Annual Quantity		Purchase Price
(in units)		(in USD)
[ * ]		[ * ]
[ * ]		[ * ]
[ * ]		[ * ]
[ * ]		[ * ]
[ * ]		[ * ]
[ * ]		[ * ]
[ * ]		[ * ]

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Exhibit D

Key Personnel; Operations Representative

Key Personnel:


Name	Position	Role
[ * ]	[ * ]	[ * ]
[ * ]	[ * ]	[ * ]
[ * ]	[ * ]	[ * ]
[ * ]	[ * ]	[ * ]
[ * ]	[ * ]	[ * ]

B.		Operations Representative:

		[ * ]

+++++++++++++++++++++++++++++++++++++++++


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Exhibit E

Quality Terms

1.		PURPOSE

		This exhibit defines the quality responsibilities between Alexza and Autoliv with respect to the quality assurance of the CPD Heat Packages manufactured by Autoliv for Alexza

2.		SCOPE

		This exhibit is applicable to the CPD Heat Packages manufactured by Autoliv.

3.		QUALITY SYSTEM

		Autoliv shall establish, document and maintain a quality system in accordance with ISO/TS 16949 Quality Management System Standard. Autoliv shall notify Alexza in advance in the event that Autoliv is required to change their Quality Management Standard (ISO/TS 16949).

		The Autoliv quality system shall consist of written procedures for the control of planned and unplanned changes to materials, packaging components, suppliers, equipment, processing steps, device component requirements, sampling test methods and releasing requirements.

4.		QUALITY AND BUSINESS REVIEW

		Alexza and Autoliv shall conduct Quality and Business Reviews according to the manufacturing and supply agreement. The appropriate Alexza & Autoliv Quality Engineer and/or Supply Team Lead or other appropriate personnel shall lead such event(s).

5.		COMPLIANCE

		Autoliv shall manufacture Alexza products in compliance with Autoliv’s established quality system procedures, ISO/TS 16949 standard and applicable regulations. Autoliv shall be responsible for maintaining certification to the current ISO/TS 16949 standard.

6.		AUDITS

		Alexza shall have the right, upon reasonable notice to Autoliv and during regular business hours to audit, observe (person in plant), or inspect the facilities being used by Autoliv for production and storage of the CPD Heat Package. Alexza shall audit for compliance to the approved Autoliv procedures relating to manufacturing of CPD Heat Packages and to the ISO/TS 16949 standard. Autoliv shall within thirty (30) calendar days of receipt of the written audit letter, remedy or cause the remedy of any deficiencies


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

		which may be noted. If deficiencies cannot reasonably be remedied within such thirty (30) business-day period, a written plan to remedy such deficiencies will be presented to Alexza.

7.		REGULATORY INSPECTIONS

		Autoliv shall notify Alexza within twenty four (24) hours of any inspection notification from any regulatory agency specifically related to the manufacture and storage of CPD Heat Packages. Autoliv shall provide Alexza copies of any inspection reports that it receives from any regulatory agency or any notice of any claim or action by any agency relating to non-compliance with any applicable laws, rules or regulations. Autoliv shall contact Alexza for instructions with regards to validity of a request about Alexza products by a regulatory agency. Except to the extent as may be required by law, Autoliv shall not communicate directly with any regulatory agency (such as FDA or sanctioning authority) regarding the CPD Heat Package except through or with the explicit review and approval of Alexza.

8.		DESIGN SPECIFICATIONS

		Specifications and drawings for CPD Heat Package components, packaging components, and the completed CPD Heat Package will be created and approved by Alexza according to Alexza’s change control process. Approved specifications and drawings will be transferred to Autoliv by Alexza.

9.		MANUFACTURING INSTRUCTIONS

		Alexza and Autoliv are jointly responsible for ensuring the appropriate process controls are implemented. Autoliv is responsible for creation and approval of the manufacturing control plan(s) according to Autoliv’s change control process. Alexza will approve the Autoliv manufacturing control plan(s) as well as references within the CPD Heat Package control plan(s)

10.		CHANGE CONTROL

		Autoliv shall not make changes to the design, materials, packaging components, requirements or process changes affecting safety, specifications, or stability requirements of the Alexza CPD Heat Package without prior written approval from Alexza. Autoliv is responsible for notifying and obtaining Alexza’s approval for any changes to the manufacturing control plan(s) prior to implementation and for providing Alexza with a copy of the most current approved control plan(s).

11.		IDENTIFICATION & TRACEABILITY

		Autoliv shall maintain a system to assure proper identification and acceptance status of materials, components and products throughout the manufacturing cycle. The manufacturing records shall allow for traceability to process, equipment, personnel, and


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

		materials and components used in the manufacturer of each lot or batch of CPD Heat Packages. The extent of traceability to the materials and components shall be defined in the manufacturing control plan(s).

12.		NON-CONFORMANCES

		Autoliv will notify Alexza of all non-conformances, as determined by the control plan, associated with manufacturing or testing CPD Heat Packages that are being reviewed for shipment of the lot to Alexza or that affect product that has already been shipped to Alexza.

13.		LOT RELEASE AND CERTIFICATE OF ANALYSIS

		Autoliv is responsible for reviewing completed manufacturing and testing records to ensure each lot of CPD Heat Packages has been manufactured and tested in accordance to the approved manufacturing instructions and that any deviations to the process have been thoroughly investigated. Autoliv is responsible for disposition of each lot of CPD Heat Packages prior to shipment to Alexza. Autoliv will generate a Certificate of Conformance (C of C) for each lot and the C of C will be provided to Alexza. The C of C will contain traceability to the lot and a compliance statement indicating the lot has been manufactured and tested according to the approved control plan(s) and meets all requirements of the product specification. Upon request, Alexza may request copies of the completed manufacturing records, test data, or other related records associated with the lot.

14.		ACCEPTANCE

		Alexza reserves the right to reject any product that is found not to be in conformance with the approved product specifications or found not to have been manufactured according to the approved control plan(s).

15.		RECORDS RETENTION

		All documentation (manufacturing records, packaging records, inspection records, batch tickets/card/records, and quality records, such as calibration logs, training records) generated during the manufacturing process will be maintained by Autoliv for a minimum of seven (7) years. Autoliv shall notify Alexza prior to destruction of any records related to the manufacture of device component and relevant quality system records and transfer such records to Alexza upon request.

16.		FAILURE ANALYSIS

		When requested by Alexza, Autoliv will perform a complete investigation on returned heat package(s) in a timely manner sufficient to determine the root cause of the abnormal condition. An investigation report will be written and submitted to Alexza for review and approval as soon as reasonably possible.


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

+++++++++++++++++++++++++++++++++++++++++


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Exhibit F

AUTOLIV PATENTS AND PATENT APPLICATIONS


Patent Description:	Patent Number:	Also Published as:
[ * ]	[ * ]	[ * ]
[ * ]	[ * ]

Pending Autoliv Review:	Internal File Number:
[ * ]	[ * ]

Autoliv Trade Secret:	File Number:
[ * ]	[ * ]


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

EX-10.37 4 f39029exv10w37.htm EXHIBIT 10.37 exv10w37

[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Exhibit 10.37

LICENSE, DEVELOPMENT AND SUPPLY AGREEMENT

BETWEEN

ALEXZA PHARMACEUTICALS, INC.

and

ENDO PHARMACEUTICALS INC.

LICENSE, DEVELOPMENT AND SUPPLY AGREEMENT

This LICENSE, DEVELOPMENT AND SUPPLY AGREEMENT (this “Agreement”) is made and effective as of December 27, 2007 (the “Effective Date”) by and among Alexza Pharmaceuticals, Inc., a Delaware corporation (“Alexza”) and Endo Pharmaceuticals Inc., a Delaware corporation (“Endo”) (each of Alexza and Endo being a “Party,” and collectively, the “Parties”).

WHEREAS, Alexza has developed and owns all right, title and interest in and to certain patents and know-how relating to its proprietary device, AZ-003 (Staccato^® fentanyl), a multiple-dose delivery system for fentanyl that permits rapid systemic delivery of fentanyl through inhalation, and Alexza has initiated clinical studies with respect to AZ-003;

WHEREAS, Endo desires to obtain a license to develop, use, commercialize, distribute and sell AZ-003 and all improvements, modifications, formulations and line extensions thereto and to obtain a supply of AZ-003 and all improvements, modifications, formulations and line extensions thereto from Alexza, and Alexza is willing to grant such license and provide such supply on the terms and conditions set forth below;

NOW THEREFORE, in consideration of the mutual promises and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

ARTICLE 1

DEFINITIONS

The following terms, whether used in the singular or the plural, shall have the meanings designated to them under this Article unless otherwise specifically indicated.

1.1 “Active Ingredient” means the pharmaceutically active compound or active pharmaceutical ingredient (API) for use in the Manufacture of a Product, including any Drug.

1.2 “Active Ingredient Specifications” means the specifications for the Active Ingredient to be used in a Product, as such specifications may be amended from time to time. The Active Ingredient Specifications for the Initial Product and any subsequent Product shall be attached to this Agreement as Annex I when such specifications are agreed to by the Parties.

1.3 “Affiliate” means any company or entity controlled by, controlling, or under common control with a Party. For purposes of this Section 1.3 only, “control” and, with corresponding meanings, the terms “controlled by,” “controlling,” and “under common control with” means (a) the ownership, directly or indirectly, of more than fifty percent (50%) of the voting securities, participating profit interest, or other ownership interests of a legal entity, or (b) the possession, directly or indirectly, of the power to direct the management or policies of a legal entity, whether through the ownership of voting securities or by contract relating to voting rights or corporate governance.


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

1.4 “Alexza Intellectual Property” means the Alexza Patents and Alexza Know-How.

1.5 “Alexza Know-How” means any and all Know-How Controlled by Alexza at any time during the Term that is necessary or useful to practice the Alexza Patents and develop and manufacture Product, but excluding the Alexza Patents.

1.6 “Alexza Patent” means any patent or patent application (including, without limitation, any provisional, continuation, divisional, or continuation-in-part application, and any substitution, reissue, renewal, reexamination, protection certificate, extension, registration or confirmation patent, and further including any patent or patent application in which Alexza and Endo have undivided equal ownership interests pursuant to Section 9.2) in the Territory that is Controlled by Alexza at any time during the Term and that pertains to the Staccato Technology and claims or would otherwise be infringed by a Product or the manufacture or use of any Product. While not intending to limit the scope of the Alexza Patents, Schedule 1.6 lists patents Controlled by Alexza that pertain to the Staccato Technology and claim or would otherwise be infringed by a Product or the manufacture or use of a Product. Schedule 1.6 shall be promptly updated by Alexza to include any other patents hereafter Controlled by Alexza that pertain to the Staccato Technology and claim or would otherwise be infringed by a Product or the manufacture or use of a Product in the Territory.

1.7 “Alexza Trademarks” means the Staccato trademark, as well as any other trademarks and trade names, whether or not registered, that are Controlled by Alexza at any time during the Term and are applied to or used in connection with the Staccato Technology generally (as opposed to a particular Device containing a particular active ingredient) or in connection with Product specifically.

1.8 “Batch” means batches of a Product for commercial resale or supply or stability testing purposes in the sizes set forth in Annex II to this Agreement which shall be attached for the Initial Product and any subsequent Product when agreed to by the Parties.

1.9 “Business Day” means any day except (a) Saturday, (b) Sunday or (c) a day that is a federal legal holiday in the U.S.

1.10 “Clinical Trial” means any clinical testing of Product in human subjects.

1.11 “Clinical Trial Material” means Product for administration to animals for pre-clinical testing or to humans in Clinical Trials (and any placebo applicable to such testing or Clinical Trials).

1.12 “CMC” means Chemistry, Manufacturing, and Controls.

1.13 “Commercially Reasonable Efforts” means, with respect to a particular Party, the level of effort and resources required to develop, manufacture and commercialize a Product in a sustained manner consistent with efforts that such Party would typically devote to a product of similar market potential, profit potential and/or strategic value resulting from either its own research efforts or in-licensed from a Third Party, based on conditions then prevailing.


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

1.14 “Controlled” means, with respect to any item of Know-How or any intellectual property right, that a Party owns or has a license to such item or right and has the ability to grant to the other Party a license or sublicense under such item or right as provided for in this Agreement without violating the terms of any agreement or other arrangement with any Third Party in existence, as applicable.

1.15 “Delivery Date” means the date for the delivery of Product to the shipping destination as stated in the applicable Purchase Order for such shipment.

1.16 “Developed Technology” means Know-How conceived and reduced to practice or originally authored by or on behalf of one or both Parties pursuant to this Agreement, including in the course of or as a direct result of, the conduct of the activities set forth or contemplated by the Development Plan, and any intellectual property rights appurtenant thereto (including any patents and patent applications claiming such Know-How).

1.17 “Development Plan” has the meaning set forth in Section 3.1.

1.18 “Device” means a hand-held device for multiple-dose delivery that embodies the Staccato Technology.

1.19 “Drug” means derivatives of N-(1-ethyl-piperidin-4-yl)-N-phenylpropanamide, including Fentanyl, sufentanil, alfentanil, remifentanil, carfentanil, lofentanil, and pharmaceutically acceptable salts thereof in any dosage strength.

1.20 “Endo Intellectual Property” means any Developed Technology that is owned by Endo pursuant to Section 9.2 and Controlled by Endo.

1.21 “Endo Product Know-How” means any and all Know-How Controlled by Endo at any time during the Term that is necessary or useful for the research, development, manufacturing, or commercialization of Product in the Territory, but excluding the Endo Product Patents.

1.22 “Endo Product Patent” means any patent or patent application in the Territory that is Controlled by Endo at any time during the Term and that claims or would otherwise be infringed by a Product or its manufacture or use.

1.23 “External PC&R Costs” has the meaning set forth in Section 3.5.

1.24 “FD&C Act” means the U.S. Federal Food, Drug, and Cosmetics Act (21 U.S.C. Section 301 et seq.), as amended.

1.25 “FDA” means the U.S. Food and Drug Administration.

1.26 “Fentanyl” means the molecule having the chemical structure and characteristics set forth on Exhibit A,


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

1.27 “First Commercial Sale” means the date on which, following Regulatory Approval in the Territory, a Product is first sold by Endo, any of its Affiliates, distributors or sublicensees to a Third Party (other than sales by Endo to its Affiliates, distributors, Subcontractors, or sublicensees).

1.28 “GAAP” means U.S. generally accepted accounting principles, consistently applied.

1.29 “Generic Product” means a product approved through an abbreviated NDA, or an application under Section 505(b)(2) of the FD&C Act that references any NDA for the Product (or future functional equivalent), listed in the Orange Book, that is rated as a therapeutic equivalent and designated as automatically substitutable for a Product at the pharmacy level under any applicable state administrative or formulary designation.

1.30 “IND” means an Investigational New Drug Application as defined in the FD&C Act and applicable regulations promulgated thereunder by the FDA, the filing of which is necessary to commence a Clinical Trial.

1.31 “Initial Indication” means the treatment of breakthrough pain in cancer patients and the treatment of breakthrough pain in non-cancer patients.

1.32 “Initial Product” means the Alexza product designed as “AZ-003” (Staccato fentanyl) and any improvement or modification thereto, but solely to the extent such improvement or modification consists of a [ * ] is delivered using the Staccato Technology.

1.33 “Know-How” means and includes conceptions, ideas, innovations, inventions, processes, machines, equipment, compositions of matter, genetic material, improvements, enhancements, modifications, technological developments, know-how, methods, techniques, systems, designs, artwork, drawings, plans, specifications, blueprints, mask works, software, documentation, data and information (irrespective of whether in human or machine-readable form), works of authorship, and products, in each case whether or not patentable, copyrightable, or susceptible to any other form of legal protection.

1.34 “Long-Term Inability to Supply” shall mean, with respect to a Product, Alexza’s failure to supply Endo with at least [ * ] of the quantities of Product ordered by Endo in accordance with the terms of this Agreement for a period that exceeds [ * ]. For the purpose of this Section 1.34, “Product ordered by Endo” shall not include any quantity of Product ordered by Endo to the extent that, pursuant to Section 5.1(b)(v), Alexza is not liable to Endo for any inability to manufacture and deliver such quantity of Product.

1.35 “Manufacture” has the meaning given to such term in Section 5.1(a)(i).

1.36 “Net Sales” means the gross amount invoiced by Endo or its Affiliates or sublicensees for the sale of a Product to Third Parties, commencing with the First Commercial Sale, less actual deductions (not otherwise credited) for: (i) normal and customary trade, cash and quantity discounts actually given, credits, price adjustments or allowances for damaged Products, returns or rejections of Products; (ii) chargeback payments and rebates (or the


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

equivalent thereof) granted to group purchasing organizations, managed health care organizations or to federal, state/provincial, local and other governments, including their agencies, or to trade customers; (iii) freight, shipping insurance and other transportation expenses directly related to the sale (if actually borne by Endo, it Affiliates or sublicensees without reimbursement from any Third Party); (iv) sales, value-added, excise taxes, tariffs and duties, and other taxes and government charges directly related to the sale, to the extent such items are included in the gross invoice price and actually borne by Endo, its Affiliates or sublicensees without reimbursement from any third party (but not including taxes assessed against the income derived from such sale); (v) required distribution commissions/fees payable to any Third Party providing distribution services to Endo in respect to a Product; and (vi) provisions for actual uncollectible amounts of the amount invoiced; in each case of (i)-(vi) as determined in accordance with GAAP consistently applied for products sold by Endo.

1.37 “Non-Registrational Trial” means a Clinical Trial for a particular indication that (a) is initiated or ongoing after completion of the first Phase III Trial for such indication, and (b) is not conducted to obtain, maintain or expand Regulatory Approval of the Product being tested.

1.38 “Packaging Specifications” means the packaging and labeling specifications for a Product, as such specifications may be amended from time to time by mutual agreement of the Parties. The Packaging Specifications for the Initial Product and any subsequent Product shall be attached to this Agreement as Annex III when agreed to by the Parties.

1.39 “Phase III Trial” means a pivotal Clinical Trial performed to prove efficacy of a Product in a target population, and to prove safety for such Product that is needed to evaluate the overall benefit-risk relationship of such Product and provide an adequate basis for physician labeling, as described in 21 C.F.R. 312.21(c).

1.40 “Plant” means the premises of Alexza located at its Mountain View, California facility that houses its manufacturing operations or such other FDA-approved facility of Alexza that is also approved by Endo for the purpose of Manufacture hereunder.

1.41 “Pre-Clinical Trial” means any pre-clinical testing of Product in animals.

1.42 “Product” means a product used or useful in the treatment of pain that employs or is based upon the Staccato Technology and utilizes the Device for the delivery of a Drug, including any and all formulations and line extensions of the Staccato Technology and the Device and any and all improvements or modifications to the Staccato Technology and the Device. Product shall include the Initial Product.

1.43 “Product Specifications” means the specifications for a Product, including master batch records, process specifications and analytical methods, as such specifications may be amended from time to time by the mutual agreement of the Parties, including, without limitation, such amendments as may be required to obtain Regulatory Approval for the Product. Product Specifications for the Initial Product and any subsequent Product shall be attached to this Agreement as Annex IV when agreed to by the Parties.


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

1.44 “Purchase Order” has the meaning given to such term in Section 5.1(b)(ii).

1.45 “Quality Agreement” means the agreement between the Parties concerning quality assurance, quality control, and validation related to the manufacture of Product.

1.46 “Raw Materials” means, in relation to a Product, the Active Ingredients, Device components, excipients and packaging materials used in the Manufacture thereof.

1.47 “Raw Material Specifications” means the specifications relating to the handling, warehousing, and storage of Raw Materials relating to a Product, as such specifications may be amended from time to time by mutual agreement of the Parties. Raw Material Specifications for the Initial Product and any subsequent Product shall be attached to this Agreement as Annex V when agreed to by the Parties.

1.48 “Regulatory Approval” means, for any Product, all permissions, approvals, licenses, registrations, authorizations, or clearances of any Regulatory Authority that are necessary for the sale of such Product in the applicable regulatory jurisdiction.

1.49 “Regulatory Authority” means the applicable government agency or agencies in a country or jurisdiction whose permission, approval, license, registration, authorization, or clearance must be obtained for the manufacturing, clinical testing and/or marketing of any Product, including, but not limited to, the FDA and any successors thereto.

1.50 “Regulatory Requirements” means (a) all specifications, methods of manufacture, and other information in one or more Regulatory Submissions related in any way to the Product, and (b) all laws, rules, regulations, applicable regulatory guidance documents, and other requirements of any Regulatory Authority that govern the Product, including its manufacture, including but not limited to the requirements set forth in the FD&C Act, the Public Health Service Act (42 U.S.C. Section 262 et seq.), the quality system regulation (“QSR”) rules set forth in 21 Code of Federal Regulation (“C.F.R.”) Part 820, and the current good manufacturing practices regulations set forth in 21 C.F.R. Section 210 et seq. and 21 C.F.R. Sections 600-610 (collectively, “cGMP”), as any of the foregoing may be amended from time to time.

1.51 “Regulatory Submissions” means all applications, filings, dossiers and the like submitted to a Regulatory Authority for the purpose of obtaining Regulatory Approval from that Regulatory Authority, including INDs and New Drug Applications.

1.52 “Safety Agreement” has the meaning set forth in Section 4.2(d).

1.53 “Specification” means each of the following as they relate to an Active Ingredient, Raw Materials and/or a Product, as appropriate:

the Product Specifications,

the Raw Material Specifications,

the Packaging Specifications or


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

the Active Ingredient Specifications,

each as set forth in annexes to be attached to this Agreement when agreed to by the Parties and as may be amended, restated or otherwise modified from time to time by the Parties.

1.54 “Staccato Technology” means Alexza’s proprietary technology for the vaporization of a pharmaceutical composition via rapid-heating to form a condensation aerosol that allows rapid systemic drug delivery to humans through deep lung inhalation, including all modifications, line extensions and formulations of such proprietary technology.

1.55 “Subcontractors” has the meaning set forth in Section 3.4.

1.56 “Term” has the meaning set forth in Section 14.1.

1.57 “Territory” means the U.S., Canada and Mexico.

1.58 “Third Party” means any person or entity other than Alexza, Endo and their respective Affiliates.

1.59 “U.S.” means the United States of America.

1.60 “Validation Activities” means those activities to be performed by Alexza under the Quality Agreement to validate the Plant and processes for the Manufacture of a Product for use for sale and supply for administration to humans.

1.61 “Validation Batches” means, for any dosage form, those Batches Manufactured by Alexza during the course of Validation Activities for such dosage form.

ARTICLE 2

GOVERNANCE

2.1 Joint Steering Committee. The Parties’ development and commercialization of Product in the Territory under this Agreement shall be overseen by a Joint Steering Committee (the “JSC”) with responsibilities as described in this Section 2.1.

(a) Membership. The JSC shall be composed of four (4) members, two (2) members appointed by each Party. The JSC will consist of at least one (1) senior officer (senior vice president or higher) from each Party authorized to make decisions with respect to matters including, but not limited to, setting development goals, making strategic decisions and resolving disputes. Promptly following the Effective Date, each Party shall appoint its initial representatives to the JSC. Each Party may replace its JSC representatives at any time upon written notice to the other Party. Endo will designate one of its representatives as the Chairperson of the JSC. The Chairperson shall be responsible for scheduling meetings, preparing and circulating an agenda in advance of each meeting, preparing and issuing minutes of each meeting within thirty (30) days thereafter, revising such minutes to reflect timely comments thereon, and overseeing the ratification of such revised minutes.


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

(b) Meetings. The JSC shall meet a minimum of twice per year. The Parties shall endeavor to schedule meetings of the JSC at least three (3) months in advance. Meetings for the JSC shall be held on an alternating basis in Palo Alto, California (or such other location in the continental U.S. as may be chosen by Alexza) and Chadds Ford, Pennsylvania (or such other location in the continental U.S. as may be chosen by Endo), or as otherwise agreed by the Parties. If an in-person meeting of the JSC is required in order to maintain progress with the Development Plan, an ad hoc JSC meeting may be called by either Party, to be held within thirty (30) days of such request at a location specified by the non-requesting Party. In no event shall the JSC be required to meet more than four (4) times per year.

(c) Responsibilities. The JSC shall:

(i) Establish the strategic direction for, and evaluate the progress of, the Parties’ collaborative development of the Product;

(ii) Review results of the work performed under the Development Plan, changes to the Development Plan properly approved by the members of any committee formed by the JSC since the most recent JSC meeting, and review and approve any amendments or modifications to the Development Plan as proposed by any subordinate committee, including the JDC;

(iii) Review and provide comments with respect to the development budget for the Development Plan on an annual basis;

(iv) Review and provide comments with respect to the Commercialization Plan;

(v) Have authority to establish one or more other committees (in addition to the JDC) that report to the JSC and assist the JSC in carrying out its responsibilities, which other committees (including the JDC) shall be subordinate to the JSC, shall have such membership and responsibilities as the JSC shall determine, and may be disbanded by the JSC at any time;

(vi) Develop and implement a strategy regarding the publication of materials in connection with this Agreement and the subject matter hereof;

(vii) Resolve, or attempt to resolve any disputes not resolved by the JDC or any other subordinate committee created by the JSC or the JDC; and

(viii) Perform such other functions as appropriate to further the purposes of this Agreement and as allocated to it in writing by the Parties.

(d) Decision Making; Authority. The JSC shall make its decisions by consensus, with each Party’s representatives collectively having one vote. If the JSC is unable to reach consensus regarding a matter before it, the issue shall be presented by the JSC, in the case of Endo, to its Chief Executive Officer (or his or her designee), and, in the case of Alexza, its Chief Executive Officer (or his or her designee) (each a “CEO” and both the “CEOs”) for


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resolution. Once an issue has been presented to the CEOs, the CEOs shall have fifteen (15) days to make a final determination regarding the issue in dispute. In the event that the CEOs are unable to reach a final determination within such fifteen (15) day period, then:

(i) Endo shall have authority to make the final decision with respect to all issues relating to pre-clinical, clinical, regulatory, development (insofar as such matters relate to preclinical and clinical development of the Product and non-manufacturing regulatory aspects of the Product, including the pre-clinical and clinical budget for the Development Plan) and commercialization matters, provided that such decision does not materially increase or accelerate Alexza’s obligations (including its monetary/budgetary obligations) under the Development Plan or payment obligations under Section 3.5; and

(ii) Alexza shall have authority to make the final decision with respect to all issues relating to Device design and development (except for issues described in Section 2.1(d)(i)) and manufacturing of Product, provided that (A) Device design and manufacture of the Product are in compliance with the Specifications, and provided further that if the Device design fails to satisfy Regulatory Requirements, Endo shall have the right to assume final decision-making authority with respect to design of the Device; and (B) such decision does not materially increase or accelerate Endo’s obligations (including its monetary/budgetary obligations) under the Development Plan or the Commercialization Plan or payment obligations under Section 3.5.

2.2 Joint Development Committee. As of the Effective Date, subject to Section 2.1(c)(v), development of Product shall be directly managed by a Joint Development Committee (the “JDC”) with responsibilities as described in this Section 2.2.

(a) Membership. Subject to Section 2.1(c)(v), the JDC shall be composed of six (6) members, three (3) members appointed by each Party, including at least one research and development executive of each Party. Promptly following the Effective Date, each Party shall appoint its initial representatives to the JDC. Each Party may replace its JDC representatives at any time upon written notice to the other Party. Endo will designate one of its representatives as the Chairperson of the JDC. The Chairperson shall be responsible for scheduling meetings, preparing and circulating an agenda in advance of each meeting, preparing and issuing minutes of each meeting within thirty (30) days thereafter, revising such minutes to reflect timely comments thereon, and overseeing the ratification of such revised minutes.

(b) Meetings. While the Parties are developing and conducting Pre-Clinical Trials and Clinical Trials for Product for one or more indications, the JDC shall meet a minimum of four (4) times per year. The Parties shall endeavor to schedule meetings of the JDC at least two (2) months in advance. Meetings for the JDC shall be held on an alternating basis in Palo Alto, California (or such other location in the continental U.S. as may be chosen by Alexza) and Chadds Ford, Pennsylvania (or such other location in the continental U.S. as may be chosen by Endo). At each meeting of the JDC, each Party shall provide the JDC with an update regarding the work performed by such Party under the Development Plan since the last meeting.

(c) Responsibilities. The JDC shall, subject to Section 2.1(c)(v):


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

(i) Oversee and manage the planning and implementation of the Development Plan;

(ii) Review results of the Development Plan and discuss and prepare proposed amendments or modifications to the Development Plan when such changes appear to be advisable to achieve the Parties’ Product development goals;

(iii) Review and provide comments with respect to the development budget for the Development Plan on an annual basis;

(iv) Approve amendments or modifications to the Development Plan and review revised development budgets;

(v) Facilitate the exchange of regulatory documents and other regulatory information between the Parties pursuant to Article 4;

(vi) Have authority to establish one or more other committees that report to the JDC and assist the JDC in managing and directing the Development Plan. Any committees formed beyond the JDC shall be subordinate to the JDC, shall have such membership and responsibilities as the JDC shall determine, and may be disbanded by the JDC at any time;

(vii) Resolve, or attempt to resolve any disputes not resolved by any subordinate committee created by the JDC; and

(viii) Perform such other functions as appropriate to further the purposes of this Agreement and as allocated to it in writing by the Parties.

(d) Decision Making; Authority. The JDC shall make its decisions by consensus, with each Party’s representatives collectively having one vote. If the JDC is unable to reach consensus regarding a matter before it, the issue shall be presented to the JSC for resolution pursuant to Section 2.1(d).

2.3 General Principles.

(a) Each of the JSC and the JDC and their respective subordinate committees has no authority beyond the specific responsibilities set forth in this Agreement with respect to such committee. Any subordinate committee created by the JSC or the JDC, as applicable, shall have such duties and responsibilities delegated to such committee by the JSC or the JDC, as applicable, so long as such duties and responsibilities do not exceed the respective power and authority assigned to the JSC and the JDC hereunder. In particular, and without limiting the generality of the foregoing, no Committee may amend or modify the terms or provisions of this Agreement.

(b) Each Party shall ensure that its representatives to a committee have appropriate expertise and authority to serve as members of such committee. With the consent of the representatives of each Party serving on a particular committee, other representatives of each


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Party may attend meetings of that committee as observers. A meeting of a committee may be held by audio or video teleconference with the consent of each Party, provided that at least half of all meetings for that committee in each calendar year shall be held in person. Meetings of a committee shall be effective only if at least one representative of each Party is present or participating. Each Party shall be responsible for all of its own expenses of participating in committee meetings. Each Party shall use good faith and cooperative efforts to facilitate and assist the efforts of the committees.

(c) Each committee shall continue to exist until the first to occur of (i) the Parties mutually agreeing to dissolve it, (ii) the expiration of all payment obligations described in Article 7, or (iii) Alexza providing to Endo written notice of its intention to dissolve and no longer participate in such committee. In any event, at any time Alexza may terminate its participation on any committee, on thirty (30) days’ written notice. Unless the Parties agree otherwise in writing at the time, upon dissolution of such committee, Alexza’s powers and duties shall automatically be assumed by Endo; provided, however, Alexza shall have a right to approve (such approval not to be unreasonably withheld or delayed) any decisions made by Endo after the dissolution of such committee, to the extent that Alexza would have had the right to make a final decision on such matter pursuant to Section 2.1(d)(ii) had Alexza not terminated its participation on the committee.

ARTICLE 3

DEVELOPMENT PROGRAM

3.1 Overview of Development. The Parties shall undertake the development of Product in a collaborative and efficient manner in accordance with this Article 3. The pre-clinical and clinical development of Product in the Territory under this Agreement shall be governed by a written development plan (the “Development Plan”), as such Development Plan may be revised from time to time in accordance with Section 3.2(a).

3.2 Development Plan.

(a) Development Plan. Within three (3) months following the Effective Date, the JDC shall develop an initial Development Plan, which will contain detailed provisions governing all pre-clinical and clinical development, budgets and timelines, manufacturing, and regulatory work to be performed to obtain Regulatory Approval of the Initial Product. The Development Plan shall be subject to final approval by Endo, except that, subject to Section 2.1(d)(ii), the Device design, development and manufacturing portion of the Development Plan shall be subject to final approval by Alexza. As long as the Product is being developed, the JDC shall review the Development Plan at least annually and may, from time to time, provide comments to and/or generate a proposed revised version of the Development Plan that is consistent with the terms of this Agreement and the goals of the Parties’ collaborative development of the Product, which revised version shall be submitted to the JSC for approval as set forth above. The JSC shall give good faith consideration to any comments and/or revisions provided by the JDC with respect to the Development Plan, but the final determination as to what changes and/or revisions shall be made to any Development Plan shall be made by the JSC,


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subject to the provisions of Section 2.1(d) in the case of any deadlock among the members of the JSC. Once approved by the JSC, such revised Development Plan shall replace the prior Development Plan. The Development Plan shall allocate between the Parties responsibility for each development-related activity described therein in a manner consistent with Section 3.3. The Development Plan shall in no event be amended in a manner that would require either Party to perform any assignment or task in a manner that would violate any applicable law or regulation. In the event of a change in any applicable law or regulation, the Parties shall work together to amend the Development Plan to enable each Party to comply fully with such law or regulation. If such amendment is not approved, the affected Party would be excused from performing any activity specified in the Development Plan that would violate or result in a violation of any applicable law or regulation.

(b) Performance of Development Plan. The Parties shall use Commercially Reasonable Efforts to conduct their respective tasks assigned pursuant to the Development Plan and to attempt to achieve the objectives of the Development Plan. Each Party shall perform its obligations under the Development Plan in a professional manner, and in compliance in all material respects with the Development Plan and the requirements of applicable laws and regulations and all applicable good clinical and manufacturing practices. Changes in the scope or direction of the development work under this Agreement that would require a material deviation from the Development Plan must be approved by the Parties as set forth in Section 3.2(a).

3.3 Responsibilities of the Parties.

(a) Endo shall have primary responsibility for implementing the clinical and pre-clinical development and non-manufacturing regulatory aspects of the Development Plan as set forth in greater detail in this Article 3 and Article 4.

(b) Alexza shall have primary responsibility for Device design and development (other than pre-clinical and clinical development), design implementation, all other Device-related aspects of the Development Plan, and all manufacturing activities with respect to Product, subject to the provisions of and as set forth in greater detail in this Article 3 and Articles 4 and 5. Such responsibilities shall include: (i) the design, development and testing of the Device for use in a Product, (ii) performance of CMC activities for a Product, and (iii) manufacture and supply of Clinical Trial Materials for use in Pre-Clinical Trials and Clinical Trials. Notwithstanding anything to the contrary in this Agreement, Alexza’s responsibility to conduct development work and to pay development costs under Section 3.5 shall terminate upon receipt of Regulatory Approval for the Initial Product for the treatment of breakthrough pain in cancer patients and the treatment of breakthrough pain in non-cancer patients (it being understood that Alexza’s responsibility to conduct development work and pay development costs under Section 3.5 shall continue prior to receipt of Regulatory Approval for so long as development work for Regulatory Approval continues for such indications), except that Alexza’a responsibilities shall continue in respect to all Clinical Trials necessary to support registration of such Product for such indications.


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

(c) Notwithstanding anything to the contrary in this Agreement, unless Alexza agrees otherwise in writing, Alexza shall have no obligation to perform any work in connection with, or in support of, (i) any Non-Registrational Trial of the Initial Product, (ii) the design, development, or manufacturing, of any Products other than the Initial Product, or (iii) any Clinical Trials for an indication other than each indication included in the Initial Indication (it being understood that Alexza’s responsibility for each such indication shall continue so long as Regulatory Approval for such indication continues to be sought or has been obtained (where Regulatory Approval has been obtained, to the extent relating to Clinical Trials to support registration)).

3.4 Third Party Contractors. Either Party shall be free to subcontract to Third Parties (“Subcontractors”) any of its obligations under this Agreement; provided, however that (a) with respect to any such Subcontractor that will be manufacturing major components for Product or overseeing or conducting Pre-Clinical Trials and Clinical Trials or toxicology studies for Product, the applicable Party shall notify the other Party in writing upon retaining such Subcontractor; (b) each Party shall enter into agreements with its Subcontractors that contain confidentiality terms at least as strict as those set forth in Article 10 hereof; and (c) no such subcontracting shall relieve a Party of its obligations hereunder. In addition, in the event that Alexza subcontracts with a Third Party to manufacture, test and/or package Product for use in the Territory, Endo shall be given the opportunity to review and comment on such manufacturing agreement in advance of its execution, and Alexza shall give good faith consideration to Endo’s comments. Such Third Party manufacturing agreement(s) shall provide that Endo shall be an intended third party beneficiary of such Third Party manufacturer’s obligations to Alexza with respect to Product thereunder, including with rights of direct enforcement by Endo. In addition, each Third Party manufacturing agreement for Product for use in the Territory shall provide, in substance, that, in the event that Alexza, or any other Person acting on behalf of Alexza or its estate pursuant to any bankruptcy laws, shall seek or obtain a bankruptcy rejection of such Third Party manufacturing agreement, then the Third Party manufacturer shall (i) timely exercise its rights to continue any and all licenses (if any) thereunder relating to the Product in the Territory, and (ii) to the extent that bankruptcy rejection effectively terminated the Third Party manufacturing agreement, immediately enter into an agreement with Endo for Product in the Territory on substantially the same terms and conditions as those contained in the agreement with Alexza. The Third Party manufacturing agreements may contain such additional terms and conditions as Alexza and the Third Party manufacturer shall agree to, subject to the review (but not the approval) of Endo prior to the execution of such Third Party manufacturing agreement and provided that such additional terms and conditions do not prejudice, reduce or limit performance by such Third Party manufacturer under this Agreement.

3.5 Development Costs. Each Party shall be responsible for all internal costs and expenses incurred by or on behalf of such Party or its Affiliates in connection with development of the Initial Product pursuant to the Development Plan hereunder. Alexza shall be responsible for all out-of-pocket expenses for Device design and development (other than pre-clinical and clinical development after the Effective Date), design implementation, all other Device-related aspects of the Development Plan with respect to the Initial Product, and all manufacturing activities with respect to the Initial Product. Except as set forth in the following sentence, after the Effective Date Endo shall be responsible for all out-of-pocket expenses payable to Third


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Parties incurred by Endo or its Affiliates in connection with pre-clinical, clinical, and regulatory development of the Initial Product pursuant to the Development Plan (“External PC&R Costs”). Endo and Alexza shall be responsible for [ * ] and [ * ], respectively, of External PC&R Costs in excess of [ * ]; provided, however, that Alexza’s responsibility for External PC&R Costs shall not exceed a total of twenty million dollars ($20,000,000). Notwithstanding the foregoing, Alexza shall not be responsible for any costs associated with any Clinical Trial for an indication other than each indication included in the Initial Indication (it being understood that Alexza’s responsibility to pay costs shall continue in respect to each such indication in the Initial Indication for which Regulatory Approval continues to be sought) or with a Non-Registrational Trial, and such costs shall not be included in External PC&R Costs for the purpose of determining whether External PC&R Costs exceed the foregoing [ * ] threshold. Any request or claim by Endo for reimbursement of External PC&R Costs shall be invoiced on a quarterly basis and shall be calculated in accordance with GAAP consistently applied by Endo. Such invoices shall be in reasonable detail and shall be due forty five (45) days after Alexza’s receipt thereof. To the extent that Endo desires to undertake the pre-clinical or clinical development of Products other than the Initial Product, the Parties shall discuss in good faith the manner in which any costs associated with such development or regulatory, design, testing, or manufacturing activities related to such development shall be paid.

3.6 Development Guidelines.

(a) General. In all matters related to implementation of the Agreement, the Parties shall be guided by standards of reasonableness in economic terms and fairness to each of the Parties, striving to balance the legitimate interests and concerns of the Parties and further the development of the Product.

(b) Independence. Subject to the terms of this Agreement, the activities and resources of each Party shall be managed by such Party, acting independently and in its individual capacity. The relationship between Alexza and Endo is that of independent contractors and neither Party shall have the power to bind or obligate the other Party in any manner, other than as is expressly set forth in this Agreement.

3.7 Generic Product. In no event shall Endo develop or manufacture a Generic Product intended for sale in the Territory or sell or otherwise commercialize a Generic Product in the Territory.

ARTICLE 4

REGULATORY MATTERS

4.1 Non-Manufacturing Regulatory Submissions.

(a) Except as set forth in Section 4.2, as between the Parties, Endo shall have sole responsibility, at its own expense, for preparing, filing and maintaining all Regulatory Submissions for Product in the Territory, including preparing all reports required in connection with the submission of any application for Regulatory Approval. Endo shall use Commercially


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Reasonable Efforts to obtain Regulatory Approvals in the U.S. for Product for one or both indications included in the Initial Indication (as determined by Endo) and for any other indications that Endo decides to pursue. If and when Regulatory Approvals are secured in the U.S., Endo shall thereafter make a determination as to whether to pursue Regulatory Approvals in Canada and Mexico, which determination shall be left to Endo’s sole discretion. If Endo decides to pursue Regulatory Approvals in Canada and/or Mexico, Endo shall use Commercially Reasonable Efforts in furtherance thereof. Subject to Section 4.2, all Regulatory Submissions for Product shall be filed in the name of Endo or one of its Affiliates or sublicensees, and, as between the Parties, Endo shall be responsible for all communications and other dealings with the Regulatory Authorities relating to Product in the Territory. Endo shall be the legal and beneficial owner of all Regulatory Submissions and Regulatory Approvals for Product in the Territory. No later than thirty (30) days following the Effective Date, Alexza shall transfer to Endo any INDs for AZ-003 that are Controlled by Alexza as of the Effective Date. For clarity, development outside of the U.S. within the Territory shall be at the sole discretion of Endo.

(b) Endo shall develop and implement procedures for drafting and review of any IND, New Drug Application, or other planned Regulatory Submission for a Product, which shall provide Alexza, to the extent reasonably practicable, a period of not less than ten (10) days to provide substantive comments. Endo shall give good faith consideration to all substantive comments provided by Alexza and shall revise each such Regulatory Submission to reflect any comments provided by Alexza that Endo, in its reasonable discretion, shall deem necessary and/or appropriate to include in such Regulatory Submission.

(c) Endo shall promptly notify Alexza of all Regulatory Submissions that it submits, and, at Alexza’s written request, shall promptly provide Alexza with a copy (which may be wholly or partly in electronic form) of such Regulatory Submissions. Endo will provide Alexza with reasonable advance notice of any scheduled meeting between Endo or its Affiliate or sublicensee with any Regulatory Authority relating to a Product, and Alexza shall have a right to have up to two (2) Alexza employees or contractors attend, and, at the request of Endo, participate in, any such meeting. Endo also shall promptly furnish Alexza with summaries of all material correspondence or material meetings with any Regulatory Authority in the Territory relating to a Product, and Endo shall, at Alexza’s written request, promptly furnish Alexza with copies of such correspondence or copies of minutes of such meetings.

(d) Following receipt of Regulatory Approval for a Product in the Territory, Endo shall retain primary responsibility for dealings with the applicable Regulatory Authority with respect to such Product, including filing all supplements and other documents with such Regulatory Authority with respect to such Regulatory Approval in the Territory.

(e) To the extent permitted by law, Alexza and its Affiliates, and any licensee of Alexza from which Alexza has obtained a corresponding right for Endo and its Affiliates (which Alexza shall use Commercially Reasonable efforts to obtain), shall have a right of reference outside of the Territory to all Regulatory Submissions filed by, and Regulatory Approvals received by, Endo with respect to the Initial Product in the Territory upon payment by Alexza or such licensee to Endo of (i) [ * ] of Endo’s External PC&R Costs allocable to such Regulatory Submissions in the case such Regulatory Submissions are to be referenced in any


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

countries in the European Union, and (ii) [ * ] of Endo’s External PC&R Costs allocable to such Regulatory Submissions in the case such Regulatory Submissions are to be referenced in any countries outside the Territory and outside the European Union. To the extent permitted by law, Endo and its Affiliates shall have a right of reference to all Regulatory Submissions filed by, and Regulatory Approvals received by, Alexza and any licensee of Alexza from which Alexza has obtained a corresponding right for Endo and its Affiliates (which Alexza shall use Commercially Reasonable Efforts to obtain) with respect to any Product outside the Territory upon payment by Endo to Alexza or such licensee of [ * ] of the out-of-pocket costs and expenses paid to a Third Party by Alexza or such licensee for such Regulatory Submissions. Both Alexza and Endo may exercise their respective rights under this Section 4.1(e) with respect to Regulatory Submissions on a Clinical Trial-by-Clinical Trial basis (including toxicology studies), in which case the payments described above shall be calculated based on the External PC&R Costs (in the case of an exercise by Alexza) or out-of-pocket costs and expenses paid to a Third Party (in the case of an exercise by Endo) allocable to the Regulatory Submissions for each such Clinical Trial.

(f) Except as set forth in Section 4.2(b), all Regulatory Submissions in the Territory and all safety and other data related thereto shall be deemed to constitute Endo Confidential Information and shall be subject to Article 10; provided, however, that the foregoing shall not limit Alexza’s right to use, for any product other than a Product, all Product-related pre-clinical and clinical data generated by, on behalf of, or for Alexza prior to the Effective Date.

4.2 Manufacturing-Related Regulatory Submissions

(a) Notwithstanding Endo’s obligation to submit Regulatory Submissions as set forth in Section 4.1(a), Alexza shall be responsible for compiling CMC information pertaining to Product for inclusion in Regulatory Submissions. Endo shall provide to Alexza the CMC portion of the Regulatory Submissions for completion by Alexza. Alexza shall promptly complete and provide the necessary information to Endo and Endo will include the CMC information provided by Alexza in Endo’s Regulatory Submissions.

(b) All CMC information compiled by Alexza pursuant to Section 4.2(a) shall be deemed to be Alexza Confidential Information and shall be subject to Article 10.

(c) Adverse Event Reporting.

(i) Endo shall be responsible for complying with all Regulatory Requirements and other legal requirements governing adverse events that occur in the Pre-Clinical Trials conducted after the Effective Date and Clinical Trials or after Regulatory Approval of a Product in the Territory. Endo shall submit copies of reports of adverse events to Alexza simultaneously with submission to the applicable Regulatory Authorities. Each Party shall notify the other in a timely manner and in any event within twenty-four (24) hours of receiving any adverse event reports, notice from a Regulatory Authority, independent review committee, data safety monitoring board or another similar clinical trial or post-marketing monitoring body alleging significant concern regarding a patient safety issue or other material information relevant to the safety or efficacy of a Product.


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(ii) Alexza shall be responsible for establishing and maintaining a global safety database.

(d) Promptly following the Effective Date, but in no event later than sixty (60) days thereafter, Endo and Alexza will develop and agree upon safety data exchange procedures in a separate and detailed safety agreement (the “Safety Agreement”). Such agreement will describe the coordination of collection, investigation, reporting, and exchange of information concerning adverse events or any other safety problem of any significance, and product quality and product complaints involving adverse events, sufficient to permit each Party, its Affiliates, sublicensees or licensees to comply with its legal obligations. The safety data exchange procedures will be promptly updated if required by changes in legal requirements.

4.3 Regulatory Correspondence.

(a) Notification to Other Parties of Regulatory Correspondence. Each Party shall promptly (and in any event, within five (5) Business Days of the date of receipt of notice) notify the other Party in writing of, and shall provide the other Party with copies of, any correspondence and other documentation received or prepared by such Party in connection with any of the following events: (i) receipt of a material regulatory letter, warning letter, Form 483, or similar item, from any Regulatory Authority directed to the manufacture, packaging, and/or storage of a Product, or Alexza facility or contract manufacturing facility associated with Alexza’s supply of Product hereunder; (ii) any recall or correction of any batch of the Drug; and (3) any regulatory comments relating to a Product requiring a response or action by a Party.

(b) Regulatory Correspondence Requiring an Alexza Response. In the event that Alexza receives any material regulatory letter or comments from any Regulatory Authority directed to its manufacture of a Product requiring a response or action by Alexza, including, but not limited to, receipt of a Form 483 or a warning letter, Endo (as applicable) will promptly provide Alexza with any data or information required by Alexza in preparing any response relating to Alexza’s manufacture of such Product, and will cooperate fully with Alexza in preparing such response. To the extent reasonably practicable (subject to the time a response is mandated), Alexza shall provide Endo with a copy of each such response for Endo’s review and comment at least five (5) Business Days prior to Alexza’s submission of the response. Alexza shall give good faith consideration to any Endo comments to each such proposed Alexza response and shall incorporate such comments to the extent Alexza deems necessary or appropriate. Endo shall have the final decision with respect to any responses or actions required by such letter or comments which relate to the pre-clinical and clinical development, commercialization and regulatory aspects of the Product.

(c) Regulatory Correspondence Requiring an Endo Response. In the event that Endo receives any material regulatory letter or comments from any Regulatory Authority relating to the manufacture of a Product, Alexza (as applicable) will promptly provide Endo with any data or information required by Endo in preparing any response relating to Alexza’s manufacture of a Product, and will cooperate fully with Endo in preparing such response. To the extent reasonably practicable (subject to the time a response is mandated), Endo shall provide Alexza with a copy of each such response for Alexza’s review and comment


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

at least five (5) Business Days prior to Endo’s submission of the response. Endo shall give good faith consideration to any Alexza comments to each such proposed Endo response and shall incorporate such comments to the extent Endo deems necessary or appropriate. Alexza shall have the final decision with respect to any responses or actions required by such letter or comments which relate to manufacture of the Product.

4.4 Inspections. In the event that the Alexza facility or contract manufacturing facility will be inspected by representatives of any Regulatory Authority directed to Alexza’s manufacture of Product or Clinical Trial Material, Alexza shall notify Endo promptly after learning of such inspection, and shall supply Endo with copies of any correspondence or portions of correspondence which relate to Product. Following any such inspection, Alexza shall provide Endo with a written summary of that portion of the inspection that was relevant to Product or Clinical Trial Material within seven (7) Business Days of such inspection.

4.5 Product Recalls and Withdrawals. In the event that a Party becomes aware that a Product may not comply with applicable law, rules or regulations (either by notification from a Regulatory Authority or otherwise) in the Territory and/or that a recall or withdrawal of a Product in the Territory is desirable, such Party shall promptly notify the other Party. Promptly after Endo receives such notice from Alexza (if Alexza is the Party that first becomes aware of the necessity/desirability of a Product recall or withdrawal) or promptly after Endo first becomes aware of the necessity/desirability of a Product recall or withdrawal (if Endo is the Party that first becomes so aware), Endo shall undertake an appropriate investigation, give good faith consideration to all substantive comments provided by Alexza, and make a determination with respect to the disposition of any such matter, including determining whether the applicable Product in the Territory shall be recalled or withdrawn. If Endo determines that a Product in the Territory shall be recalled, Endo shall develop and implement a plan to conduct such recall. The Party that is predominantly responsible for the applicable Product’s non-compliance with applicable laws, rules and regulations shall bear all costs and expenses associated with conducting such recall in accordance with such recall plan, unless such recall results predominantly from the other Party’s material breach of its obligations under this Agreement or unless such recall otherwise predominantly results from the gross negligence or wrongful intentional acts or omissions of the other Party, in which case the other Party shall bear all costs and expenses associated with such recall. In all cases, each Party shall use Commercially Reasonable Efforts to implement any recall of any Product in the Territory.

4.6 Regulatory Updates. During the Term, Endo will keep Alexza generally apprised of the status of any Regulatory Submissions related to a Product in the Territory. Endo shall immediately notify Alexza in writing upon receipt by Endo or its sublicensee(s) of any Regulatory Approval to market a Product for any indication in the Territory. Correspondingly, Alexza shall immediately notify Endo in writing upon receipt by Alexza or its sublicense(s) of any Regulatory Approvals to market Product for any indication outside the Territory.


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

ARTICLE 5

MANUFACTURE AND SUPPLY OF PRODUCT

5.1 Supply of Clinical Trial Materials and Product.

(a) Manufacture and Purchase of Clinical Trial Materials and Product.

(i) Alexza shall be responsible for the production, manufacture, testing, packaging and all related activities, including, without limitation, acquisition of Raw Materials and warehousing, storage and supplying final packaged materials (collectively, the “Manufacture”), of and with respect to Clinical Trial Materials and Product (upon applicable Regulatory Approval), and carrying out quality assurance in accordance with the Quality Agreement. The Parties shall enter into the Quality Agreement within ninety (90) days of the Effective Date. Except as otherwise set forth herein, Endo shall purchase all of its requirements of Clinical Trial Materials in respect to the Initial Product and the Initial Product from Alexza and Alexza shall supply all of Endo’s requirements for such Clinical Trial Materials (as set forth in the Development Plan) and Product. Clinical Trial Materials in respect to the Initial Product and the Initial Product (if not otherwise specified in this Article 5, where applicable, Product shall refer to the Initial Product and to Clinical Trial Materials in respect to the Initial Product) shall be supplied in accordance with the following provisions. Subject to Section 5.1(c)(vi), Alexza shall supply Product at its sole cost and expense.

(1) Subject to the provisions of this Article 5, Alexza shall Manufacture at the Plant (and/or have Manufactured by Subcontractor(s)) Clinical Trial Materials and Product for the benefit of Endo, its Affiliates and sublicensees for use in the Territory in accordance with the Product Specifications, cGMP and the Quality Agreement using Alexza Intellectual Property and, where appropriate, in accordance with and using Endo Intellectual Property licensed under this Agreement.

(2) Alexza shall have sole responsibility for disposing of all Clinical Trial Materials and Product and wastes arising from Manufacture in accordance with all applicable laws, rules and Regulatory Requirements.

(ii) Alexza shall, at its cost, perform all Validation Activities relating to manufacturing, equipment, packaging and cleaning process and shall produce necessary Validation Batches with respect to the Clinical Trial Materials and Product.

(iii) Endo acknowledges and agrees that Alexza may manufacture Clinical Trial Materials and Product for use outside of the Territory. Without limiting Alexza’s obligations under this Agreement to supply Product and Endo’s right to enforce such obligation, in the event of a prospective shortage of capacity, Alexza shall reasonably allocate, based on historical and forecasted needs, available quantities of Clinical Trial Materials and Product to Endo and any Third Party with rights to the Clinical Trial Materials and Product outside of the Territory in priority to any allocation to Alexza and any of its Affiliates, provided, however, that in the event of any such prospective shortage of capacity Alexza covenants to allocate at least


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

[ * ] of its manufacturing capacity to Endo’s Purchase Orders in priority to any other Person’s orders. In no event shall Alexza manufacture a Generic Product for sale in the Territory.

(iv) Clinical Trial Materials shall be supplied to Endo as specified in the Development Plan.

(b) Forecasts; Orders of Product.

(i) No later than [ * ] prior to January 1 of each year following the First Commercial Sale of a Product in the Territory, Endo shall deliver to Alexza a non-binding [ * ] forecast of Endo’s unit requirements for Product for each year during that period. Such long-term forecast shall thereafter be updated at least once every [ * ] during the Term.

(ii) No later than [ * ] prior to the expected First Commercial Sale, Endo and Alexza shall discuss in good faith the quantities of Product forecasted to be necessary to support commercial launch. No later than [ * ] prior to the First Commercial Sale, Endo shall submit to Alexza a written forecast of its monthly requirements for Product for each of the next succeeding [ * ]. The forecast shall be updated [ * ].

(iii) The forecast of the most current [ * ] period shall always constitute a firm order by Endo for the [ * ] forecasted requirements. Endo shall submit a Purchase Order to Alexza with respect to such firm order (a “Purchase Order”) with not less than sixty (60) days lead time prior to a requested Delivery Date for the first nine months following First Commercial Sale, and ninety (90) days lead time thereafter, which Purchase Order shall state in detail the required amounts and related Delivery Dates, and shall be binding on the Parties regarding Products to be purchased. Alexza shall have ten (10) days to accept or reject such order for failure to conform to the firm order quantity or failure to comply with the lead time requirements, with failure to respond being deemed acceptance. The forecast for the remaining [ * ] period of each rolling forecast is for planning purposes only and shall not constitute a commitment to purchase or supply Product. In the event that Endo does not ultimately purchase the forecast quantities for the binding [ * ] period representing a firm order, then as of the last day of the end of the month in such [ * ] period in which a firm order is not completed with Purchase Orders during such period Endo shall be deemed to have provided a Purchase Order for the amount of Product equal to (A) the applicable firm order amount less (B) the previously ordered amounts represented by Purchase Orders for the applicable [ * ] (the “Final Firm Order Commitment”). The Final Firm Order Commitment shall have a Delivery Date that is sixty (60) days from end of the month in which the Final Firm Order Commitment is deemed to occur. Notwithstanding the foregoing, Endo may cancel without penalty any and all Purchase Orders in the event Alexza is unable to fulfill any outstanding Purchase Order within ninety (90) days of its scheduled Delivery Date due to a force majeure event.

(iv) Endo shall have the right to reasonably approve suppliers selected by Alexza for the provision of Raw Materials for use in the Clinical Trial Materials and Product. Alexza shall be permitted to purchase Raw Materials for the Manufacture of Product using the forecast of the most current [ * ] period in the [ * ] Product forecast. Should any Raw Materials purchased based on this [ * ] forecast become obsolete or unusable as a result of subsequent


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

changes to Endo’s forecast quantities or to Product Specifications, then Endo shall, at Endo’s option, purchase from Alexza at Alexza’s acquisition cost, the amount of inventory of Raw Materials so rendered obsolete (including related costs for destruction), or, if possible, have Alexza return such materials and reimburse Alexza any restocking fees incurred.

(v) Should any Purchase Order include volume of Product in amounts that exceed [ * ] of amounts set forth in the most recent forecast provided by Endo to Alexza pursuant to Section 5.1(b)(ii) hereof, or should Endo desire to increase the amount of Product to be purchased pursuant to any already submitted Purchase Order, then Alexza shall use Commercially Reasonable Efforts to meet such excess Product request. Notwithstanding the foregoing, Alexza shall not be liable to Endo for any inability, despite its Commercially Reasonable Efforts, to manufacture and deliver such excess Product.

(c) Purchase of Product; Deliveries.

(i) Endo shall place Purchase Orders only in whole Batch quantities. Alexza shall furnish to Endo with each shipment of Product ordered by Endo hereunder, (A) a certificate of analysis reflecting that such Product conforms to the relevant Specifications and (B) all documentation required by law, Regulatory Requirements or any Regulatory Authority having jurisdiction over such shipment.

(ii) Endo shall not be required to take receipt of a Batch of Product with less than [ * ] expiry or [ * ] of the original shelf life, whichever is greater, except that in the event that the Product receives an original shelf life of [ * ] or less, the qualification as to [ * ] of the original shelf life shall not apply to Product delivered in respect to a Purchase Order that has a Delivery Date within [ * ]. Endo and Alexza may nonetheless negotiate in good faith for Endo to purchase such Batches.

(iii) Property in, title to and risk of loss of or damage to Product shall remain with Alexza and pass to Endo only upon delivery EXW (Incoterms) Alexza’s Plant shipping dock in the U.S. to a carrier designated by Endo. Product shall be prepared by Alexza for shipment in accordance with mutually agreed shipping and packing specifications and all shipments shall be accompanied by appropriate transportation and other agreed upon documentation.

(iv) In the event that any Product shall fail to conform in all material respects with any Purchase Order, any warranty, the Quality Agreement and/or the Specifications, Endo shall have the right to reject such Product by giving written notice to Alexza within thirty (30) days after receipt by Endo in the case of patent defects in such Product and thirty (30) days from the date when Endo learned of such defects in the case of latent defects in such Product. Any notice given hereunder shall specify in writing the manner in which the Product fails to conform to the Purchase Order or fails to meet such warranty or the Specifications.

(1) If it is determined by agreement of the Parties (or in the absence of agreement of the Parties, by a mutually acceptable independent laboratory or


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

consultant whose fees shall be paid by the non-prevailing Party) that the non-conformity is due to damage to the Product (i) caused by Endo or its agents or customers or (ii) which occurs subsequent to delivery of such Product to Endo’s carrier at the Plant in the U.S., Alexza shall have no liability to Endo with respect thereto. In all other instances following the determination by agreement of the Parties (or in the absence of agreement of the Parties, by a mutually acceptable independent laboratory or consultant whose fees shall be paid by the non-prevailing Party) that Alexza is responsible for the non-conformity, Endo shall be entitled, in addition to any other remedies it may have, to prompt replacement by Alexza of such non-conforming Product with conforming Product at no additional cost to Endo. In the case of non-conforming Product for which Alexza is responsible as provided above at a time when Endo has no additional quantities of Product on order with Alexza, Alexza shall pay to Endo a credit in an amount equal to the amount paid by Endo to Alexza for such Product, plus associated shipping and insurance charges.

(2) In any case where Endo rejects non-conforming Product, Endo shall await written instructions from Alexza as to further disposition of the non-conforming Product. If Alexza does not provide such instructions within ninety (90) days of receipt of Endo’s rejection notice, Endo shall dispose of the Product and invoice Alexza for the costs of destruction. In any event, Endo may retain samples of non-conforming Product for the purpose of determining any dispute.

(v) In the event Endo elects to accept Product that is delivered after the Delivery Date specified in the applicable Purchase Order, Endo may, in addition to any other remedies available to it, commencing on the eleventh (11^th) day after the specified Delivery Date, charge Alexza for each seven day period thereafter that the delivery is late a late delivery charge equal to [ * ] of royalties payable by Endo in respect to such Product for the first seven day period, [ * ] of royalties payable by Endo in respect to such Product for the second seven day period, and [ * ] percent of royalties payable by Endo in respect to such Product for each subsequent seven day period, up to a maximum late delivery charge of [ * ] of royalties in respect to such Product. However, no late fee shall accrue on any Product delivered (i) pursuant to a Purchase Order accepted by Alexza pursuant to Section 5.1(b)(v) or (ii) within thirty (30) days after the Delivery Date specified in the applicable Purchase Order if the Purchase Order has a Delivery Date within ninety (90) days after [ * ] and includes a volume of Product that is in excess of the amounts set forth in the forecast provided by Endo to Alexza [ * ].

(vi) Endo shall pay Alexza a transfer price of [ * ] per controller included in the Initial Product and [ * ] per cartridge of Drug included in the Initial Product in respect to Initial Product acquired by Endo to be sold in the First Commercial Sale [ * ]. In no event shall Endo be required to pay Alexza for the supply of any Raw Materials, Clinical Trial Materials or other Product hereunder unless otherwise agreed by Endo. Payments due by Endo to Alexza under this paragraph are due forty five (45) days from the date of Alexza’s invoice, which invoice shall be sent out concurrently with shipment of Product.

(d) Capacity. Alexza covenants that it will have the capacity to Manufacture up to [ * ] controllers and [ * ] cartridges of Drug for the Initial Product per year for Endo (the


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

“Volume Commitment”) in the event that Endo forecasts such quantities. Alexza shall use its Commercially Reasonable Efforts to ensure that all of Endo’s Product requirements in excess of the Volume Commitment are met. In the event that Alexza in its reasonable judgment based on the forecast provided pursuant to Section 5.1(b)(i) approaches full capacity for Manufacturing Product at its Plant which would be reasonably expected to fail to fulfill Endo’s requirements of Product within the next [ * ] based on Endo’s most recent forecast, Alexza shall give written notice to Endo. Within sixty (60) days of receipt of such notice, Endo and Alexza shall meet to determine courses of action to address such capacity issues. If Endo determines that an appropriate course of action is establishing an alternative source of supply and Alexza is unwilling or unable to establish such alternative source of supply, Alexza shall transfer to a Third Party manufacturer designated by Endo such rights in Alexza Intellectual Property and manufacturing technology and shall otherwise provide Endo, its Affiliates and such Third Party manufacturer with such support as may be reasonably necessary to allow for such Third Party to Manufacture in a timely manner in order to avoid any loss of, or interruption in, supply of Product. Anything herein to the contrary notwithstanding, in such event (i) Endo may send to such Third Party manufacturer the greater of the shortage in Alexza’s supply capacity or [ * ] of Endo’s requirements for Product, and (ii) no royalties shall be payable by Endo to Alexza in respect to Product supplied by such Third Party manufacturer. For the avoidance of doubt, if Alexza establishes an alternative source of supply by retaining a Third Party manufacturer as a Subcontractor (at Alexza’s expense), Endo shall owe Alexza the royalties specified in Section 7.3 in respect to Product supplied by such Third Party manufacturer.

(e) Continuing Supply.

(i) Upon expiration of the Term, at Endo’s request, Alexza shall continue the Manufacture of Product in accordance with the terms of this Agreement for such period as may be reasonably necessary for Endo to transfer production to an alternative manufacturer (not to exceed [ * ]), including, without limitation, time to negotiate terms and qualify and validate any such alternative manufacturer, and otherwise Manufacture all outstanding orders. Royalties under Section 7.3 shall be paid by Endo in respect to Product supplied by Alexza during such period, except that if a Generic Product is then being sold and Alexza provides evidence to Endo that the royalty does not cover its costs of manufacturing Product (as computed consistent with industry standards to be direct costs plus a reasonable allocation of indirect labor and facilities costs attributable to manufacture of Product (but not corporate overhead)) plus [ * ], supply shall be at such cost of manufacturing plus [ * ].

(ii) Without limiting the obligations of Alexza set forth elsewhere in this Agreement regarding Manufacture and technology transfer, commencing at the request of Endo made not earlier than thirty (30) months prior to the expiration of the Term, Alexza shall transfer rights in Alexza Intellectual Property and technology to any Third Party manufacturer, and otherwise provide Endo, its Affiliates and/or any Third Party manufacturer, with such support and technical assistance as may be reasonably necessary to Manufacture in a timely manner in order to avoid any loss of, or interruption in, supply of Product. Prior to the expiration of the Term, Endo shall owe Alexza the royalties specified in Section 7.3 in respect to Product supplied by such Third Party manufacturer under this Section 5.1(e).


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

(f) Long-Term Inability to Supply or Other Inability to Supply. In the event that a Long-Term Inability to Supply has occurred, Endo shall have the right, at its sole discretion, to (i) use a Third Party manufacturer and take such other related actions as may be necessary to fill the Product supply shortfall and not pay Alexza any royalties in respect of Product manufactured by such Third Party manufacturer; or (ii) exercise any right that Endo may have under Section 14.2(c) to terminate this Agreement (and all licenses granted to Endo) as a result of such Long-Term Inability to Supply. In the event that a Long-Term Inability to Supply has occurred, Alexza shall have the obligation, upon request by Endo, to transfer to the Third Party manufacturer rights in such Alexza Intellectual Property and technology and otherwise provide Endo, its Affiliates and such Third Party manufacturer with such support and technical assistance as may be reasonably necessary to allow the Third Party manufacturer to Manufacture in a timely manner so as to minimize the loss of, and interruption in, the supply of Product.

In the event that at any time Alexza is in continuing or repeated breach of its obligations to supply Product under Section 5, but such breach does not constitute Long-Term Inability to Supply, in addition to any other remedies Endo may have, Endo may give written notice to Alexza and thereupon the Parties shall promptly meet to determine courses of action to address such breach. The Parties shall attempt to agree upon a corrective plan with respect to such breach; provided that if the Parties are unable to agree upon a corrective plan within ninety (90) days of Endo’s written notice and if Endo determines that an appropriate course of action is establishing an alternative source of supply and Alexza is unwilling or unable to promptly establish such alternative source of supply, then Endo shall notify Alexza of such determination in writing. Promptly thereafter, Alexza shall transfer to a qualified Third Party manufacturer designated by Endo such rights in Alexza Intellectual Property and manufacturing technology and shall otherwise provide Endo, its Affiliates and such Third Party manufacturer with such support as may be reasonably necessary to allow for such Third Party to Manufacture in a timely manner in order to avoid any loss of, or interruption in, supply of Product. Anything herein to the contrary notwithstanding, in such event (i) Endo may send to such Third Party manufacturer the greater of the shortage in Alexza’s supply capacity or [ * ] of Endo’s requirements for Product, and (ii) no royalties shall be payable by Endo to Alexza in respect to Product supplied by such Third Party manufacturer. For the avoidance of doubt, if Alexza establishes an alternative source of supply by retaining a Third Party manufacturer as a Subcontractor (at Alexza’s expense), Endo shall owe Alexza the royalties specified in Section 7.3 in respect to Product supplied by such Third Party manufacturer.

(g) Commercial Supply. Not less than [ * ] prior to the initiation of the first Phase III clinical study of a Product, the Parties shall agree upon Specifications for the Product and amend the Quality Agreement consistent with Alexza’s obligations to Manufacture Product for commercial sale.

ARTICLE 6

COMMERCIALIZATION

6.1 Commercialization. Endo shall have sole responsibility and decision-making authority for commercialization of Product in the U.S. (and if Regulatory Approval for a Product


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

is pursued by Endo as provided in Section 4.1(a) and obtained, elsewhere in the Territory where such Regulatory Approval is obtained), which shall be carried out in accordance with the Commercialization Plan. Endo shall be solely responsible for all costs and expenses associated with its commercialization of Product in the Territory. Endo may, in its sole discretion, choose whether to market and sell a particular Product itself or to collaborate with Affiliates, sublicensees or distributors to market and sell such Product, subject to Section 8.6.

6.2 Commercialization Plan.

(a) No later than [ * ] prior to the anticipated filing of an application for Regulatory Approval for a Product in the U.S., Endo shall deliver to the JSC a draft written commercialization plan setting forth anticipated material commercialization activities to be performed with respect to such Product in the U.S. by Endo or on its behalf, as well as projected timelines for such activities (the “Commercialization Plan”). The JSC shall promptly review such draft initial Commercialization Plan and may provide commercially reasonable comments to Endo for its consideration. Endo shall give good faith consideration to such comments and may revise such draft Commercialization Plan to implement such of the JSC’s comments that it shall deem necessary or advisable to include in the draft. Endo shall, thereafter, submit the Commercialization Plan with such changes, revisions and modifications that it shall deem advisable to the JSC, and the Commercialization Plan, together with such changes, revisions and modifications, as applicable, shall be deemed final.

(b) No later than [ * ] prior to the anticipated launch of a Product in the U.S., Endo shall update the Commercialization Plan, and shall thereafter update the Commercialization Plan on an annual basis as follows: Endo shall provide the JSC with a draft update to the Commercialization Plan no later than December 1 of each year. Endo shall give good faith consideration to any comments provided by the JSC and may revise such Commercialization Plan to implement such of the JSC’s comments that it shall deem necessary or advisable to include in the Commercialization Plan, after which the update to the Commercialization Plan shall be deemed to be finalized. Endo shall deliver a final version of the updated Commercialization Plan no later than January 31 of the following year.

(c) The Commercialization Plan shall include a marketing plan for the Product for which Regulatory Approval is being sought or obtained in the U.S. that includes plans related to the anticipated promotion and sale of such Product in the U.S., competitive analysis, including information regarding actions intended to mitigate competitive threats, a non-binding sales forecast for the following year and the marketing, promotion and advertising campaigns proposed to be conducted, including the number of detailing representatives, level of promotion and Endo’s medical education activities.

6.3 Efforts. Endo shall use Commercially Reasonable Efforts to commercialize each Product in such part of the Territory for which Regulatory Approval is obtained. If Alexza in its reasonable opinion believes that Endo has not satisfied any of its material obligations under this Section, Alexza may convene a special meeting of the JSC to discuss the matter by written notice to Endo. Such notice shall state with particularity the obligations that Alexza believes that Endo has not satisfied and the basis for such belief, including any supporting evidence that it wishes to


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

provide in connection therewith. The meeting shall be convened at Endo’s office in Chadds Ford, Pennsylvania, within ten (10) Business Days of Endo’s receipt of such notice. At such meeting, the members of the JSC shall discuss the concerns of Alexza, Endo’s efforts in such areas of concern and any additional actions that Alexza requests that Endo take to remedy the cause for Alexza’s concern. If after such meeting Alexza continues to have reasonable belief that Endo is not meeting its obligations under this Section, Alexza may within one hundred eighty (180) days after such meeting so notify Endo in writing. Within thirty (30) days after the date of any such notice, Endo shall respond in writing in good faith to Alexza with its explanation and supporting evidence. The foregoing procedure is not intended to limit Alexza’s right to terminate this Agreement under Section 14.2(c) with respect to any failure by Endo to comply with the first sentence of this Section 6.3 that is a material breach of this Agreement.

ARTICLE 7

PAYMENTS

7.1 Upfront Payment. Endo shall pay Alexza a nonrefundable, non-creditable payment of Ten Million Dollars ($10,000,000) within five (5) Business Days after the Effective Date.

7.2 Milestone Payments. Endo shall make the following nonrefundable, non-creditable payments to Alexza within thirty (30) days after the first achievement of the corresponding event set forth below:

(a) [ * ];

(b) [ * ];

(c) [ * ]; and

(d) [ * ].

As a matter of clarification, the payments referred to in subsections (a), (b), and (c) above shall be made one time with respect to the first Product which meets the requirements for the payment and not for any subsequent Product and the payment referred to in subsection (d) shall be made the first time the corresponding event is achieved and not for any subsequent achievement of such event.

7.3 Royalty Payments. Commencing with the First Commercial Sale of the Initial Product, Endo shall make royalty payments to Alexza equal to [ * ] of [ * ] of such Product, except that if a Generic Product is sold by a Third Party within a country in the Territory during the Term, the royalties to which Alexza is entitled hereunder with respect to sales in such country shall be reduced by [ * ]. All royalties due under this Section 7.3 shall be paid quarterly within sixty (60) days of the end of the relevant calendar quarter. Endo shall be permitted to credit against such royalty payment the transfer price specified in Section 5.1(c)(vi) that is paid by Endo for the units of Product whose sale gave rise to such royalties, it being understood that a transfer price shall only be payable for Product during the [ * ].


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Any transfer price payments not credited against royalties for any period shall be carried forward and applied to subsequent royalty payments.

7.4 Term of Royalties. Alexza’s right to receive royalties under Section 7.3 shall expire on a Product-by-Product basis upon the later of (a) [ * ] years from the First Commercial Sale of such Product in the Territory, or (b) the expiration of the last to expire Alexza Patent in the Territory.

7.5 Royalty Reports. Commencing with the First Commercial Sale of a Product in the Territory, Endo shall provide Alexza with a written report together with the royalty payment within forty five (45) days after the last day of each calendar quarter. Each such report shall include a calculation of the Net Sales of Product, on a Product-by-Product basis made during the calendar quarter in question, the royalties payable thereon and the total annual Net Sales for the year to date. In addition, Endo shall provide Alexza within thirty (30) days after the last day of each calendar quarter with its then-current estimate of the royalties payable by Alexza for the prior quarter.

7.6 Payment Method. All payments due under this Agreement to Alexza shall be made by bank wire transfer in immediately available funds to an account designated by Alexza. All payments hereunder shall be made in U.S. dollars.

7.7 Taxes. Alexza shall pay any and all taxes levied on account of all payments it receives under this Agreement. If laws or regulations require that taxes be withheld, Endo will (a) deduct those taxes from the remittable payment, (b) pay the taxes to the proper taxing authority, and (c) send evidence of the obligation together with proof of tax payment to Alexza within thirty (30) days following that tax payment.

7.8 Interest. If either Party fails to make any payment due under this Agreement within ten (10) Business Days after the date upon which such payment is due, then interest shall accrue on such payment on a daily basis from the date such payment was originally due at a rate equal to [ * ] above the then-applicable prime commercial lending rate of Citibank, N.A., or at the maximum rate permitted by applicable law, whichever is the lower, and such interest shall be paid when such payment is made.

7.9 Records.

(a) Retention. Endo shall keep for at least three (3) years following the end of the calendar year to which they pertain complete records of External PC&R Costs and of the Net Sales of Product in the Territory. Such record keeping obligation shall survive any expiration or termination of this Agreement for the time provided herein.

(b) Access to Records. Subject to the other terms of this Section 7.9, Alexza may audit the records of Endo regarding External PC&R Costs and Net Sales. Such audit shall be conducted (i) after at least thirty (30) days prior written notice from Alexza, (ii) at the facility(ies) where the applicable records are maintained, (iii) with the minimal reasonable


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

disruption to operations of Endo (to the extent reasonably practicable, such examination shall be completed within ten (10) Business Days), (iv) no more frequently than once in any calendar year, and (v) with respect to calendar years ended not more than two (2) years prior to the date of the audit. The audit shall be conducted by a nationally recognized independent certified public accountant selected by Alexza (but not the accountant that conducts or has within the past three (3) years conducted the audit of Alexza’s financial statements). The auditor will execute a written confidentiality agreement with Endo that is substantially similar to the confidentiality provisions of Article 10 and limiting the disclosure and use of information obtained from such audit to authorized representatives of the Parties and the purposes germane to this Section 7.9. The auditor will disclose to Alexza only the amount and accuracy of costs or payments, as applicable, reported and actually paid or otherwise payable under this Agreement. The auditor will send a copy of the report to both Parties at the same time. Alexza shall be responsible for expenses for the independent certified public accountant, except that Endo shall reimburse Alexza up to [ * ] for such independent accountant documented services if the independent accountant determines that the costs reported or payments made by Endo are less than [ * ] of the amount actually owed in the case of payments, or more than [ * ] in excess of actual costs in the case of cost reporting, in each case for the period of the audit and such determination is finally resolved in favor of Alexza pursuant to Section 7.9(d) below if contested by Endo.

(c) Underpayment or Overpayment. If, as a result of any audit pursuant to Section 7.9(b), it is shown that Endo’s charges to Alexza for External PC&R Costs with respect to the time period audited were higher than the amount that should have been charged or that Endo’s payments to Alexza under this Agreement with respect to the period of time audited were less than the amount that should have been paid pursuant to this Agreement, then Endo shall, within thirty (30) days after Alexza’s demand therefor, either pay Alexza the amount of such excess charge or shortfall in payment, plus interest thereon as provided in Section 7.8, or proceed to the dispute resolution mechanism set forth in Section 7.9(d) below. If, as a result of any audit pursuant to Section 7.9(b), it is shown that Endo’s charges to Alexza for External PC&R Costs with respect to the time period audited were less than the amount that should have been charged or that Endo’s payments to Alexza under this Agreement with respect to the period of time audited exceeded the amount that should have been paid pursuant to this Agreement, then Alexza shall, within thirty (30) days after Endo’s demand therefor, either pay Endo the amount of such under charge or excess, plus interest thereon as provided in Section 7.8, or proceed to the dispute resolution mechanism set forth in Section 7.9(d) below.

(d) Resolution of Dispute as to Audit. In the event that the Parties do not agree on the amount of overpayment or underpayment, within thirty (30) days, each Party shall select an independent public accounting firm (and each Party shall pay the costs of its own accounting firm), which shall meet and discuss the amount in dispute and other related matters within thirty (30) days thereafter. If such independent public accounting firms cannot agree on a resolution mutually agreeable to the Parties, such independent public accounting firms shall, within thirty (30) days after such selection, appoint a third independent public accounting firm which shall resolve the issue within thirty (30) days after its selection, and the Parties shall equally share the costs of such accounting firm. The recommendation of the third independent public accounting firm shall be final and binding upon the Parties. A judgment on such firm’s disposition may be entered in any court having jurisdiction over the Parties. Notwithstanding


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

anything to the contrary herein, the resolution of any dispute under this Section 7.9 shall be made under this subsection 7.9(d) instead and in lieu of Section 15.11. The preceding sentence shall not preclude the application of Section 15.11 to any contract interpretation issue (as compared to an accounting issue which would be precluded from determination under Section 15.11).

ARTICLE 8

LICENSE RIGHTS AND LIMITATIONS

8.1 Licenses to Endo.

(a) Subject to the terms and conditions of this Agreement, Alexza hereby grants to Endo a royalty-bearing (such royalties that are payable being specified in Section in Section 7.3 for the period specified in Section 7.4), exclusive (including with respect to Alexza except as necessary for Alexza to carry out its obligations under this Agreement) license (with the right to sublicense solely in accordance with Section 8.6) in the Territory, under the Alexza Intellectual Property, to develop, make or have made, use, offer for sale, sell, import, market and promote Product.

(b) Endo acknowledges and agrees that the licenses set forth in this Section 8.1 do not include any rights (i) to commercialize the Product outside the Territory or to engage in development in support of such commercialization; or (ii) to research, develop, manufacture, or commercialize any product other than a Product.

(c) Endo covenants that (i) it will not exercise or sublicense its right under Section 8.1(a) to make or have made the Product prior to the occurrence of an event requiring or permitting a transfer of manufacturing responsibility pursuant to Section 5.1(d), (e), or (f) and (ii) it will not exercise any rights granted in Section 8.1(a) with respect to Products other than the Initial Product unless and until the Parties agree in writing on the terms of development of such Products, including without limitation any compensation to Alexza.

8.2 Licenses to Alexza.

(a) Subject to the terms and conditions of this Agreement, Endo hereby grants to Alexza a worldwide, royalty-free, non-exclusive license (with the right to sublicense solely to Alexza’s Subcontractors), under any Endo Product Patents and any Endo Product Know-How Controlled by Endo, solely to conduct its obligations under this Agreement, including without limitation under the Development Plan or under Article 5.

(b) Subject to the terms and conditions of this Agreement, including Section 8.3(a), Endo hereby grants to Alexza a non-exclusive license (with the right to sublicense), under Endo Intellectual Property to use and practice the Endo Intellectual Property in connection with the development, design and manufacture of Devices and/or the Staccato Technology (other than Product).

(c) Subject to the terms and conditions of this Agreement, including Section 8.3(b), Endo hereby grants to Alexza, a non-exclusive license (with the right to sublicense),


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

under Endo Intellectual Property, to use and practice Endo Intellectual Property in connection with the manufacture, development and commercialization of Product outside the Territory so long as any licensee of Alexza outside the Territory grants to Alexza (with right to sublicense to Endo) intellectual property developed by such licensee in connection with development and commercialization of Product outside the Territory for use and practice of such licensee’s intellectual property in connection with the manufacture, development and commercialization of Product in the Territory.

8.3

[ * ]

	(a)		[ * ]

	(b)		[ * ]

8.4 Alexza Trademarks.

(a) Grant of License. Subject to the terms and conditions of this Agreement, Alexza hereby grants to Endo an exclusive, royalty-bearing (such royalties that are payable being specified in Section 7.3 for the period specified in Section 7.4) license (with the right to sublicense in accordance with Section 8.6) to use the Alexza Trademarks specified on Exhibit C solely in connection with Pre-Clinical Trials and Clinical Trials and upon, or in relation to, Product. Endo agrees that it shall use Commercially Reasonable Efforts to use the Alexza Trademarks on Product and identify Alexza as the manufacturer of Product on the packaging therefor, subject, in all respects, to all applicable laws and Regulatory Requirements. Nothing in this Agreement shall obligate Endo to identify a Product, or to use Alexza’s Trademarks with respect to a Product, in any manner that Endo, in its reasonable discretion, determines may have an adverse effect upon the development or marketability of, or potential sales with respect to, such Product.

(b) Use of Trademarks. Endo agrees to comply with all applicable laws and regulations pertaining to the proper use and designation of the Alexza Trademarks. Additionally, Endo shall use Commercially Reasonable Efforts to:

(i) use the Alexza Trademarks upon or in relation to Product only in such manner that the distinctiveness, reputation, and validity of the Alexza Trademarks shall not be impaired, and without limiting the generality of the foregoing, ensure that the Alexza Trademarks are accompanied by words accurately describing the nature of the goods or services to which it relates and that the Alexza Trademarks are displayed as set forth in Exhibit C;

(ii) comply with the reasonable requirements of Alexza, to the extent provided by Alexza to Endo in writing, as to the form, manner, scale and context of use of the Alexza Trademarks;

(iii) display the proper form of trademark and service mark notice associated with each Alexza Trademark in accordance with instructions received from Alexza, subject to Endo being responsible in this regard to use only the same degree of care as Endo uses with its own marks;


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

(iv) include, on any item which bears a Alexza Trademark, a statement identifying Alexza as the owner of such Alexza Trademark and stating that Endo is an authorized user of such Alexza Trademark;

(v) not conduct, without the written consent of Alexza, the whole or any part of its business under a business name or trading style which incorporates any of the Alexza Trademarks; and

(vi) neither use nor display any of the Alexza Trademarks in such relation to any other mark or marks owned by any Third Party, Endo or an Affiliate of Endo as to suggest that the multiple marks constitute a single or composite trademark, service mark, or are under the same proprietorship.

(c) Additional Trademark Terms. Endo shall not take any action inconsistent with Alexza’s ownership of the Alexza Trademarks. Any benefits (including good will) accruing from Endo’s use of the Alexza Trademarks shall automatically vest in Alexza. Endo shall not form any combination trademarks or trade names with the Alexza Trademarks. Endo shall grant Alexza reasonable access to Endo’s packaging and promotional materials for the purpose of inspecting Endo’s use of the Alexza Trademarks.

8.5 Negative Covenants.

(a) Endo hereby covenants that it shall not use or practice, nor shall it cause or permit any of its Affiliates or sublicensees to use or practice, directly or indirectly, any Alexza Intellectual Property or Alexza Trademarks for any other purposes other than those expressly permitted by this Agreement.

(b) Alexza hereby covenants that it shall not use or practice, nor shall it cause or permit any of its Affiliates or sublicensees to use or practice, directly or indirectly, any Endo Intellectual Property, Endo Product Patents or Endo Know-How for any other purposes other than those expressly permitted by this Agreement.

8.6 Rights to Sublicense. Subject to Section 8.1(c)(i), Endo shall have the right to sublicense the rights granted under Sections 8.1 and 8.4 to any Affiliate of Endo and to any Third Party in Mexico and Canada without the prior written consent of Alexza, and to any Third Party in the U.S. only with the prior written consent of Alexza, such consent not to be unreasonably withheld. In the event that Endo sublicenses the rights granted under Sections 8.1 and 8.4, Endo shall provide Alexza with an accurate and complete copy of the applicable sublicense agreement no later than thirty (30) days after execution of such sublicense agreement.

8.7 No Implied Licenses. Neither Party grants (or agrees to grant) to the other Party any right or license to use any of its intellectual property, know-how or other proprietary information, materials or technology, or to practice any of its patent, trademark, or trade dress rights, except as expressly set forth in this Agreement.


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

ARTICLE 9

INTELLECTUAL PROPERTY

9.1 Background Intellectual Property. Except as expressly set forth herein, as between the Parties, each Party is and shall remain the owner of all intellectual property and Confidential Information that it owns or controls as of the Effective Date or that it develops or acquires thereafter pursuant to activities independent of this Agreement.

9.2 Ownership of Developed Technology. Each Party shall own and retain the entire right, title and interest in and to all Developed Technology made solely by the employee(s) or agent(s) of such Party or any of its Affiliates, subject only to the rights expressly granted to the other Party under this Agreement. Each Party shall own and retain an undivided equal ownership interest in all Developed Technology made jointly by the employee(s) or agent(s) of one Party or any of its Affiliates and the employee(s) or agent(s) of the other Party or any of its Affiliates, subject only to the rights expressly granted by the Parties under this Agreement. Inventorship of Developed Technology will be determined in accordance with U.S. laws of inventorship. Each Party hereby assigns and agrees to assign to the other Party such rights in the Developed Technology, and to take all other actions, in each case that are reasonably necessary to give effect to the ownership interests set forth in this Section 9.2.

9.3 Patent Prosecution and Maintenance. Except as provided below and in Section 9.4, Alexza shall have the sole right to prosecute and maintain the Alexza Patents in the Territory, to the extent it has the rights to do so. Alexza shall provide Endo with a reasonable opportunity to comment on all draft filings for the Alexza Patents in the Territory listed on Schedule 1.6 (including, without limitation, any foreign counterparts in the Territory, continuations, divisions, or continuations-in-part, and any substitution, reissue, renewal, reexamination, protection certificate, extension, registration or confirmation patent), prior to their submission to the relevant patent authority. On the reasonable request of Alexza, Endo shall cooperate, in all reasonable ways, in connection with the prosecution of the Alexza Patents. Should Alexza decide that it is no longer interested in maintaining or prosecuting a particular Alexza Patent in the Territory, it shall promptly advise Endo, and Endo may assume such prosecution and maintenance in the Territory at its sole expense.

9.4 Infringement by Third Parties.

(a) Notice. Each of Endo and Alexza shall promptly notify the other Party in writing of any alleged or threatened infringement of any Alexza Patent by a Third Party product that delivers the Drug through inhalation (a “Field Infringement”), of which the Party becomes aware.

(b) Right to Bring Suit. Endo shall have the first right to bring and control any action or proceeding with respect to any Field Infringement. If Endo does not bring and continue pursuing an action or proceeding against, or otherwise cause the cessation of Field Infringement by or after (i) one hundred twenty (120) days following the notice of alleged infringement or (ii) ten (10) days before the time limit, if any, set forth in the appropriate laws and regulations for the filing of such an action, whichever comes first, then Alexza shall have the


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

right to bring and control an infringement action under the applicable Alexza Patents with respect to such Field Infringement at its own expense and by counsel of its own choice.

(c) Cooperation; Settlement. For any action or proceeding brought by a Party under this Section 9.4 (the “Initiating Party”), regardless of which Party brings such action or proceeding, the other Party (the “Non-Initiating Party”) hereby agrees to cooperate reasonably in any such effort, all at the Initiating Party’s expense, and the Parties shall reasonably cooperate to address new facts or circumstances that come to light during the course of any such action or proceeding that may affect the need for one Party or the other to participate in such action. The Non-Initiating Party agrees to be joined as a party plaintiff, at the Initiating Party’s expense, in any such action if needed for the Initiating Party to bring or continue an infringement action hereunder. The Non-Initiating Party shall, at its own expense and with its own counsel, have the right to advise and provide comments with respect to any action against a Field Infringement brought by the Initiating Party under this Section 9.4. Neither Party may settle any action or proceeding brought against a Field Infringement under this Section 9.4 in a manner that, or take any other action in the course thereof that, to the knowledge of the Party taking the action, materially adversely affects the other Party’s interest in the Alexza Patents, without the written consent of such other Party, such consent not to be unreasonably withheld.

(d) Recoveries. Except as otherwise agreed to by the Parties as part of a cost-sharing arrangement, any recovery realized as a result of any litigation under this Section 9.4, after reimbursement of any litigation expenses of Endo and Alexza, as applicable, shall be retained by the Party that brought and controlled such litigation for purposes of this Agreement; provided, however, that, the other Party shall be entitled to receive twenty-five percent (25%) of any recovery realized by the Party that brought and controlled such litigation under this Section 9.4, after reimbursement of each of the Parties’ related litigation expenses.

(e) Other Infringements. Notwithstanding anything to the contrary in this Agreement, Alexza shall have the sole right to bring and control any action or proceeding with respect to any alleged or threatened infringement of any Alexza Patent other than a Field Infringement, and Alexza shall retain any recovery realized by Alexza in connection therewith.

9.5 Third Party Claims for Infringement or Misappropriation. Each Party shall promptly notify the other in writing of any potential or actual allegation, claim or suit that the manufacture, use or sale of a Product, the Drug, the Device contained in a Product or any component thereof, or any other activities that are undertaken pursuant to this Agreement, infringes or misappropriates a Third Party’s patent or other proprietary rights. To the extent such potential or actual allegation, claim or suit relates to the Device contained in the Product (and does not relate to the use or combination of such Device with goods, materials, or services not supplied by Alexza, or any modification or alteration of such Device by anyone other than Alexza, where the alleged infringement or misappropriation would not have arisen except for such use, combination, modification or alteration), Alexza shall have the sole right to obtain a license from such Third Party and shall bear all costs associated therewith and shall use Commercially Reasonable Efforts to obtain such a license. If such potential or actual allegation, claim or suit is not addressed in the preceding sentence, then the Parties shall determine as soon as practicable thereafter whether it is reasonably necessary or appropriate to obtain a license


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

from such Third Party, which Party shall seek to so obtain such license and how the costs associated with such license shall be allocated between the Parties.

ARTICLE 10

CONFIDENTIALITY

10.1 Definition of Confidential Information. During the Term, either Party (the “Disclosing Party”) may from time to time furnish the other Party (the “Receiving Party”) with scientific, technical, trade or business information or materials which are treated by the Disclosing Party as confidential or proprietary, including, without limitation, information and materials related to the Drug, the Device, Product, processes, methods for pulmonary delivery of drugs, assay systems, formulae, procedures, tests, equipment, data, batch records, reports, know-how, sources of supply, patent positioning, relationships with consultants and employees, business plans and business developments, and information concerning the existence, scope or activities of any research, design, development, manufacturing, marketing or other projects. All such disclosed information shall be referred to herein as “Confidential Information” if it is provided in writing and is designated or otherwise identified as “Confidential” at the time of disclosure, or if is first provided orally, visually, or by inspection and is identified as “Confidential” at the time of disclosure. Notwithstanding the foregoing, Confidential Information shall also include such information or materials that would reasonably be identified or understood by the Receiving Party to be the confidential or proprietary information of the Disclosing Party, even if they are not so identified as described in the previous sentence. The “Alexza Confidential Information” means any and all Confidential Information for which Alexza is the Disclosing Party and Endo the Receiving Party hereunder. The “Endo Confidential Information” means any and all Confidential Information for which Endo is the Disclosing Party and Alexza the Receiving Party hereunder.

10.2 Confidentiality. Except to the extent expressly authorized by this Agreement or otherwise agreed in writing by the Parties, the Parties agree that for the Term and for seven (7) years thereafter, the Receiving Party shall keep confidential and shall not publish or otherwise disclose and shall not use for any purpose any Confidential Information furnished to it by the Disclosing Party pursuant to this Agreement.

10.3 Exclusions. Notwithstanding anything herein to the contrary, the obligations of confidentiality and nonuse under this Article 10 applicable to Confidential Information hereunder shall not apply to information that:

(a) at the time of disclosure, is known publicly or thereafter becomes known publicly through no fault of the Receiving Party, its Affiliates or agents;

(b) is disclosed to the Receiving Party on a non-confidential basis by a Third Party that is not legally prohibited from disclosing such information;

(c) was developed by the Receiving Party independently of information obtained from the Disclosing Party, as shown by the Receiving Party’s prior written records;


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

(d) was already known to the Receiving Party before receipt from the Disclosing Party, as shown by the Receiving Party’s prior written records; or

(e) is released with the prior written consent of the Disclosing Party.

10.4 Permitted Disclosures. Notwithstanding the foregoing, each Receiving Party may disclose the Disclosing Party’s Confidential Information (a) to the Receiving Party’s employees, consultants, Affiliates, agents, contractors, or sublicensees who are bound by obligations relating to confidentiality at least as restrictive of those contained herein and who have a need to know such information in connection with the Receiving Party’s performance of its obligations or practice of its rights under this Agreement, (b) to Regulatory Authorities in connection with any Regulatory Submissions required for development of Product pursuant to the Development Plan or in compliance with Regulatory Requirements, including, without limitation, any requirements under or pursuant to the Food and Drug Administration Amendments Act of 2007, (c) if Alexza is the Receiving Party, to Regulatory Authorities in connection with any Regulatory Submissions in connection with Alexza’s exercise of its rights under Section 4.1(e) and Section 8.2, or (d) pursuant to Section 10.6.

10.5 Terms of Agreement. Subject to Section 10.6 below, no Party shall, without the prior written consent of the other Party, disclose in any manner to any Third Party the material terms and conditions of this Agreement, except for terms or subject matter which has been the subject of prior public disclosure or has been mutually approved for such disclosure. Notwithstanding the foregoing, each Party shall have the right to disclose the material terms of this Agreement in confidence to any bona fide potential or actual investor, investment banker, counsel, acquirer, merger or acquisition target or sublicensee that is otherwise bound by obligations of confidentiality at least as restrictive as those contained in this Agreement.

10.6 Mandatory Disclosure.

(a) Notification and Consultation. In the event that the Receiving Party is required by applicable statute, regulation, or stock exchange rules or by court order or judicial or administrative process to disclose any part of the Disclosing Party’s Confidential Information or any material terms or conditions of this Agreement, the Receiving Party shall (i) promptly notify the Disclosing Party of each such requirement and identify the documents so required thereby, so that the Disclosing Party may seek or request the Receiving Party to seek an appropriate protective order, confidential treatment or other remedy and/or waive compliance by the Receiving Party with the provisions of this Agreement and (ii) consult with the Disclosing Party on the advisability of taking legally available steps to resist or narrow the scope of such requirement. Each Party acknowledges that the other Party may be legally required to file this Agreement as an exhibit to its filings with the U.S. Securities and Exchange Commission.

(b) Limited Disclosure. If, in the absence of such a protective order, confidential treatment request, other remedy or waiver by the Disclosing Party, the Receiving Party is nonetheless required to disclose any part of the Disclosing Party’s Confidential Information or any material terms or conditions of this Agreement, the Receiving Party may disclose such Confidential Information or material terms or conditions without liability under this Agreement, except that the Receiving Party shall furnish only that portion of the Confidential Information or material terms or conditions that is legally required.


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

ARTICLE 11

PRESS RELEASES; USE OF NAMES; PUBLICATIONS

11.1 Press Releases. The Parties agree that the public announcement of the execution of this Agreement shall be substantially in the form of the press release attached as Exhibit D, and the Parties will cooperate in the release thereof as soon as practicable after the signature of this Agreement by the Parties. No Party shall publish or otherwise disclose any other press release, publicity or other form of public written disclosure announcing, describing, or referring to this Agreement unless the other Party has provided its written consent, which consent shall not be unreasonably withheld. Each Party shall review any such press release, publicity, or other form of public disclosure within three (3) Business Days of having received it or within such other time as may be agreed by the Parties. Notwithstanding the foregoing, if a Party is making such a press release, publicity or other form of public disclosure to fulfill its applicable regulatory reporting or legal disclosure obligations, this Section 11.1 shall not apply, but the provisions of Section 10.6 shall apply instead.

11.2 Use of Names. Alexza shall not make use of the name of Endo or any of its Affiliates in any advertising or promotional material, or otherwise, without the prior written consent of Endo except pursuant to Section 11.1. Except as provided in Section 8.4 or 11.1, Endo shall not make use of the name of Alexza or any of its Affiliates in any advertising or promotional material, or otherwise, without the prior written consent of Alexza. Notwithstanding the foregoing, either Party may use the name of the other Party or its Affiliates in the context of mentioning the existence of this Agreement in advertising or promotional materials.

11.3 Publication.

(a) Prior to public disclosure or submission for publication of a proposed publication describing the results of any scientific or clinical activity relating to Product, each Party shall send the JSC by expedited delivery a copy of the proposed publication to be submitted and the JSC shall have a reasonable time period (but no less than thirty (30) days from the date of confirmed receipt) in which to determine whether the proposed publication contains subject matter for which patent protection should be sought (prior to publication of such proposed publication) for the purpose of protecting an invention, or whether the proposed publication contains Confidential Information of the other Party, or whether the proposed publication contains information that is reasonably likely to have a material adverse impact on the development or commercialization of the Device or the Staccato Technology or Product. Following the expiration of the applicable time period for review, the applicable Party shall be free to submit such proposed publication for publication and publish or otherwise disclose to the public such scientific or clinical results, subject to the procedures set forth in Section 11.3(b), except that any publication in the Territory by or on behalf of Alexza, its Affiliates, sublicensees or Subcontractors requires the prior written consent of Endo, not to be unreasonably withheld.


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

(b) If the JSC believes that the subject matter of the proposed publication contains Confidential Information of the non-publishing Party or a patentable invention owned by such Party or in which such Party otherwise has rights, then prior to the expiration of the applicable time period for review, the JSC shall notify the other Party in writing of such belief. On receipt of written notice from the JSC that such proposed publication contains Confidential Information of the non-publishing Party, the publishing Party shall remove such Confidential Information from such proposed publication prior to any publication thereof, unless the non-publishing Party agrees otherwise in writing. On receipt of written notice from the JSC that such proposed publication contains a patentable invention owned by the non-publishing Party or in which the non-publishing Party otherwise has rights, the publishing Party shall delay public disclosure of such information or submission of the proposed publication for an additional period of thirty (30) days to permit preparation and filing of a patent application on such invention. The publishing Party shall thereafter be free to publish or disclose such information, subject to Article 10 and the last sentence in Section 11.3(a).

ARTICLE 12

REPRESENTATIONS AND WARRANTIES

12.1 Mutual Representations and Warranties of Alexza and Endo. Each of Alexza and Endo hereby represents and warrants to the other Party as of the Effective Date as follows:

(a) It is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. It has the requisite corporate power and authority to conduct its business as presently being conducted and as proposed to be conducted by it.

(b) It has the requisite corporate power and authority to enter into this Agreement and to perform the services contemplated hereunder. All corporate actions on its part, necessary for (i) the authorization, execution, delivery and performance by it of this Agreement, and (ii) the consummation of the transactions contemplated hereby, have been duly taken.

(c) Assuming the due authorization, execution and delivery by the other Party, this Agreement is its legally valid and binding obligation, enforceable against it in accordance with its terms (except in all cases as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the enforcement of creditors’ rights generally and except that the availability of the equitable remedy of specific performance or injunctive relief is subject to the discretion of the court or other tribunal before which any proceeding may be brought).

(d) There is no contractual restriction or obligation binding on either Party which would be materially contravened by execution and delivery of this Agreement or by the performance or observance of its terms.

(e) Each Party has and will continue to have written contracts with all Third Parties (including employees and subcontractors) performing services on its behalf under this


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Agreement where such services are intended to create inventions that assign or license to such Party all inventions and rights therein.

(f) To each Party’s knowledge, no representation or warranty made by it in this Agreement, nor any statement contained in any schedule or exhibit hereto furnished by it, contains any untrue statement of a material fact or omits any material fact necessary to make the statements contained herein or therein not misleading.

12.2 Additional Representations and Warranties of Alexza. Alexza hereby further represents and warrants to Endo as of the Effective Date:

(a) Alexza is the owner of, or has exclusive rights to, all of the Alexza Patents in existence on the Effective Date and is the owner of all of the Alexza Know-How in existence on the Effective Date and has not granted rights in any of the Alexza Know-How to any Third Party (other than licenses granted to Symphony Allegro and its affiliated entities (collectively, “Symphony”) with respect to certain products that are not Products). The Alexza Patents are in full force and effect. Alexza has the exclusive right to grant the rights granted under this Agreement. To the knowledge of Alexza, all of the issued Alexza Patents in existence on the Effective Date are valid and enforceable.

(b) All of the information requested by Endo for due diligence purposes in connection with entering into this Agreement has been provided by Alexza and all of such information is in all material respects true, complete and unredacted (except as expressly noted). Without limiting the generality of the foregoing, Alexza has provided Endo, or given Endo access to true, complete and unredacted (except as expressly noted) copies of all (i) submissions to, and correspondence with, Regulatory Authorities relating to the Device, Drug or Product, including adverse event files, complaint files, manufacturing records and inspection reports; and (ii) material agreements (including any letter agreements) between Alexza and any licensor, licensee, production or financing partner or other Third Party, including all effective amendments to any such agreements, which in any event (A) would reasonably be expected to materially affect Endo’s rights under the Agreement; or (B) relates to the Device, Drug or Product. Alexza is in material compliance with all applicable federal, state and local laws, rules and regulations, including, without limitation, all Regulatory Requirements, with respect to each facility and site to be used in the Manufacture of Product and, to Alexza’s knowledge, there are no circumstances or conditions which would reasonably be expected to prevent compliance from continuing during the duration of this Agreement or to interfere with Alexza’s ability to Manufacture Product as required by this Agreement.

(c) There is no pending or, to the knowledge of Alexza, threatened claim, interference, opposition or demand of any Third Party challenging the ownership, validity or scope of any Alexza Intellectual Property or Alexza Trademarks in existence as of the Effective Date. To the knowledge of Alexza, (i) the manufacture or sale of the Initial Product (as formulated as of the Effective Date) or its use in each indication included in the Initial Indication will not infringe any existing issued patent in the Territory and (ii) in developing or acquiring the Alexza Intellectual Property or Alexza Trademarks, Alexza has not misappropriated any trade secret of any Third Party.


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

(d) Alexza has disclosed to Endo its current financing arrangement with Symphony (as defined in Section 12.2(a)), pursuant to which certain of the Alexza Intellectual Property is exclusively licensed to Symphony with respect to certain products that are not Products and certain of such Alexza Intellectual Property is exclusively sublicensed by Symphony to Alexza. To the knowledge of Alexza, except as set forth in the Alexza’s agreements with Symphony in connection with such financing arrangement, there are no liens or claims currently existing on or to the Alexza Intellectual Property or Alexza Trademarks or on any proceeds thereof (including any liens or claims on or to (i) rights to sue for past, present and future infringements thereof, (ii) any licenses, claims, damages and proceeds of suit arising therefor, or (iii) any payments or rights to payments arising out of the sale, lease, license, assignment, or other disposition thereof). No liens or claims currently exist on or to Alexza Intellectual Property or Alexza Trademarks or proceeds thereof, and Alexza will not create, incur, or permit to exist on or to any Alexza Intellectual Property or Alexza Trademarks or proceeds thereof any lien or claim, in each case that could adversely affect in any material respect any rights of Endo under this Agreement, including any right of set-off or credit.

(e) Product supplied to Endo will be of satisfactory quality, free of any defects and will be Manufactured in compliance with the Specifications, cGMP and all other provisions of this Agreement, the Quality Agreement and all applicable federal, state and local laws, rules and regulations, including, without limitation, all Regulatory Requirements and environmental laws, in force at the time of Manufacture.

12.3 Disclaimer. EXCEPT AS EXPRESSLY PROVIDED IN THIS ARTICLE 12, EACH PARTY DISCLAIMS ANY AND ALL WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION THE WARRANTIES OF DESIGN, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NONINFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. THE PARTIES FURTHER ACKNOWLEDGE THAT ALL CLINICAL TRIAL MATERIAL IS PROVIDED ON AN “AS IS” BASIS WITHOUT WARRANTY OF ANY KIND.

ARTICLE 13

INDEMNIFICATION AND LIMITATION OF LIABILITY

13.1 Indemnification by Endo. Subject to Section 13.3, Endo shall indemnify, defend and hold Alexza, its Affiliates, and their respective directors, officers, employees consultants, contractors, sublicensees and agents (collectively, the “Alexza Indemnitees”) harmless from and against any and all claims, suits, proceedings or causes of action (“Claims”) brought by a Third Party against such Alexza Indemnitee, including any damages or other amounts payable to such Third Party, as well as any reasonable attorneys’ fees and costs of litigation incurred as to any such Claim until the indemnifying Party has acknowledged that it will provide indemnification hereunder with respect to such Claim as provided below (collectively, “Damages”), in each case resulting from or based on: (a) clinical development, use, importation, offer for sale or sale of any Product in the Territory, (b) Endo’s breach of this Agreement; (c) the negligence or willful misconduct of, or violation of applicable law by, Endo,


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

its Affiliates or (sub)licensees, or their respective employees, contractors or agents in the performance of this Agreement; and/or (d) breach of a contractual or fiduciary obligation owed by Endo to a Third Party (including without limitation misappropriation of trade secrets). The foregoing indemnity obligation shall not apply to the extent Alexza has an obligation to indemnify Endo in respect to such matter under Section 13.2.

13.2 Indemnification by Alexza. Subject to Section 13.3, Alexza shall indemnify, defend and hold Endo, its Affiliates, and their respective directors, officers, employees consultants, contractors, sublicensees and agents (collectively, the “Endo Indemnitees”) harmless from and against any and all Claims brought by a Third Party against such Endo Indemnitee, including any Damages resulting therefrom, in each case resulting from or based on: (a) Alexza’s breach of this Agreement; (b) the negligence or willful misconduct of, or violation of applicable law by, Alexza, its Affiliates or (sub)licensees, or their respective employees, contractors or agents in the performance of this Agreement; (c) breach of a contractual or fiduciary obligation owed by Alexza to a Third Party (including without limitation misappropriation of trade secrets); (d) an allegation that the Device comprising part of the Initial Product infringes the patents of a Third Party (except to the extent such infringement arises from the use or combination of such Device with goods, materials, or services not supplied by Alexza, or any modification or alteration of such Device by anyone other than Alexza, where such infringement would not have arisen except for such use, combination, modification or alteration) and/or (e) any Alexza Design Defect. “Alexza Design Defect” shall be a defect in the design of the Device included in a Product or the Staccato Technology used to develop a Product. The foregoing indemnity obligation shall not apply to the extent such Third Party Claims result from (i) Endo’s breach of this Agreement; (ii) the negligence or willful misconduct of, or violation of applicable law by, such Endo Indemnitee; and/or (iii) Endo’s or such Endo Indemnitee’s breach of a contractual or fiduciary obligation owed by it to a Third Party (including without limitation misappropriation of trade secrets).

13.3 Indemnification Procedures. A Party seeking indemnification under Sections 13.1 or 13.2 hereof (the “Indemnitee”) shall promptly notify the other Party (the “Indemnitor”) in writing of any claim, lawsuit or other action in respect of which the Indemnitee, its Affiliates, or any of their respective directors, officers, employees and agents intend to claim such indemnification. The Indemnitee shall permit, and shall cause its Affiliates and their respective directors, officers, employees and agents to permit, (i) the Indemnitor to have complete control of such defense (except as set forth below) so long as it promptly assumes the defense and prosecutes the defense with appropriate diligence and care and (ii) the Indemnitor, at its discretion, to settle any such claim, lawsuit or other action with the prior written consent of the Indemnitee, provided, however, that such consent shall not be unreasonably withheld or delayed so long as such settlement does not adversely affect the Indemnitee’s rights hereunder or impose any obligations on the Indemnitee in addition to those set forth herein. No such claim, lawsuit or other action shall be settled by the Indemnitee without the prior written consent of the Indemnitor and the Indemnitor shall not be responsible for any legal fees or other costs incurred other than as provided herein. The Indemnitee, its Affiliates and their respective directors, officers, employees and agents shall cooperate fully with the Indemnitor and its legal representatives in the investigation and defense of any claim, lawsuit or other action covered by this indemnification. The Indemnitor, if it is directing the defense as set forth above, shall keep


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

the Indemnitee reasonably informed of the progress of the action and shall consider the comments and observations of the Indemnitee timely given in the course of the proceedings. The Indemnitee shall have the right, but not the obligation, to be represented by counsel of its own selection and expense. Notwithstanding the foregoing, the Indemnitee may be represented by separate counsel at the expense of the Indemnitor if a conflict of interest exists between the interests of the Indemnitor and Indemnitee so that a single counsel representing Indemnitor cannot adequately defend the rights of the Indemnitee

13.4 Survival of Indemnification Obligations. The provisions of this Article 13 shall survive the termination or expiration of this Agreement.

13.5 Insurance. The Parties shall maintain insurance or self-insurance against such risks and in such amounts as are usually maintained or insured against by other companies of established repute engaged in the same or a similar business. Each Party shall submit to the other Party evidence of the insurance or self-insurance that is carried by such Party upon written request of the other Party.

ARTICLE 14

TERM AND TERMINATION

14.1 Term. The term of this Agreement shall commence on the Effective Date and shall expire upon the later to occur of: (i) [ * ] from the First Commercial Sale of a Product, and (ii) the date on which the last of the Alexza Patents related to a Product have expired, unless earlier terminated in accordance with Section 14.2 (the “Term”).

14.2 Termination.

(a) Termination by Endo. This Agreement may be terminated at any time by Endo upon ninety (90) days prior written notice to Alexza.

(b) Mutual Agreement. This Agreement may be terminated in its entirety at any time upon mutual written agreement between the Parties.

(c) Material Breach. Either Party may terminate this Agreement at any time upon written notice to the other Party if the other Party is in material default or breach of this Agreement and such material default or breach is not cured within sixty (60) days (twenty (20) Business Days in the case of Endo’s failure to pay any amounts due hereunder) after written notice thereof is delivered to the defaulting or breaching Party.

(d) Patent Challenge. Alexza shall have the right to terminate this Agreement at any time upon written notice to Endo if Endo or its Affiliate (i) files suit or initiates an administrative or other governmental proceeding to challenge the validity or enforceability of any Alexza Patent or (ii) voluntarily assists any Third Party with respect to any suit or proceeding described in subsection (i).


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

14.3 Consequences of Termination.

(a) Termination of Licenses. Upon the termination of this Agreement for any reason, the licenses granted to Endo under Sections 8.1 and 8.4 shall terminate, except that upon expiration of the Term such licenses shall remain in full force and effect in accordance with their terms without any additional payment required by Endo under Article 7 or otherwise except for such additional payments as Endo and Alexza may agree to in consideration of Alexza continuing to supply Product to Endo.

(b) Return of Confidential Information. Upon expiration or termination of this Agreement in its entirety, unless otherwise directed by Endo, Alexza shall promptly return all Endo Confidential Information to Endo, except for a single copy and/or sample for documentation purposes only. Upon expiration or termination of this Agreement in its entirety, unless otherwise directed by Alexza, Endo shall promptly return all Alexza Confidential Information to Alexza, except for a single copy and/or sample to be retained for documentation purposes only and except that Endo, its Affiliates and any Third Party manufacturer shall be entitled to retain such Confidential Information relating to the Manufacture of Product as may be necessary to continue such Manufacture after expiration of the Term.

(c) Licenses to Alexza. Upon the termination of this Agreement for any reason (other than by Endo pursuant to Section 14.2(c)), the licenses granted by Endo to Alexza under Sections 8.2(b) and (c) shall continue. Upon termination of this Agreement by Endo under Section 14.2(a) or by Alexza under Section 14.2(c), Endo shall grant to Alexza an irrevocable, perpetual, royalty-free, fully paid, non-exclusive license (with full rights to sublicense) under the Endo Product Know-How and the Endo Product Patents, to make, have made, import, use, offer for sale and sell Products in the Territory.

(d) Regulatory Filings. Upon the termination of this Agreement by Endo pursuant to Section 14.2(a) or by Alexza under Section 14.2(c) for any reason, Endo shall assign to Alexza, and will provide full copies of, all Regulatory Approvals and Regulatory Submissions that are owned or Controlled by Endo or its Affiliates. Endo shall also take such actions and execute such other instruments, assignments and documents as may be necessary to effect the transfer of rights thereunder to Alexza.

(e) Data Disclosure. Upon the termination of this Agreement by Endo pursuant to Section 14.2(a) or by Alexza under Section 14.2(c), Endo will provide to Alexza copies of the relevant portions of all material reports and data, including clinical and non-clinical data and reports, obtained or generated by or on behalf of Endo or its Affiliates pursuant to this Agreement to the extent that they relate to Products, within sixty (60) days of such termination unless otherwise agreed, and Alexza shall have the right to use any such information in developing and commercializing Products, and to license any Third Parties to do so.

(f) Payment of Certain Costs. Upon the termination of this Agreement by Endo pursuant to Section 14.2(a) or by Alexza under Section 14.2(c), Endo shall reimburse Alexza for [ * ] of (i) any non-cancellable capital expenses incurred by Alexza as of the date of termination in order to increase Alexza’s capacity for Manufacturing Product (whether at its Plant or in connection with establishing a new plant) or (ii) any upfront and non-cancellable costs incurred by Alexza as of the date of termination in connection with establishing and


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

validating a Third Party manufacturer as an alternative source of supply of the Product, in each case to the extent such activities were consistent with a mutually agreed written plan and budget for expanding Manufacturing capacity or such activities were, at the time such activities were initiated, reasonably determined by Endo to be an appropriate course of action in accordance with Section 5.1(d) to ensure that Alexza would be able to fulfill Endo’s requirements of Product in excess of the Volume Commitment within the [ * ] based on Endo’s most recent forecast. Such payment shall be due no later than (60) days following receipt of a written invoice from Alexza.

(g) Accrued Obligations. Except as set forth herein, any termination or expiration of this Agreement shall not relieve either Party of any obligation which has accrued prior to the effective date of such termination or expiration, which obligations shall remain in full force and effect for the period provided therein.

(h) Cumulative Remedies. Except as expressly stated otherwise in this Agreement, remedies under this Agreement are cumulative, and termination of this Agreement in accordance with and fulfillment of all obligations set forth in this Article 14 shall not affect any other rights or remedies that may be available to a Party in law or equity. In addition, nothing in this Agreement shall prevent either Party, in the case of a breach, from not terminating this Agreement and seeking to enforce its rights hereunder.

(i) Survival. The terms of Sections 3.4, 4.1(e), 4.2(c), 4.3, 4.4, 4.5, 5.1(e), 7.9, 9.2, 14.3 and Articles 1, 10, 11, 13 and 15 shall survive any termination or expiration of this Agreement.

ARTICLE 15

MISCELLANEOUS

15.1 Notices. Any notice, request, demand, waiver, consent, approval or other communication which is required or permitted to be given to any Party shall be in writing and shall be deemed given (i) when delivered to the Party personally, (ii) five (5) days after sent to the Party by registered mail, return receipt requested, postage prepaid, (iii) on the second Business Day after sent by a nationally recognized courier service guaranteeing next-day or second-day delivery, charges prepaid, in each case addressed to the Party at its address set forth below, or (iv) on the first Business Day after sent by facsimile transmission to the number set forth below, or at such other address or fax number as such Party may from time to time specify by notice given in the manner provided herein to the Party entitled to receive notice hereunder:


		For Alexza:				Alexza Pharmaceuticals, Inc.
						1020 East Meadow Circle
						Palo Alto, CA 94303
						Attention: Chief Executive Officer
						FAX: (650) 687-3999


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


		With a copy to:		Cooley Godward Kronish LLP
				Five Palo Alto Square
				3000 El Camino Real
				Palo Alto, CA 94306
				Attention: Glen Sato, Esq.
				FAX: (650) 849-7400

		For Endo:		Endo Pharmaceuticals Inc.
				100 Endo Boulevard
				Chadds Ford, PA 19317
				Attention: Chief Legal Officer
				FAX (610) 558-9684

15.2 Entire Agreement. This Agreement (including any Exhibits or other attachments hereto) constitutes the entire agreement between the Parties with respect to the subject matter hereof, and no oral or written statement may be used to interpret or vary the meaning of the terms and conditions hereof. This Agreement supersedes any prior or contemporaneous agreements and understandings, whether written or oral, between the Parties with respect to the subject matter hereof, including the Confidentiality Agreement between Alexza and Endo dated February 9, 2007 (the “Existing CDA”). All information disclosed by Alexza pursuant to the Existing CDA shall be deemed Alexza Confidential Information for the purposes of this Agreement.

15.3 Assignment. Neither Party may assign or otherwise transfer this Agreement without the prior written consent of the other Party; provided, however, that either Party may assign this Agreement without the consent of the other Party to any Affiliate or in connection with the acquisition of such Party or the sale of all or substantially all of the assets of such Party. Any assignment of this Agreement in violation of this Section 15.3 shall be null and void. Assignment of this Agreement by either Party shall not relieve the assignor of its obligations hereunder. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns.

15.4 Force Majeure. Both Parties shall be excused from the performance of their obligations under this Agreement to the extent that such performance is prevented by force majeure and the nonperforming Party promptly provides notice of the prevention to the other Party. Such excuse shall be continued so long as the condition constituting force majeure continues and the nonperforming Party takes reasonable efforts to minimize the effect of and overcome or remove the cause or condition causing such force majeure. For purposes of this Agreement, force majeure shall include conditions beyond the control of the Parties, including, without limitation, an act of God, war, civil commotion, terrorist act, labor strike or lock-out, epidemic, failure or default of public utilities or common carriers, destruction of production facilities or materials by fire, earthquake, storm or like catastrophe, and failure of plant or machinery (provided that such failure could not have been prevented by the exercise of skill, diligence, and prudence that would be reasonably and ordinarily expected from a skilled and experienced person engaged in the same type of undertaking under the same or similar


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

circumstances). Notwithstanding the foregoing, a Party shall not be excused from making payments owed hereunder because of a force majeure affecting such Party. In the event that either Party is prevented or delayed in performing any of its obligations under this Agreement due to force majeure for an aggregate period in excess of ninety (90) days in any twelve month period, the Parties shall meet as soon as practicable to discuss in good faith how best to alleviate the circumstances in question.

15.5 Headings. The descriptive headings contained in this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of the Agreement.

15.6 Independent Contractor. Each Party shall be acting as an independent contractor in performing under this Agreement and shall not be considered or deemed to be an agent, employee, joint venturer or partner of the other Party.

15.7 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any Party.

15.8 No Third-Party Beneficiaries. Nothing in this Agreement, either express or implied, is intended to or shall confer upon any third party any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.

15.9 Amendment. This Agreement may not be amended or modified except by an instrument in writing signed by authorized representatives of Endo and Alexza.

15.10 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without reference to choice of law rules.

15.11 Dispute Resolution. In the event of any dispute under this Agreement (other than disputes excluded in subsection (a) below), the Parties shall refer such dispute to the CEOs for attempted resolution by good faith negotiations within thirty (30) days after such referral is made. If the CEOs are unable to resolve the dispute within the time allotted, either Party may proceed as set forth below.

(a) Alternative Dispute Resolution. Any dispute, controversy or claim arising out of or relating to the validity, construction, enforceability or performance of this Agreement, including disputes relating to an alleged breach or to termination of this Agreement and including any claim of inducement by fraud or otherwise, but excluding any dispute, controversy or claim arising out of or relating to the validity, enforceability, or infringement of any Alexza Patent or any suit for injunctive relief under Section 15.12 (which shall be submitted to a court of competent jurisdiction), shall be settled by mediation and arbitration in the manner described below:


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

(b) Mediation. The CEOs shall select a mediator with appropriate expertise in the subject matter to which the dispute relates, who will be engaged to resolve the dispute. If the CEOs cannot agree on a mediator within fifteen (15) days, each Party may seek appropriate resolution through arbitration as described below. If the Parties are unable to resolve their dispute through mediation within ninety (90) days after selection of the mediator(s), either Party may seek appropriate resolution through arbitration as described below.

(c) Arbitration. Any dispute, controversy or claim arising out of or relating to the validity, construction, enforceability or performance of this Agreement which is not resolved by mediation, including disputes relating to alleged breach or to termination of this Agreement (other than disputes referred to in Section 15.11(a) that are to be submitted to a court of competent jurisdiction), shall be settled by binding arbitration (“Arbitration”) in the manner described below:

(i) If a Party intends to begin an Arbitration to resolve a dispute, such Party shall provide written notice (the “Arbitration Request”) to the other Party informing such other Party of such intention and the issues to be resolved. From the date of the Arbitration Request and until such time as any matter has been finally settled by Arbitration, the running of the time periods contained in Article 14 as to which Party must cure a breach of this Agreement shall be suspended as to the subject matter of the dispute. Within ten (10) Business Days after the receipt of the Arbitration Request, the other Party may, by written notice to the Party initiating Arbitration, add additional issues to be resolved.

(d) Procedure. The Arbitration shall be conducted pursuant to the then-current JAMS/ENDISPUTE Rules (streamlined for disputes involving [ * ] or less and comprehensive for disputes involving more than [ * ] or involving a right to terminate this Agreement under Section 14.2(c) or (d)). Notwithstanding those rules, the following provisions shall apply to the ADR hereunder:

(i) Arbitrator. In the event that the dispute at issue involves an amount less than [ * ], the Arbitration shall be conducted by one (1) arbitrator (the “Threshold 1 Arbitrator”). In the event, however, that the dispute at issue involves an amount greater than [ * ] or the termination of this Agreement under Section 14(c) or (d), the Arbitration shall be conducted by a panel of three (3) arbitrators (collectively, with the Threshold 1 Arbitrator, the “Arbitrators”). The Arbitrators shall be selected from a pool of retired independent federal judges to be presented to the Parties by JAMS/ENDISPUTE. Neither Party shall engage in ex parte contact with the arbitrators.

(ii) Proceedings. The Arbitrators shall render a written opinion setting forth findings of fact and conclusions of law with the reason therefor stated. A transcript of the evidence adduced at the hearing shall be made and, upon request, shall be made available to each Party. The Arbitrators shall, in rendering their decision, apply the substantive law set forth in Section 15.10, except that the interpretation of and enforcement of this Section 15.11 shall be governed by the Federal Arbitration Act. The Arbitrator shall apply the Federal Rules of Evidence to the hearing. The proceeding shall take place in Chicago, Illinois and shall be conducted in such a manner so that the written opinion of the Arbitrators is given with 180 days


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

after the Arbitrators are selected. The fees of the Arbitrators and JAMS/ENDISPUTE shall be paid by the losing Party, which shall be designated by the Arbitrator(s). If the Arbitrator(s) is unable to designate a losing Party, it shall so state and the fees shall be split equally between the Parties.

(iii) Award. Subject to Section 15.12, the Arbitrator(s) is empowered to award any remedy allowed by law, including money damages, prejudgment interest and attorneys’ fees, and to grant final, complete, interim, or interlocutory relief, including injunctive relief.

(iv) Costs. Except as set forth in Sections 15.11(d)(ii) and (iii) above, each Party shall bear its own legal fees and costs.

(v) Confidentiality. The ADR proceeding shall be confidential and the Arbitrators shall issue appropriate protective orders to safeguard each Party’s Confidential Information. Except as required by law, no Party shall make (or instruct the Arbitrators to make) any public announcement with respect to the proceedings or decision of the Arbitrators without prior written consent of each other Party. The existence of any dispute submitted to ADR, and the award, shall be kept in confidence by the Parties and the Arbitrators, except as required in connection with the enforcement of such award or as otherwise required by applicable law.

(vi) Judgment; Provisional Remedies. Any court having jurisdiction of this matter may enter judgment upon any award granted under this Section 15.11. Each Party has the right before or during the arbitration to seek and obtain from the appropriate court provisional remedies such as attachment, preliminary injunction, replevin, etc. to avoid irreparable harm, maintain the status quo, or preserve the subject matter of the arbitration.

(vii) Language. All pleadings, complaints and other documents filed or presented in connection with, and all proceedings in, any dispute resolution proceeding described in this Section 15.11 must be in the English language.

15.12 Injunctive Relief. Each Party shall be entitled to seek injunctive relief to enforce the respective covenants and agreements of the Parties in this Agreement, including, without limitation, the respective rights and obligations of the Parties under Articles 5, 8 and 10.

15.13 Waiver of Jury Trial. EACH PARTY HERETO WAIVES ITS RIGHT TO TRIAL OF ANY ISSUE BY JURY.

15.14 Limitation of Liability. IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR LOST PROFITS OR FOR ANY SPECIAL, INDIRECT, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES, HOWEVER CAUSED, ON ANY THEORY OF LIABILITY AND WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, ARISING UNDER ANY CAUSE OF ACTION AND ARISING IN ANY WAY OUT OF THIS AGREEMENT. THE FOREGOING LIMITATION WILL NOT LIMIT EITHER PARTY’S LIABILITY FOR BREACH OF ARTICLE 10 OR EITHER PARTY’S INDEMNIFICATION OBLIGATIONS TO THE OTHER PARTY UNDER ARTICLE 13.


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

15.15 No Waiver. The failure of either Party to enforce at any time for any period the provisions of or any rights deriving from this Agreement shall not be construed to be a waiver of such provisions or rights or the right of such Party thereafter to enforce such provisions.

15.16 Counterparts. This Agreement may be executed in one or more counterparts, and by the respective Parties in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same Agreement.

[SIGNATURES FOLLOW ON NEXT PAGE]


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed as of the date first written above by their respective duly authorized officers.


ALEXZA PHARMACEUTICALS, INC.

By:		/s/ Thomas B. King
		Name: Thomas B. King
		Title: President and Chief Executive Officer

ENDO PHARMACEUTICALS INC.

By:		/s/ Peter A. Lankau
		Name: Peter A. Lankau
		Title: President and Chief Executive Officer


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

ANNEX I

Active Ingredient Specifications

[ * ]


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

ANNEX II

Batch Sizes

[ * ]


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

ANNEX III

Packaging Specifications

[ * ]


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

ANNEX IV

Product Specifications

[ * ]


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

ANNEX V

Raw Material Specifications

[ * ]


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Schedule 1.6


	Application	Application	Patent
Country	Number	Date	Number	Grant Date	Title
[ * ]	[ * ]	[ * ]	[ * ]	[ * ]	[ * ]
[ * ]	[ * ]	[ * ]	[ * ]	[ * ]	[ * ]
[ * ]	[ * ]	[ * ]	[ * ]	[ * ]	[ * ]
[ * ]	[ * ]	[ * ]	[ * ]	[ * ]	[ * ]
[ * ]	[ * ]	[ * ]	[ * ]	[ * ]	[ * ]
[ * ]	[ * ]	[ * ]	[ * ]	[ * ]	[ * ]
[ * ]	[ * ]	[ * ]	[ * ]	[ * ]	[ * ]
[ * ]	[ * ]	[ * ]	[ * ]	[ * ]	[ * ]
[ * ]	[ * ]	[ * ]	[ * ]	[ * ]	[ * ]
[ * ]	[ * ]	[ * ]	[ * ]	[ * ]	[ * ]


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Exhibit A

Fentanyl


International Nonproprietary Name		Fentanyl alkaloid

Chemical Name		N-Phenyl-N-[1-(2-phenylethyl)-4-piperdinyl]propanamide

Physical Form		White crystalline powder

Solubility		Soluble in aqueous acids, organic solvents such as methanol and ethanol; insoluble in water

Molecular Formula		C₂₂H₂₈N₂O

Formula Weight		336.46

Melting Point		83-86 ^oC

CAS Number		437-38-7

Commercial Names (of base)		Duragesic (Janssen-Ortho)

Commercial and Trade Names (of Citrate Salt)		Actiq (Cephalon); Sublimaze (Akorn); fentanyl (generic); Hospira (Baxter Healthcare)


Chemical Structure


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Exhibit B

Target product profile

[ * ]


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Exhibit C

Alexza Trademarks


Trademark	Country	Filing Date	Appln. No.	Reg. Date	Reg. No.
[ * ]	[ * ]	[ * ]	[ * ]	[ * ]	[ * ]
[ * ]	[ * ]	[ * ]	[ * ]	[ * ]	[ * ]
[ * ]	[ * ]	[ * ]	[ * ]	[ * ]	[ * ]
[ * ]	[ * ]	[ * ]	[ * ]	[ * ]	[ * ]
[ * ]	[ * ]	[ * ]	[ * ]	[ * ]	[ * ]
[ * ]	[ * ]	[ * ]	[ * ]	[ * ]	[ * ]


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Exhibit D

Press Release

{ Intentionally Omitted }


[ * ] =		Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

EX-10.38 5 f39029exv10w38.htm EXHIBIT 10.38 exv10w38

Exhibit 10.38

January 23, 2008

Michael J. Simms
1879 Los Altos Drive
San Mateo, CA 94402

Dear Mike:

On behalf of Alexza Pharmaceuticals, we are pleased to offer you the position in the company as Senior Vice President, Operations and Manufacturing, reporting to the President and CEO, Tom King. This is a Corporate Officer and Executive Team member, and full-time offer to work at the new Alexza Pharmaceuticals facilities located on Stierlin Court in Mountain View, California, beginning on or about February 18, 2008 (actual date to be determined). This offer is contingent upon any pre-employment background check required for DEA and other regulatory agency compliance. To facilitate these requirements, please complete and sign the enclosed background check release form.

Your initial monthly base salary will be $26,250.00 payable in accordance with the Company’s customary payroll practice for salaried exempt positions. This equates to base compensation of $315,000 on an annualized basis. We are in the process of finalizing our 2008 Bonus Plan with our Board of Directors and you would be eligible to participate in that plan at the Senior Vice President level. We anticipate the plan to be similar to our 2007 plan. That plan was based upon the achievement of a combination of our corporate goals, as well as your personal and department goals established and agreed upon by yourself and your manager, with the opportunity to earn up to 45% of your earned salary for 2008. In the event that we do not put a bonus plan in place during 2008, we will guarantee a 35% bonus payout of your earned salary for 2008. We will also provide you a signing bonus of $50,000 (less applicable payroll taxes) and would be payable in the first pay period after your start date.

We will also grant you an option to purchase 175,000 shares of common stock. This option grant will be subject to all the standard terms and conditions of the Alexza 2005 Equity Incentive Plan. The option will vest over a 48-month period, with ¹/4 of the shares vesting after 12 months and the remainder vesting on a monthly basis thereafter.

You will also be eligible to participate in our Employee Stock Purchase Plan, which is a payroll deduction plan that offers eligible employees the opportunity to purchase Alexza common stock at a discount to the market price. Participants may authorize after-tax deductions of up to 20% of their base compensation for the purchase of stock under the 2005 Employee Stock Purchase Plan. Detailed provisions of the Plan are outlined in the Plan Document.

In addition, as a Senior Vice President at Alexza, you will execute a Severance Agreement that will entitle you to a severance benefit upon a change of control of Alexza on the terms and conditions described in our public filings.

Should you decide to accept our offer, you will be an “at-will” employee of Alexza. This means that either you or Alexza may terminate the employment relationship with or without cause at any time. Participation in any benefit, compensation or bonus program does not change the nature of the employment relationship, which remains “at-will”. The Vice President positions have “change of control” provisions as outlined in Alexza corporate documents.

To enable Alexza to safeguard its proprietary and confidential information, it is a condition of your employment that you sign Alexza’s standard Employee Invention Assignment and Confidentiality Agreement. A copy of this agreement is enclosed for your review and signature. We understand that you are likely to have signed similar agreements with prior employers, and wish to impress upon you that Alexza does not want to receive the confidential or proprietary information of others, and will support you in respecting your lawful obligations to prior employers.

As an executive with over over 20 years previous work history, you will be eligible for 20 days of flexible time off (vacation plus sick leave) during your first year of employment, following your three-month anniversary of full-time employment.

You will also be eligible for medical, dental, vision and life insurance for yourself and your immediate family. Alexza Pharmaceuticals sponsors a 401(k) plan to which employees can make contributions. You will be eligible to participate in this 401(k) plan on the first day of the month coincident with or following your day of hire. Upon acceptance of this offer of employment, we will provide the materials to you to apply for coverage under Alexza Pharmaceuticals’ health insurance plan.

This letter contains our complete understanding and agreement regarding the terms of your employment by Alexza and supersedes in their entirety all other or prior agreements by you with the Company as to the specific subjects of this letter. This binding agreement may only be amended in a writing signed by both you and the Company, although it is understood that Alexza may, from time to time, in its sole discretion, adjust the salaries, incentive compensation and benefits paid to you and its other employees, as well as job titles, locations, duties, responsibilities, assignments and reporting relationships.

If you agree with the terms of this offer letter, please sign below and fax this page along with the completed Background Check Authorization Form to Alexza Pharmaceuticals at (650) 687-6698 by January 30, 2008, upon which date this offer expires. Upon your signature below, this will become our binding agreement with respect to the subject matter of this letter.

We look forward to a long and mutually rewarding relationship with you as a member of the Alexza team. With very best regards.

Sincerely,

/s/ Emily Lee Kelly

Emily Lee Kelley
Vice President, Human Resources
ekelley@alexza.com

Accepted and Agreed:


/s/ Michael S. Simms		1/28/08

Michael S. Simms		Date

Alexza Pharmaceuticals, Inc.
1020 East Meadow Circle
Palo Alto, CA 94303

EX-23.1 6 f39029exv23w1.htm EXHIBIT 23.1 exv23w1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-132593, 333-141718 and 333-149129) pertaining to the 2005 Equity Incentive Plan, 2005 Non-Employee Directors’ Stock Option Plan and 2005 Employee Stock Purchase Plan of Alexza Pharmaceuticals, Inc. and the Registration Statements on Form S-3 (Nos. 333-141739 and 333-141724) of Alexza Pharmaceuticals, Inc. and in the related prospectuses of our reports dated March 11, 2008, with respect to the consolidated financial statements of Alexza Pharmaceuticals, Inc., and the effectiveness of internal control over financial reporting of Alexza Pharmaceuticals, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2007.


		/s/ Ernst & Young LLP

March 11, 2008
Palo Alto, California

EX-31.1 7 f39029exv31w1.htm EXHIBIT 31.1 exv31w1

Exhibit 31.1

CERTIFICATIONS

I, Thomas B. King certify that:

1. I have reviewed this annual report on Form 10-K of Alexza Pharmaceuticals, Inc.:

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: March 17, 2008		/s/ Thomas B. King Thomas B. King President and Chief Executive Officer

EX-31.2 8 f39029exv31w2.htm EXHIBIT 31.2 exv31w2

Exhibit 31.2

CERTIFICATIONS

I, August J. Moretti, certify that:

1. I have reviewed this annual report on Form 10-K of Alexza Pharmaceuticals, Inc.:

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: March 17 , 2008		/s/ August J. Moretti August J. Moretti Senior Vice President and Chief Financial Officer

EX-32.1 9 f39029exv32w1.htm EXHIBIT 32.1 exv32w1

Exhibit 32.1

CERTIFICATION

Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. § 1350), Thomas B. King, President and Chief Executive Officer of Alexza Pharmaceuticals, Inc. (the “Company”), and August J. Moretti, the Senior Vice President and Chief Financial Officer of the Company, each hereby certifies that, to his knowledge:

1. The Company’s Annual Report on Form 10-K for the period ended December 31, 2007, to which this Certification is attached as Exhibit 32.1 (the “Annual Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and

2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

In Witness Whereof, the undersigned have set their hands hereto as of the 17 day of March, 2008.


/s/ Thomas B. King Thomas B. King President and Chief Executive Officer		/s/ August J. Moretti August J. Moretti Senior Vice President and Chief Financial Officer

This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Alexza Pharmaceuticals, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.

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