This Quarterly Report on Form 10-Q contains forward-looking information
based on our current expectations. Because our actual results may differ materially from any forward-looking statements that we make or that are made on our behalf, this section includes a discussion of important factors that could affect our actual
future results, including, but not limited to, our product sales, capital resources, commercial market estimates, safety of NUEDEXTA, future development efforts, patent protection, effects of healthcare reform, reliance on third parties, and other
risks set forth below. We disclaim any intent to update forward-looking statements to reflect subsequent developments or actual results.
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Risks Relating to Our Business
Our near-term prospects depend on reaching profitability from the commercialization of NUEDEXTA in the United States. If we are unable to
continue to increase NUEDEXTA revenues, including through raising PBA awareness among patients and physicians, driving higher rates of physician adoption and obtaining reimbursement and third party payer coverage, our ability to generate significant
revenue or achieve profitability will be adversely affected.
Although NUEDEXTA has been approved for marketing, our ability to
generate significant revenue in the near term is entirely dependent upon our ability to continue the successful commercialization of NUEDEXTA. To continue to be successful we must:
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maintain successful sales, marketing and educational programs for our targeted physicians and other health care providers;
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raise patient and physician awareness of PBA and encourage physicians to screen patients for the condition;
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obtain adequate reimbursement for NUEDEXTA from a broad range of payers; and
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maintain and defend our patent protection and maintain regulatory exclusivity for NUEDEXTA.
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Supplying the market for NUEDEXTA requires us to manage relationships with an increasing number of collaborative partners, suppliers and
third-party contractors. If we are unable to successfully maintain the required sales and marketing infrastructure, as well as successfully manage an increasing number of relationships, including with suppliers, manufacturers, distributors,
insurance carriers and prescribers, we will have difficulty growing our business. In addition, pharmacies, institutions and prescribers may rely on third-party medical information systems to interpret the NUEDEXTA approved product label and guide
utilization of NUEDEXTA. If these information systems load incorrect information or misinterpret the approved product label, it may result in lower adoption or utilization than expected. For example, because NUEDEXTA contains quinidine, which is a
known pro-arrhythmic drug at antiarrhythmic doses exceeding 600 mg per day, it is possible that medical information systems may incorrectly identify NUEDEXTA as contraindicated or otherwise inappropriate for a patient, even in situations where the
risks are substantially less than perceived.
In addition, we may enter into co-promotion or out-licensing arrangements with other
pharmaceutical or biotechnology partners for NUEDEXTA where necessary to reach customers in domestic or foreign market segments and when deemed strategically and economically advantageous. To the extent that we enter into co-promotion or other
licensing arrangements, our product revenues may be lower than if we directly marketed and sold NUEDEXTA, and some or all of the revenues we receive will depend upon the efforts of third parties, which may not be successful. If we are unable to
accomplish any of these key objectives, we may not be able to generate significant product revenue or become profitable.
We have a
history of net losses and an accumulated deficit, and we may be unable to generate sufficient revenue to achieve or maintain profitability in the future.
We have experienced significant net losses and negative cash flows from operations and we expect our negative cash flow from operations to
continue until we are able to generate significant revenues from sales of NUEDEXTA. As of December 31, 2013, we had an accumulated deficit of approximately $511.5 million. We have incurred these losses principally from costs incurred in funding
the research, development and clinical testing of our drug candidates, from our general and administrative expenses and from our commercialization activities for NUEDEXTA. We may continue incurring net losses for the foreseeable future and we expect
our operating losses to continue for the foreseeable future as we continue to grow NUEDEXTA sales, invest in the development of AVP-923 and AVP-786, seek to commercialize NUEDEXTA in the European Union (EU), and seek FDA approval and
subsequently commercialize AVP-825.
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Our ability to generate revenue and achieve profitability in the near term is dependent on our
ability, alone or with partners, to successfully manufacture and market NUEDEXTA for the treatment of patients with PBA in the United States. We expect to continue to spend substantial amounts on the ongoing marketing of NUEDEXTA domestically for
the treatment of PBA, invest in Europe to commercialize NUEDEXTA, and seek regulatory approvals for use of NUEDEXTA in other geographic markets and indications. As a result, we may be unable to generate sufficient revenue from product sales to
become profitable or generate positive cash flows.
Certain of our key issued patents covering NUEDEXTA are currently being challenged
and our pending patent applications may be denied. An adverse outcome in either case would adversely affect our ability to generate significant product revenue or become profitable.
We have invested in an extensive patent portfolio and we rely substantially on the protection of our intellectual property through our
ownership or control of issued patents and patent applications. The degree of patent protection that will ultimately be afforded to us in the U.S. and in other important markets remains uncertain and is dependent upon the scope of protection
decided upon by the patent offices, courts and lawmakers in these countries. If we cannot prevent others from exploiting claims in our patent portfolio, we will not derive the benefit from it that we currently expect. Further, we may incur
substantial expense from litigation to protect our patent portfolio.
The validity, enforceability and scope of our core patents covering
NUEDEXTA are currently being challenged as a result of abbreviated new drug application (ANDA) filings from generic drug companies. An adverse outcome in the current or any future challenges to the validity, enforceability or scope of
our patent portfolio could significantly reduce revenues from NUEDEXTA and any future products. More broadly, investors should be aware that the pharmaceutical industry is highly competitive. Our ability to compete in this space involves various
risks relating to our intellectual property, including:
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our patents covering NUEDEXTA may be found to be invalid and unenforceable or insufficiently broad to block the introduction of a generic form of NUEDEXTA;
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the claims in any of our pending patent applications may not be allowed and/or our patent applications may not be granted;
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competitors may develop similar or superior technologies independently, duplicate our technologies, or design around the patented aspects of our technologies;
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any of our issued patents may not provide us with significant competitive advantages; and
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we may not be able to secure additional worldwide intellectual property protection for our NUEDEXTA patent portfolio.
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An adverse outcome with respect to any of these risks could adversely affect our ability to generate significant product revenue or become
profitable.
We have received notices of ANDA filings for NUEDEXTA submitted by five generic drug companies. These ANDA filings assert
that a generic form of NUEDEXTA would not infringe our FDA Orange Book listed patents and/or those patents are invalid. As a result of these filings, we have commenced litigation to defend our patent rights, and have subsequently settled three of
these cases. The litigation has been costly and time consuming and, depending on the outcome of the litigation, we may face competition from lower cost generic or follow-on products in the near term.
NUEDEXTA is approved under the provisions of the Federal Food, Drug and Cosmetic Act (FDCA), which renders it susceptible to
potential competition from generic manufacturers via the Hatch-Waxman Act and ANDA process. Generic manufacturers pursuing ANDA approval are not required to conduct costly and time-consuming clinical trials to establish the safety and efficacy of
their products; rather, they are permitted to rely on the innovators data regarding safety and efficacy. Additionally, generic drug companies generally do not expend significant sums on sales and marketing activities, instead relying on
physicians or payers to substitute the generic form of a drug for the branded form. Thus, generic manufacturers can sell their products at prices much lower than those charged by the innovative pharmaceutical or biotechnology companies who have
incurred substantial expenses associated with the research and development of the drug product and who must spend significant sums marketing a new drug.
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The ANDA procedure includes provisions allowing generic manufacturers to challenge the
innovators patent protection by submitting Paragraph IV certifications to the FDA in which the generic manufacturer claims that the innovators patent is invalid, unenforceable and/or will not be infringed by the manufacture,
use, or sale of the generic product. A patent owner who receives a Paragraph IV certification may choose to sue the generic applicant for patent infringement. In recent years, generic manufacturers have used Paragraph IV certifications extensively
to challenge the applicability of patents listed in the FDAs Approved Drug Products List with Therapeutic Equivalence Evaluations, commonly referred to as the Orange Book, on a wide array of innovative therapeutic products. We expect this
trend to continue and to affect drug products with even relatively modest revenues.
We have received Paragraph IV certification notices
from five separate companies contending that our patents listed in the Orange Book (U.S. Patents 7,659,282, 8,227,484 and RE 38,115, which expire in August 2026, July 2023 and January 2016, respectively) are invalid, unenforceable and/or will
not be infringed by the manufacture, use, or sale of a generic form of NUEDEXTA. In response to these notices, we have filed suit against all of the generic drug companies to defend our patent rights. We have entered into settlement agreements with
three of the companies to resolve pending patent litigation in response to their ANDAs seeking approval to market generic versions of NUEDEXTA capsules. The settlement agreements grant the three companies the right to begin selling a generic version
of NUEDEXTA on July 30, 2026, or earlier under certain circumstances. The parties also filed stipulations and orders of dismissal with the United States District Court for the District of Delaware which conclude the litigation with respect to
the three companies. The settlements do not end our ongoing litigation against the other two ANDA filers.
The 30-month stay associated
with the filing of the ANDA actions expired on December 30, 2013. In order to launch a generic form of NUEDEXTA, the Defendants must first receive FDA approval and as of February 4, 2014, the FDA has not granted approval to any
Defendants ANDA.
Although we intend to vigorously enforce our intellectual property rights relating to NUEDEXTA, there can be no
assurance that we will prevail in our defense of our patent rights. Our existing patents could be invalidated, found unenforceable or found not to cover a generic form of NUEDEXTA. If an ANDA filer were to receive FDA approval to sell a generic
version of NUEDEXTA and/or prevail in any patent litigation, NUEDEXTA would become subject to increased competition and our revenue would be adversely affected.
PBA is a new market and estimates vary significantly over the potential market size and our anticipated revenues over the near and long
term.
NUEDEXTA is being made available to patients to treat PBA, an indication for which there was no previously established
pharmaceutical market. Industry sources and equity research analysts have a wide divergence of estimates for the near- and long-term market potential of our product. A variety of assumptions directly impact the estimates for our drugs market
potential, including estimates of underlying neurologic condition prevalence, severity of PBA prevalence among these conditions, rates of physician adoption of our drug for treatment of PBA among these populations, health plan reimbursement rates,
and patient adherence and compliance rates within each underlying neurological condition. Small differences in these assumptions can lead to widely divergent estimates of the market potential of our product. Additionally, although our approved
product label is indicated to treat PBA, without regard to the underlying neurological condition, it is possible that physicians, the FDAs Office of Prescription Drug Promotion (OPDP), payers or others may interpret the label more narrowly
than the FDAs Division of Neurology Products approval for a broad PBA label and believe that PBA secondary to certain conditions, such as Alzheimers disease, is not an indicated use. If such misinterpretations are widespread, the actual
market size may be smaller than we have estimated. Accordingly, investors are cautioned not to place undue reliance on any particular estimates of equity research analysts or industry sources.
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Significant safety or drug interaction problems could arise with respect to NUEDEXTA, which
could result in restrictions in NUEDEXTAs label, recalls, withdrawal of NUEDEXTA from the market, an adverse impact on potential sales of NUEDEXTA, or cause us to alter or terminate current or future NUEDEXTA clinical development programs, any
of which would adversely impact our future business prospects.
Discovery of previously unknown safety or drug interaction problems
with an approved product may result in a variety of adverse regulatory actions. This risk may be increased as physicians, at their own discretion, may prescribe NUEDEXTA for off-label uses, which may result in unknown safety or drug interactions.
Under the Food and Drug Administration Amendments Act of 2007, the FDA has broad authority to force drug manufacturers to take any number of actions if previously unknown safety or drug interaction problems arise, including, but not limited to:
(i) requiring manufacturers to conduct post-approval clinical studies to assess known risks or signals of serious risks, or to identify unexpected serious risks; (ii) mandating labeling changes to a product based on new safety information;
or (iii) requiring manufacturers to implement a Risk Evaluation Mitigation Strategy, or REMS, where necessary to assure safe use of the drug. In addition, previously unknown safety or drug interaction problems could result in product recalls,
restrictions on the products permissible uses, or withdrawal of the product from the market.
The combination of dextromethorphan
and quinidine has never been marketed for the treatment of any condition until the approval of NUEDEXTA for the treatment of PBA. NUEDEXTA has only been studied in a limited number of patients in clinical trials. The data submitted to the FDA and
the European Medicines Agency (EMA) were obtained in controlled clinical trials of limited duration. In connection with the approval of NUEDEXTA, the FDA and EMA have required that we conduct certain post-approval studies, which include
clinical and non-clinical studies. New safety or drug interaction issues may arise from these studies or as NUEDEXTA is used over longer periods of time by a wider group of patients. For example, elderly patients may be more prone to have multiple
risk factors for adverse events such as certain cardiac conditions, hepatic or renal insufficiency, or multi-drug treatment regimens. In addition, as we conduct other clinical trials for AVP-923 in other indications, new safety or drug interaction
problems may be identified which could negatively impact both our ability to successfully complete these studies and the use and/or regulatory status of NUEDEXTA for the treatment of PBA. New safety or drug interaction issues may result in product
liability lawsuits and may require us to, among other things, provide additional warnings and/or restrictions on the NUEDEXTA prescribing information, including a boxed warning, directly alert healthcare providers of new safety information, narrow
our approved indications, or alter or terminate current or planned trials for additional uses of AVP-923, any of which could have a significant adverse impact on potential sales of NUEDEXTA and our ability to achieve or maintain profitability.
In addition, if we are required to conduct additional post-approval clinical studies, implement a REMS, or take other similar actions, such
requirements or restrictions could have a material adverse impact on our ability to generate revenues from sales of NUEDEXTA, and/or require us to expend significant additional funds.
We have limited capital resources and may need to raise additional funds to support our operations.
We have experienced significant operating losses due to costs associated with funding the research, development, clinical testing and
commercialization of NUEDEXTA and our drug candidates. We expect to continue to incur substantial operating losses for the foreseeable future as we continue to expand our commercialization efforts for NUEDEXTA in the U.S. and in European markets,
continue to develop AVP-923 and AVP-786, and seek FDA approval and subsequently commercialize AVP-825. Although we had approximately $46.5 million in cash and cash equivalents, restricted cash and cash equivalents, and restricted investments as of
December 31, 2013, we currently do not have sufficient revenue from NUEDEXTA or other sources of recurring revenue or cash flow from operations to sustain our operations and it is possible that we may not be able to achieve profitability with
our current capital resources.
In light of our substantial long-term capital needs, we may need to partner our rights to NUEDEXTA (either
in the U.S. or outside the U.S.) or raise additional capital in the future to finance our long-term operations, until we are able to generate sufficient revenue from product sales to fund our operations. Based on our current loss rate and existing
capital resources as of the date of this report, we estimate that we have sufficient funds to sustain our operations at their current and anticipated levels over the next 12 months, which includes the costs associated with the ongoing
commercialization of NUEDEXTA for the treatment of PBA in the U.S. and European markets, seeking
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FDA approval and subsequently commercialize AVP-825. Although we expect to be able to raise additional capital if needed, there can be no assurance that we will be able to do so or that the
available terms of any financing would be acceptable to us. If we are unable to raise additional capital to fund future operations, we may experience significant delays or cutbacks in the commercialization of NUEDEXTA and may be forced to further
curtail our operations.
If we raise additional capital, we may do so through various financing alternatives, including licensing or sales
of our technologies, drugs and/or drug candidates, selling shares of common or preferred stock, through the acquisition of other companies, or through the issuance of debt securities. Each of these financing alternatives carries certain risks.
Raising capital through the issuance of common stock may depress the market price of our stock. Any such financing will dilute our existing
stockholders and, if our stock price is relatively depressed at the time of any such offering, the levels of dilution would be greater.
In addition, debt financing may involve agreements that include covenants limiting or restricting our ability to take specific actions, such
as encumbering our assets, making capital expenditures or entering into certain licensing transactions.
Our Loan Agreement with Oxford
and SVB contains certain covenants that could adversely affect our operations and, if an event of default were to occur, we could be forced to repay the outstanding indebtedness sooner than planned and possibly at a time when we do not have
sufficient capital to meet this obligation. The occurrence of any of these events could cause a significant adverse impact on our business, prospects and stock price.
Pursuant to our Loan Agreement with Oxford and SVB, we have pledged all of our assets, other than our patents and other intellectual property
rights, and have agreed that we may not sell or assign rights to our patents and other intellectual property without the prior consent of Oxford and SVB. The Loan Agreement also requires us to maintain a minimum sales level relative to projected
NUEDEXTA revenues, measured on a trailing three-month basis, or maintain cash and cash equivalents in accounts subject to control agreements in favor of the collateral agent equal to at least 1.5 times the outstanding amount of obligations under the
Loan Agreement. The failure to satisfy both of these tests would result in an event of default, which could accelerate our repayment obligations. Additionally, the Loan Agreement contains affirmative and negative covenants that, among other things,
restrict our ability to:
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incur additional indebtedness or guarantees;
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make investments, loans and acquisitions;
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sell assets, including capital stock of subsidiaries;
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alter the business of the Company;
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engage in transactions with affiliates; and
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enter into agreements limiting dividends and distributions of certain subsidiaries.
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The Loan
Agreement also includes events of default, including, among other things, payment defaults; breaches of representations, warranties or covenants; certain bankruptcy events; the occurrence of certain material adverse changes; and a commercial,
generic version of NUEDEXTA (for the treatment of PBA) becoming available. Upon the occurrence of an event of default and following any cure periods (if applicable), a default interest rate of an additional 5.0% per annum may be applied to the
outstanding loan balances, and the lenders may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Loan Agreement.
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These terms of the Loan Agreement could prevent us from taking certain actions without the
consent of our lenders and, if an event of default should occur, we could be required to immediately repay the outstanding indebtedness. If we are unable to repay this debt, the lenders would be able to foreclose on the secured collateral, including
our cash accounts, and take other remedies permitted under the security agreement. Even if we are able to repay the indebtedness on an event of default, the repayment of these sums may significantly reduce our working capital and impair our ability
to operate as planned. The occurrence of any of these events could cause a significant adverse impact on our business, prospects and stock price.
We recently entered into a co-promotion agreement for our institutional sales force that could have negative business implications.
We recently entered into a multi-year agreement involving our institutional sales team. This co-promote agreement involves certain
financial and operating risks, including:
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promotional efforts being diverted to the co-promote product which could result in a negative impact on NUEDEXTA revenues;
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increased compliance risk which could harm our reputation; and
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if we are unable to generate significant revenue or achieve profitability for the co-promote activity.
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If any of these risks occurred, it could adversely affect our business, financial condition and operating results.
There can be no assurance that the FDA will approve AVP-825 for the treatment of acute migraine.
A Phase II and Phase III clinical trial of AVP-825 for acute treatment of migraine have been completed and will form the basis for a 505(b)(2)
NDA filing with the FDA together with previously completed studies with the reference drug, sumatriptan. The FDA and other regulatory authorities will have substantial discretion in evaluating the results of the Phase III clinical trial and our NDA
filing.
It is possible that the FDA may require us to conduct additional non-clinical, clinical or chemical manufacturing control-related
studies before we gain approval for AVP-825. Prior to approving a new drug, the FDA generally requires that the efficacy of the drug be demonstrated in two adequate and well-controlled clinical trials. In some situations, the FDA approves drugs on
the basis of a single well-controlled clinical trial and / or on the basis of referencing data generated previously with the reference drug under the 505(b)(2) application process. If the FDA determines that the clinical trials already conducted do
not demonstrate a clinically meaningful benefit and an acceptable safety profile, or do not reflect an acceptable risk-benefit profile or if the FDA requires us to conduct additional clinical trials in order to gain approval, we may incur
significant additional development costs and commercialization of AVP-825 would be prevented or delayed and our business would be adversely affected. AVP-825 is classified as a new drug-device combination which requires additional conditions to be
satisfied for FDA approval beyond what is required for other drug products.
In addition, this Breath Powered intranasal device has not
been previously reviewed or approved by the FDA and therefore, it is possible that other issues may arise during the review process which could delay or preclude the approval and require additional capital investment.
We established a joint steering committee, a joint intellectual property committee and joint development committee which will give OptiNose
input on matters related to development of AVP-825 and intellectual property related to the product. As a result, our success depends partially on the success of OptiNose in performing its responsibilities and enforcing their intellectual property
rights.
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There can be no assurance that we will be able to successfully manufacture, distribute and
commercialize AVP-825, including adequate sales, marketing, distribution and manufacturing capabilities. If we are unable to successfully commercialize AVP-825, our ability to generate significant revenue and achieve product launch timelines may be
adversely affected.
We are primarily responsible for the manufacturing and distribution of AVP-825. We will utilize third parties to
manufacture, package and distribute AVP-825. We have no experience in manufacturing AVP-825 in commercial quantities. Any delays or difficulties, including the purchase of manufacturing equipment, entering into manufacturing and supply agreements,
obtaining API or in the manufacturing, packaging or distribution of AVP-825, could negatively affect our sales revenues as well as delay FDA approval.
If AVP-825 is approved by the FDA, our ability to generate significant revenue is entirely dependent upon our ability to commercialize
AVP-825. Our future results could be impacted by important factors which include, but are not limited to, commercial market estimates, reliance on market research, competition in the migraine segment, effect of healthcare reform, ability to secure
reasonable pricing and patent protection. If we are unable to generate revenues from AVP-825, including through raising awareness among patients and physicians of the benefits of using the device for the treatment of acute migraine, driving higher
rates of physician adoption and obtaining reimbursement and third party payer coverage, our ability to generate significant revenue or achieve profitability will be adversely affected.
We may not be able to adequately build or maintain necessary sales, marketing, supply chain management or reimbursement capabilities on our
own or enter into arrangements with third parties to perform these functions in a timely manner or on acceptable terms. Additionally, maintaining sales, marketing and distribution capabilities may be more expensive than we anticipate, requiring us
to divert capital from other intended purposes or preventing us from building our sales, marketing and distribution capabilities to the desired levels. To be successful we must:
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recruit and retain adequate numbers of effective sales personnel;
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effectively train our sales personnel on AVP-825;
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reach an adequate number of health care providers which treat acute migraine;
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manage geographically dispersed sales and marketing operations; and
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rely on OptiNose to maintain and defend the patent protection and maintain regulatory exclusivity for AVP-825.
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The commercialization of AVP-825 requires us to manage relationships with an increasing number of collaborative partners, suppliers and
third-party contractors. If we are unable to successfully establish and maintain the required infrastructure, either internally or through third parties, and successfully manage an increasing number of relationships, we will have difficulty growing
our business. In addition, we may enter into co-promotion or out-licensing arrangements with other pharmaceutical or biotechnology partners where necessary to reach customers when deemed strategically and economically advisable. To the extent that
we enter into co-promotion or other licensing arrangements, our product revenues are likely to be lower than if we directly marketed and sold AVP-825, and some or all of the revenues we receive will depend upon the efforts of third parties, which
may not be successful. If we are unable to develop and maintain adequate sales, marketing and distribution capabilities, independently or with others, we may not be able to generate significant product revenue or become profitable.
We recently entered into a license agreement with obligations that could require significant capital infusions and could involve many
financial and operating risks.
In July 2013, we entered into an exclusive license agreement for the development and commercialization
of a Breath Powered intranasal delivery system containing low-dose sumatriptan powder to treat acute migraine, now named AVP-825. The licensed territories are the United States, Canada and Mexico. Our obligations pursuant to this license agreement
could require significant capital infusions and could involve many financial and operating risks, including, but not limited to, the following:
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we may have to issue debt or equity securities to meet our obligations under this license agreement, which would dilute our stockholders and could adversely affect the market price of our common stock, and we may issue
securities or rights with contingent payment obligations, which could have variable accounting treatment and negative accounting consequences;
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our obligations pursuant to this license agreement may result in a negative impact on our results of operations and, as such, delay profitability;
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we may encounter difficulties in assimilating and integrating AVP-825 into our existing business, including related technologies, personnel or operations;
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our obligations pursuant to this license agreement may require significant capital infusions and AVP-825 may not generate sufficient value to justify the acquisition cost;
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focus on integrating AVP-825 into our existing business may disrupt our ongoing business, divert resources, increase our expenses and distract our management; and
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we have little or no prior experience in the migraine market and our assumptions surrounding the market, including revenue forecasts, may not be accurate.
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If any of these risks occurred, it could adversely affect our business, financial condition and operating results.
Our co-promotion agreement with Merck may be terminated with or without cause, which could negatively impact our business.
The co-promotion agreement with Merck may be terminated with cause at any time or without cause upon 90 days written notice at any time
after the first year anniversary of the launch date. If the agreement were to be terminated, with or without cause, our business could be negatively impacted, including failure to achieve profitability for the co-promote activity and damage to our
reputation.
We are seeking partners to market NUEDEXTA in the EU, and we will be substantially dependent on any such marketing
partners in those countries to successfully commercialize NUEDEXTA. We may not be successful in establishing a partnership, but even if we are successful in establishing a partnership or decide to launch ourselves, we may be unable to generate
NUEDEXTA revenue in the European market, including through raising PBA awareness among patients and physicians, driving higher rates of physician adoption and obtaining reimbursement and third party payer coverage, our ability to generate
significant revenue or achieve profitability in the European market will be adversely affected.
NUEDEXTA has been approved for
marketing in the EU and our ability to generate significant revenue in the EU is entirely dependent upon our ability to successfully commercialize NUEDEXTA. To be successful in the EU we must:
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maintain successful sales, marketing and educational programs for our targeted physicians and other health care providers;
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raise patient and physician awareness of PBA and encourage physicians to screen patients for the condition;
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obtain adequate reimbursement for NUEDEXTA from a broad range of payers; and
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maintain and defend our patent protection and maintain regulatory exclusivity for NUEDEXTA.
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Our prospects to successfully commercialize NUEDEXTA in the EU will depend, among other things, on our ability to establish successful
arrangements with international distribution and marketing partners. Consummation of NUEDEXTA partnering arrangements is subject to the negotiation of complex contractual relationships and we may not be able to negotiate such agreements on a timely
basis, if at all, or on terms acceptable to us. Where we are successful in entering into these third party arrangements, our revenues from NUEDEXTA sales will be lower than if we commercialized directly, as we will be required to share the revenues
with our licensing, commercialization and development partners. If our commercialization efforts with our partners are unsuccessful or we are unable to launch NUEDEXTA in certain countries, we may realize little or no revenue from sales in the EU
despite having received marketing approval. In the event that we are unsuccessful in obtaining a partner, we may establish a NUEDEXTA sales and marketing sales infrastructure in the EU.
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We are developing AVP-786, a next generation drug product containing deuterium-modified
dextromethorphan. It is possible that studies of AVP-786 may not produce favorable results and future studies utilizing AVP-786 carry certain risks.
We have licensed exclusive, worldwide rights to develop and commercialize deuterium-modified dextromethorphan compounds for the potential
treatment of neurologic and psychiatric disorders, as well as certain rights to other deuterium-modified dextromethorphan compounds. The goal of the AVP-786 program is to deliver therapeutically effective levels of deuterium-modified
dextromethorphan, but with a reduction in the need for an enzyme inhibitor such as quinidine. Although we believe that a drug product containing deuterium-modified dextromethorphan will allow us to significantly reduce the level of quinidine, we are
not certain that AVP-786 will have a similar efficacy profile to AVP-923 and, if approved by the FDA, that the reduction in quinidine will result in improved safety language in the package insert.
We completed a pharmacokinetic study with AVP-786 and, based on this data, we believe that we have identified a formulation of AVP-786 with a
comparable pharmacokinetic profile, and likely a comparable safety and tolerability profile to AVP-923. In June 2013, the FDA agreed to an expedited development pathway for AVP-786, requiring only a limited non-clinical package as part of the
Investigational New Drug application. Although the FDA has agreed to allow us to reference the extensive data generated during the AVP-923 development programs in support of the AVP-786 development programs and regulatory filings, there can be no
assurance that we will be successful developing this investigational drug or that we will obtain regulatory approval domestically or internationally. In addition, our initial discussions regarding the development of AVP-786 have been with the
FDAs Division of Neurology. There can be no assurance that other divisions at the FDA will agree with the expedited development plan discussed with the Division of Neurology.
Additionally, we established a joint steering committee and a joint patent committee which will give Concert input on development and patent
prosecution for a period of time. As a result, our success depends partially on the success of Concert in performing its responsibilities.
We have licensed or sold most of our non-core drug development programs and related assets and these and other possible future transactions
carry certain risks.
We have entered into agreements for the licensing or sale of our non-core assets, including FazaClo, our anthrax
antibody program, and other antibodies in our infectious disease program, as well as docosanol in the U.S. and other markets worldwide. From time to time, we have been and will continue to be engaged in discussions with potential licensing or
development partners for NUEDEXTA for the treatment of PBA and/or AVP-923/AVP-786 for other indications and we may choose to pursue a partnership or license involving NUEDEXTA and/or AVP-923/AVP-786 if the terms are attractive. Additionally, we may
seek to acquire rights to other drugs or technologies. However, all of these transactions involve numerous risks, including:
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diversion of managements attention from normal daily operations of the business;
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disputes over earn-outs, working capital adjustments or contingent payment obligations;
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inability to effectively integrate an acquired business or asset or to achieve the efficiencies or synergies we anticipate;
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insufficient proceeds to offset expenses associated with the transactions; and
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the potential loss of key employees following such a transaction.
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Transactions such as these
carry significant risks where a large portion of the total consideration is contingent upon post-closing events, such as regulatory, commercialization or sales milestones. We may not have control over whether these milestones are met and, if they
are not met, then a potentially large portion of the value of the transaction may not be realized. Disputes may also develop over these and other terms, such as representations and warranties, indemnities, earn-outs, and other provisions in the
transaction agreements. If disputes are resolved unfavorably, our financial condition and results of operations may be adversely affected and we may not realize the anticipated benefits from the transactions.
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Disputes relating to these transactions can lead to expensive and time-consuming litigation and
may subject us to unanticipated liabilities or risks, disrupt our operations, divert managements attention from day-to-day operations, and increase our operating expenses.
The FDAs safety concerns regarding our prior formulation of NUEDEXTA, known as AVP-923, for the treatment of PBA extend to other
clinical indications that we have been pursuing, including DPN pain. Due to these concerns, any future development of AVP-923 or AVP-786 for other indications, including central neuropathic pain in patients with MS, is expected to use an alternative
lower-dose quinidine formulation, which may negatively affect efficacy.
We have completed a single Phase III trial for AVP-923 in the
treatment of DPN pain. In communications regarding the continued development of AVP-923 for this indication, the FDA has stated that certain safety concerns and questions raised in the PBA approvable letter issued in 2006 necessitate the testing of
a low-dose quinidine formulation for the DPN pain indication. Additionally, based on feedback we have received from the FDA on the proposed continued development of AVP-923 for DPN pain, we believe it is likely that two additional large
well-controlled Phase III trials would be needed to support a supplemental NDA filing for this indication. Due to our limited capital resources, we do not expect that we will be able to conduct the trials needed for this indication without
additional capital, a development partner for AVP-923 for DPN pain, or a commercialization partner for NUEDEXTA. Moreover, although we achieved positive results in our initial Phase III trial, an alternative low-dose quinidine formulation may not
yield the same levels of efficacy as seen in the earlier trials or as predicted based on our subsequent pharmacokinetic study. Any decrease in efficacy may be so great that the drug does not demonstrate a statistically significant improvement over
placebo or an active comparator. Additionally, any alternative low-dose quinidine formulation that we develop may not sufficiently satisfy the FDAs safety concerns. If this were to happen, we may not be able to pursue the development of
AVP-923 or AVP-786 for DPN pain or other indications, including central neuropathic pain in patients with MS and symptoms of agitation in patients with Alzheimers disease, or may need to undertake significant additional clinical trials, which
would be costly and cause potentially substantial delays.
If our products infringe the intellectual property rights of others, we may
incur damages and be required to incur the expense of obtaining a license.
Even if we successfully secure our intellectual property
rights, third parties, including other biotechnology or pharmaceutical companies, may allege that our technology infringes on their rights. Intellectual property litigation is costly, and even if we were to prevail in such a dispute, the cost of
litigation could adversely affect our business, financial condition, and results of operations. Litigation is also time consuming and could divert managements attention and resources away from our operations and other activities. If we were to
lose any litigation, in addition to any damages we would have to pay, we could be required to stop the infringing activity or obtain a license. Any required license might not be available to us on acceptable terms, or at all. Some licenses might be
non-exclusive, and our competitors could have access to the same technology licensed to us. If we were to fail to obtain a required license or were unable to design around a competitors patent, we would be unable to sell or continue to develop
some of our products, which would have a material adverse effect on our business, financial condition and results of operations.
We
rely on market research to evaluate the commercial acceptance of NUEDEXTA and AVP-825.
Based on the results of our market research,
we believe that physicians are likely to continue to support the use and adoption of NUEDEXTA for the treatment of PBA. In addition, we believe that physicians are likely to support and adopt the use of AVP-825 for the treatment of acute migraine,
if approved by the FDA. We conduct market research in accordance with Good Marketing Research Practices; however, research findings may not be indicative of the response we might receive from a broader sample of physicians. Moreover, these results
are based on physicians impressions formed from a description of the product or their actual experience from having prescribed the product, which could result in different impressions or intended behaviors compared to other physicians in our
target audience. If the actual use and adoption rates of NUEDEXTA and AVP-825 (if approved by the FDA) are significantly lower than market research or other data suggest, our financial condition and results of operations could be adversely affected.
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It is unclear whether we would be eligible for patent term extension in the U.S. and
supplementary protection certificates in Europe and we therefore do not know whether our patent term can be extended.
Market
exclusivity provisions under the FDCA may also delay the submission or the approval of certain applications for competing product candidates. The FDCA provides three years of non-patent marketing exclusivity for an NDA if new clinical
investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application. This three-year exclusivity covers only the conditions associated with
the new clinical investigations and does not prohibit the FDA from approving abbreviated NDAs (ANDA) for drugs containing the original active agent.
Once the three-year FDCA exclusivity period has passed and after the patents (including the patent extension term, if any) that cover NUEDEXTA
expire or have been invalidated, generic drug companies would be able to introduce competing versions of the drug. If we are unsuccessful in defending our patents against generic competition, our long-term revenues from NUEDEXTA sales may be
significantly less than expected, we may have greater difficulty finding a development partner or licensee for NUEDEXTA and the costs to defend the patents would be significant.
In Europe, based on the European Commissions Article 14(11) of Regulation (EC) No. 726/2004, NUEDEXTA qualifies for ten years of
regulatory data protection. Similar to the U.S., market exclusivity provisions provide for a maximum five-year extension for certain patents through the granting of Supplementary Protection Certificates. Although all countries in the European Union
are required to provide Supplementary Protection Certificates that come into force after expiry of the patent upon which they are based, no unified cross-recognition exists. Applications for Supplementary Protection Certificates must be filed with
each countrys patent office and approved on a country-by-country basis. Although we believe that NUEDEXTA will qualify for this extension and we plan to apply for Supplementary Protection Certificates, we cannot assure you that NUEDEXTA will
be granted any Supplementary Protection Certificates nor, if a Supplementary Protection Certificate is granted, that the term of the extension will be five years.
We may be unable to protect our unpatented proprietary technology and information.
In addition to our patented intellectual property, we also rely on trade secrets and confidential information. We may be unable to effectively
protect our rights to such proprietary technology or information. Other parties may independently develop or gain access to equivalent technologies or information and disclose it for others to use. Disputes may arise about inventorship and
corresponding rights to know-how and inventions resulting from the joint creation or use of intellectual property by us and our corporate partners, licensees, scientific and academic collaborators and consultants. In addition, confidentiality
agreements and material transfer agreements we have entered into with these parties and with employees and advisors may not provide effective protection of our proprietary technology or information or, in the event of unauthorized use or disclosure,
may not provide adequate remedies. If we fail to protect our trade secrets and confidential information, our business and results of operations could be adversely affected.
We face challenges recruiting and retaining members of management and other key personnel.
The industry in which we compete has a high level of employee mobility and aggressive recruiting of skilled employees. This type of
environment creates intense competition for qualified personnel, particularly in commercial, clinical and regulatory affairs, research and development and accounting and finance. Because we have a relatively small management team, the loss of any
executive officers, including the Chief Executive Officer, key members of senior management or other key employees, could adversely affect our operations.
Our operations might be interrupted by the occurrence of a natural disaster or other catastrophic event.
Our principal operations are located in Aliso Viejo, California. We depend on our facilities and on our partners, contractors and vendors for
the continued operation of our business. Natural disasters or other catastrophic events, interruptions in the supply of natural resources, political and governmental changes, wildfires and other fires, floods, explosions, actions of animal rights
activists, earthquakes and civil unrest could disrupt our operations or those of our partners, contractors and vendors. Even though we believe we carry commercially reasonable business
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interruption and liability insurance, and our contractors may carry liability insurance that protect us in certain events, we might suffer losses as a result of business interruptions that exceed
the coverage available under our and our contractors insurance policies or for which we or our contractors do not have coverage. Any natural disaster or catastrophic event could have a significant negative impact on our operations and
financial results. However, we have a disaster recovery plan in place for our information technology infrastructure that generally allows us to have our critical systems operational in as little as four hours of triggering the disaster recovery
plan, depending on the severity of the disaster. Moreover, any such event could adversely impact the commercialization of NUEDEXTA and our research and development programs.
We may become involved in litigation and administrative proceedings that may materially affect us.
From time to time, we may become involved in various legal proceedings relating to matters incidental to the ordinary course of our business,
including commercial, employment, class action, whistleblower and other litigation and claims, and governmental and other regulatory investigations and proceedings. Litigation may also arise as a result of a decline in the market price of our
securities or as a result of disclosures we make with the Securities and Exchange Commission in our periodic reports and documents that are provided to our stockholders. For example, a putative stockholder class action was filed in January 2014,
alleging claims based upon purported deficiencies in disclosures relating to our 2014 Annual Meeting proxy statement, with respect to our equity compensation plan and practices. Although we do not currently expect that this or similar litigation
will have a material effect on us, such matters can be time-consuming, divert managements attention and resources and may cause us to incur significant expenses. Furthermore, because litigation is inherently unpredictable, there can be no
assurance that the results of any of these actions will not have a material adverse effect on our business, results of operations or financial condition.
Risks Relating to Our Industry
The
pharmaceutical industry is highly competitive and most of our competitors have larger operations and greater resources. As a result, we face significant competitive hurdles.
The pharmaceutical and biotechnology industries are highly competitive and subject to significant and rapid technological change. We compete
with hundreds of companies that develop and market products and technologies in areas similar to those in which we are performing our research. For example, we expect that NUEDEXTA may face competition from off-label use of other agents in the
treatment of PBA, even though none of these agents has proven to be safe and effective for the treatment of PBA. Additionally, NUEDEXTA may face direct competition from a generic form of NUEDEXTA, if approved, as described above.
Our competitors may have specific expertise and development technologies that are better than ours and many of these companies, which include
large pharmaceutical companies, either alone or together with their research partners, have substantially greater financial resources, larger research and development capabilities and substantially greater experience than we do. Accordingly, our
competitors may successfully develop competing products. We are also competing with other companies and their products with respect to manufacturing efficiencies and marketing capabilities, areas where we have limited or no direct experience.
Further, AVP-825 will have to compete with existing and any newly developed migraine products or therapies. There are also likely to be
numerous competitors developing new products to treat migraine, which could render AVP-825 obsolete or non-competitive.
If we fail to
comply with regulatory requirements, regulatory agencies may take action against us, which could significantly harm our business.
Marketed products, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for
these products, are subject to continual requirements and review by the FDA, the EMA and other regulatory bodies. In addition, regulatory authorities subject a marketed product, its manufacturer and the manufacturing facilities to ongoing review and
periodic inspections. We are subject to ongoing FDA requirements, including required submissions of safety and other post-market information and reports, registration requirements, current Good Manufacturing Practices (cGMP) regulations,
requirements regarding the distribution of samples to physicians and recordkeeping requirements.
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The cGMP regulations also include requirements relating to quality control and quality assurance,
as well as the corresponding maintenance of records and documentation. We rely on the compliance by our contract manufacturers with cGMP regulations and other regulatory requirements relating to the manufacture of products. We are also subject to
state laws and registration requirements covering the distribution of our products. If we fail to comply with any of these requirements, we may be subject to action by regulatory agencies, which could negatively affect our business.
Regulatory agencies may also change existing requirements or adopt new requirements or policies. We may be slow to adapt or may not be able to
adapt to these changes or new requirements.
There are a number of difficulties and risks associated with clinical trials and our
trials may not yield the expected results.
There are a number of difficulties and risks associated with conducting clinical trials.
For instance, we may discover that a product candidate does not exhibit the expected therapeutic results, may cause harmful side effects or have other unexpected characteristics that may delay or preclude regulatory approval or limit commercial use
if approved. It typically takes several years to complete a late-stage clinical trial and a clinical trial can fail at any stage of testing. If clinical trial difficulties or failures arise, our product candidates may never be approved for sale or
become commercially viable.
In addition, the possibility exists that:
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the results from earlier clinical trials may not be predictive of results that will be obtained from subsequent clinical trials, particularly larger trials;
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institutional review boards or regulators, including the FDA, may hold, suspend or terminate our clinical research or the clinical trials of our product candidates for various reasons, including noncompliance with
regulatory requirements or if, in their opinion, the participating subjects are being exposed to unacceptable health risks;
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subjects may drop out of our clinical trials;
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our non-clinical studies or clinical trials may produce negative, inconsistent or inconclusive results, and we may decide, or regulators may require us, to conduct additional preclinical studies or clinical trials;
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trial results derived from top-line data, which is based on a preliminary analysis of efficacy and safety data related to primary and secondary endpoints, may change following a more comprehensive review of the complete
data set derived from a particular clinical trial or may change due to FDA requests to analyze the data differently;
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the cost of our clinical trials may be greater than we currently anticipate and clinical trials may take longer than expected to enroll patients and complete, particularly for progressive diseases such as MS where our
drug candidates are primarily aimed at treating associated symptoms and not the underlying disease itself; and
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there could be a delay in initiating our clinical trials.
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It is possible that earlier
clinical and non-clinical trial results may not be predictive of the results of subsequent clinical trials. If earlier clinical and/or non-clinical trial results cannot be replicated or are inconsistent with subsequent results, our development
programs may be cancelled or deferred. In addition, the results of these prior clinical trials may not be acceptable to the FDA or similar foreign regulatory authorities because the data may be incomplete, outdated or not otherwise acceptable for
inclusion in our submissions for regulatory approval.
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Additionally, the FDA has substantial discretion in the approval process and may reject our data,
disagree with our interpretations of regulations, draw different conclusions from our clinical trial data or ask for additional information at any time during their review.
Although we would work to be able to fully address any such FDA concerns, we may not be able to resolve all such matters favorably, if at all.
Disputes that are not resolved favorably could result in one or more of the following:
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delays in our ability to submit an NDA;
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the refusal by the FDA to accept for filing any NDA we may submit;
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requests for additional studies or data;
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delays in obtaining an approval;
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the rejection of an application; or
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the approval of the drug, but with restrictive labeling that could adversely affect the commercial market.
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If we do not receive regulatory approval to sell our product candidates or cannot successfully commercialize our product candidates, we may
not be able to generate sufficient revenues or achieve or maintain profitability.
We face uncertainty related to healthcare reform,
pricing and reimbursement, which could reduce our revenue.
In the United States, President Obama signed in March 2010 the Patient
Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively, PPACA), which is expected to substantially change the way health care is financed by both governmental and
private payers. PPACA provides for changes to extend medical benefits to those who currently lack insurance coverage, encourages improvements in the quality of health care items and services, and significantly impacts the U.S. pharmaceutical
industry in a number of ways, further listed below. By extending coverage to a larger population, PPACA may substantially change the structure of the health insurance system and the methodology for reimbursing medical services, drugs and devices.
These structural changes, as well as other changes that may be made as part of deficit and debt reduction efforts in Congress, could entail modifications to the existing system of private payers and government programs, such as Medicare, Medicaid
and State Childrens Health Insurance Program, as well as the creation of a government-sponsored healthcare insurance source, or some combination of both. Such restructuring of the coverage of medical care in the United States could impact the
extent of reimbursement for prescribed drugs, including our product candidates, biopharmaceuticals, and medical devices. While the constitutionality of key provisions of the Healthcare Reform Act were recently upheld by the Supreme Court,
legislative changes to it remain possible. We expect that the Healthcare Reform Act, as currently enacted or as it may be amended in the future, and other healthcare reform measures that may be adopted in the future could have a material adverse
effect on our industry in general and on our ability to maintain or increase our product sales, successfully commercialize our product candidates or could limit or eliminate our future spending on development projects. Some of the specific
PPACA provisions, among other things:
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Establish annual, non-deductible fees on any entity that manufactures or imports certain branded prescription drugs and biologics;
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Increase minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program;
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Extend manufacturers Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations or extension of statutory rebates to a broader patient population;
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Establish a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research;
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Require manufacturers to participate in a coverage gap discount program, under which they must agree to offer 50 percent point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries
during their coverage gap period, as a condition for the manufacturers outpatient drugs to be covered under Medicare Part D; and
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Revised the definition of average manufacturer price by changing the classes of purchasers included in the calculation, and expanded the entities eligible for discounted 340B pricing
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A majority of sales of NUEDEXTA come from institutional settings. Any adverse change in
reimbursement policy affecting patients, providers and payers in institutional settings could have a material and adverse impact on our business.
If future reimbursement for NUEDEXTA or any other approved product candidates, if any, is substantially less than we project, or rebate
obligations associated with them are substantially increased, our business could be materially and adversely impacted.
Sales of NUEDEXTA
for treatment of patients with PBA will depend in part on the availability of coverage and reimbursement from third-party payers such as government insurance programs, including Medicare and Medicaid, private health insurers, health maintenance
organizations and other health care related organizations. Accordingly, coverage and reimbursement may be uncertain. Adoption of NUEDEXTA by the medical community may be limited if third-party payers will not offer coverage. Cost control initiatives
may decrease coverage and payment levels for NUEDEXTA and, in turn, the price that we will be able to charge. We are unable to predict all changes to the coverage or reimbursement methodologies that will be applied by private or government payers to
NUEDEXTA. Any denial of private or government payer coverage of NUEDEXTA could harm our business and reduce our revenue.
In addition,
both the federal and state governments in the United States and foreign governments continue to propose and pass new legislation affecting coverage and reimbursement policies, which are designed to contain or reduce the cost of health care, as well
as hold public hearings on these matters, which has resulted in certain private companies dropping the prices of their drugs. Further federal and state proposals and healthcare reforms are likely, which could limit the prices that can be charged for
the product candidates that we develop and may further limit our commercial opportunity. There may be future changes that result in reductions in current coverage and reimbursement levels for our products, if commercialized, and we cannot predict
the scope of any future changes or the impact that those changes would have on our operations.
If we fail to obtain regulatory
approval in foreign jurisdictions, we would not be able to market our products abroad and our revenue prospects would be limited.
We
are seeking to have our products or product candidates marketed outside the United States. In order to market our products in the EU and many other foreign jurisdictions, we must obtain separate regulatory approvals and comply with numerous and
varying regulatory requirements. The approval procedure varies among countries and jurisdictions and can involve additional testing. The time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory
approval processes may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all, and may not qualify or be accepted for accelerated review in foreign countries. For
example, our development partner in Japan encountered significant difficulty in seeking approval of docosanol in that country and was forced to abandon efforts to seek approval in that country. Approval by the FDA does not ensure approval by
regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or jurisdictions or by the FDA. We may not be able to file for
regulatory approvals and may not receive necessary approvals to commercialize our products in any market. The failure to obtain these approvals could materially adversely affect our business, financial condition and results of operations.
We rely on insurance companies to mitigate our exposure for business activities, including developing and marketing pharmaceutical products
for human use.
The conduct of our business, including the testing, marketing and sale of pharmaceutical products, involves the risk
of liability claims by consumers, stockholders, and other third parties including products in which we co-promote. Although we maintain various types of insurance, including product liability and director and officer liability, claims can be high
and our insurance may not sufficiently cover our actual liabilities. If liability claims were made against us, it is possible that our insurance carriers may deny, or attempt to deny, coverage in certain
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instances. If a lawsuit against us is successful, then the lack or insufficiency of insurance coverage could materially and adversely affect our business and financial condition. Furthermore,
various distributors of pharmaceutical products require minimum product liability insurance coverage before their purchase or acceptance of products for distribution. Failure to satisfy these insurance requirements could impede our ability to
achieve broad distribution of our products and the imposition of higher insurance requirements could impose additional costs on us. Additionally, we are potentially at risk if our insurance carriers become insolvent. Although we have historically
obtained coverage through highly rated and capitalized firms, there can be no assurance that we will be able to maintain coverage under existing policies at the current rates or purchase insurance under new policies at reasonable rates.
If we market products in a manner that violates health care fraud and abuse laws, we may be subject to civil and criminal penalties, which
may adversely affect our business, financial condition and results of operations.
We are subject to healthcare fraud and abuse
regulation and enforcement by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:
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the federal healthcare programs Anti-Kickback Law (as amended by the PPACA, which modified the intent requirement of the Anti-Kickback Law so that a person or entity no longer needs to have actual knowledge of the
statute or specific intent to violate it), which prohibits, among other things, persons from soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or
the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;
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federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers that
are false or fraudulent and, under the PPACA, the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims
statutes;
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the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false
statements relating to healthcare matters; and
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state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payer, including commercial insurers.
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In addition, the compliance environment is changing as some states mandate implementation of commercial compliance programs
to ensure compliance with these laws. The PPACA also imposes new reporting and disclosure requirements on drug manufacturers for any transfer of value made or distributed to prescribers and other healthcare providers and such information
will be made publicly available in a searchable format. Drug manufacturers are required to begin collecting required information on August 1, 2013 and to submit reports disclosing any investment interests held by physicians and their immediate
family members from August through December of 2013 by March 31, 2014. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (and up to an aggregate of $1 million per year for
knowing failures), for all payments, transfers of value or ownership or investment interests not reported in an annual submission. PPACA also requires pharmaceutical manufacturers and distributors to provide the U.S. Department of Health
and Human Services with an annual report on the drug samples they provide to physicians. There has also been a recent trend of increased federal and state regulation of payments made to physicians for marketing, including the tracking and reporting
of gifts, compensation, and other remuneration to physicians. The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with multiple jurisdictions with different compliance and/or
reporting requirements increases the possibility that a healthcare company may run afoul of one or more of the requirements.
If our
operations are found to be in violation of any of the laws described above or any other domestic or foreign laws or governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines,
exclusion from governmental health care programs, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of
these laws is increased by the fact that many of them
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have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Even if we are not found to be in violation of any of
the laws described above or any other domestic or foreign laws or governmental regulations that apply to us, any action against us for violation of these laws could cause us to incur significant legal expenses and divert our managements
attention from the operation of our business.
We may incur significant liability if it is determined that we are promoting the
off-label use of drugs.
We have taken numerous steps to ensure compliance is a high priority throughout the
organization and we believe that our communications regarding our products are in compliance with the relevant regulatory requirements. However, the FDA or another regulatory authority may disagree.
Responding to government investigations, defending any claims raised, and any resulting fines, restitution, damages and penalties, settlement
payments or administrative actions, as well as any related actions brought by stockholders or other third parties, could have a material impact on our reputation, business and financial condition and divert the attention of our management from
operating our business. Our distribution and contracting partners may also be the subject of regulatory investigations involving, or remedies or sanctions for, off-label promotion of products we have licensed to them, or for which they provide
vendor support services, which may have an adverse impact on sales of such licensed products, or indemnification obligations, which may, in turn, have a material adverse effect on our business, financial condition and results of operations and could
cause the market value of our common shares to decline. The risks of a regulatory investigation are increased by the practice of some stock market participants to publicly issue reports alleging compliance violations. A report of this nature
was recently issued regarding the Companys practices.
Companies may not promote drugs for off-label
uses that is, uses that are not described in the products labeling and that differ from those approved by the FDA or other applicable regulatory agencies. Physicians may prescribe drug products for off-label uses, and such
off-label uses are common across medical specialties. Although the FDA and other regulatory agencies do not regulate a physicians choice of treatments for a given medical condition, the FDA and other regulatory agencies do restrict
communications by pharmaceutical companies and their sales representatives regarding dissemination of information concerning off-label use. The FDA and other regulatory agencies actively enforce regulations prohibiting promotion of product for
off-label uses and the promotion of products for which marketing authorization has not been obtained. A company that is found to have promoted product for off-label uses may be subject to significant liability, including civil and administrative
remedies as well as criminal sanctions. Notwithstanding the regulatory restrictions on off-label promotion, the FDA and other regulatory authorities allow companies to engage in truthful, non-misleading, and non-promotional scientific exchange with
health care professionals concerning their products.
Risks Related to Reliance on Third Parties
We depend on third parties to manufacture, package and distribute compounds for our drugs and drug candidates. The failure of these third
parties to perform successfully could harm our business.
We have utilized, and intend to continue utilizing, third parties to
manufacture, package and distribute NUEDEXTA and the active pharmaceutical ingredient (API) for docosanol 10% cream and to provide clinical supplies of our drug candidates. We will also utilize third parties to manufacture, package and
distribute AVP-825. We have no experience in manufacturing and do not have any manufacturing facilities. Currently, we have sole suppliers for the API for docosanol and NUEDEXTA, and a sole manufacturer for the finished form of NUEDEXTA. In
addition, these materials are custom-made and available from only a limited number of sources. In particular, there may be a limited supply source for APIs in NUEDEXTA. Although we maintain a significant supply of APIs on hand, any sustained
disruption in this supply could adversely affect our operations and revenues. Any material disruption in manufacturing could cause a delay in shipments and possible loss of sales. We do not have any long-term agreements in place with our current
docosanol supplier or NUEDEXTA API suppliers. If we are required to change manufacturers, we may experience delays associated with finding an alternate manufacturer that is properly qualified to produce supplies of our products and product
candidates in accordance with FDA requirements and our specifications. Any delays or difficulties in obtaining APIs or in manufacturing, packaging or distributing NUEDEXTA could negatively affect our sales revenues, as well as delay our clinical
trials of AVP-923
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for DPN pain, MS-related pain or other potential indications. The third parties we rely on for manufacturing and packaging are also subject to regulatory review, and any regulatory compliance
problems with these third parties could significantly delay or disrupt our commercialization activities. Additionally, macro-economic conditions may adversely affect these third parties, causing them to suffer liquidity or operational problems. If a
key third party vendor becomes insolvent or is forced to lay off workers assisting with our projects, our results and development timing could suffer.
Because we depend on clinical research centers and other contractors for clinical testing and for certain research and development
activities, the results of our clinical trials and such research activities are, to a certain extent, beyond our control.
The nature
of clinical trials and our business strategy of outsourcing a substantial portion of our research require that we rely on clinical research centers and other contractors to assist us with research and development, clinical testing activities,
patient enrollment and regulatory submissions to the FDA. As a result, our success depends partially on the success of these third parties in performing their responsibilities. Although we pre-qualify our contractors and we believe that they are
fully capable of performing their contractual obligations, we cannot directly control the adequacy and timeliness of the resources and expertise that they apply to these activities. Additionally, macro-economic conditions may affect our development
partners and vendors, which could adversely affect their ability to timely perform their tasks. If our contractors do not perform their obligations in an adequate and timely manner, the pace of clinical development, regulatory approval and
commercialization of our drug candidates could be significantly delayed and our prospects could be adversely affected.
We generally do
not control the development of compounds licensed to third parties and, as a result, we may not realize a significant portion of the potential value of any such license arrangements.
Under our typical out-license arrangement we have no direct control over the development of drug candidates and have only limited, if any,
input on the direction of development efforts. These development efforts are made by our licensing partner, and if the results of their development efforts are negative or inconclusive, it is possible that our licensing partner could elect to defer
or abandon further development of these programs. We similarly rely on licensing partners to obtain regulatory approval for docosanol in foreign jurisdictions. Because much of the potential value of these license arrangements is contingent upon the
successful development and commercialization of the licensed technology, the ultimate value of these licenses will depend on the efforts of licensing partners. If our licensing partners do not succeed in developing the licensed technology for
whatever reason, or elect to discontinue the development of these programs, we may be unable to realize the potential value of these arrangements. If we were to license NUEDEXTA to a third party or a development partner, it is likely that much of
the long-term success of that drug will similarly depend on the efforts of the licensee.
We expect to rely entirely on third parties
for international registration, sales and marketing efforts.
In the event that we attempt to enter into international markets, in
some instances we expect to rely on collaborative partners to obtain regulatory approvals and to market and sell our product(s) in those markets. We have not yet entered into any collaborative arrangement with respect to marketing or selling
NUEDEXTA, with the exception of one such agreement relating to Israel. We may be unable to enter into any other arrangements on terms favorable to us, or at all, and even if we are able to enter into sales and marketing arrangements with
collaborative partners, we cannot assure you that their sales and marketing efforts will be successful. If we are unable to enter into favorable collaborative arrangements with respect to marketing or selling NUEDEXTA in international markets, or if
our collaborators efforts are unsuccessful, our ability to generate revenues from international product sales will suffer.
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Risks Relating to Our Stock
Our stock price has historically been volatile and we expect that this volatility will continue for the foreseeable future.
The market price of our common stock has been, and is likely to continue to be, highly volatile. This volatility can be attributed to many
factors independent of our operating results, including the following:
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comments made by securities analysts, including changes in their recommendations;
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short selling activity by certain investors, including any failures to timely settle short sale transactions;
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announcements by us of financing transactions and/or future sales of equity or debt securities;
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sales of our common stock by our directors, officers or significant stockholders, including sales effected pursuant to predetermined trading plans adopted under the safe-harbor afforded by Rule 10b5-1;
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negative opinions that are misleading and inaccurate regarding our business, management or future prospects published by certain market participants intent on putting downward pressure on our stock price;
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regulatory developments in the U.S. and foreign countries, including the passage of laws, rules or regulations relating to healthcare and reimbursement or the public announcement of inquiries relating to these subjects;
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lack of volume of stock trading leading to low liquidity; and
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market and economic conditions.
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If a substantial number of shares are sold into the market at
any given time, particularly following any significant announcements or large swings in our stock price (whether sales are under our existing shelf registration statements, from an existing stockholder, or the result of warrant or stock
options exercised), there may not be sufficient demand in the market to purchase the shares without a decline in the market price for our common stock. Moreover, continuous sales into the market of a number of shares in excess of the typical trading
volume for our common stock, or even the availability of such a large number of shares, could depress the trading market for our common stock over an extended period of time.
Additionally, our stock price has been volatile as a result of announcements of regulatory actions and decisions relating to NUEDEXTA, and
periodic variations in our operating results. We expect that our operating results will continue to vary from quarter to quarter, particularly as we continue to market NUEDEXTA and report sales results. Our operating results and prospects may also
vary depending on the status of our partnering arrangements.
As a result of these factors, we expect that our stock price may continue to
be volatile and investors may be unable to sell their shares at a price equal to, or above, the price paid. Additionally, any significant drops in our stock price could give rise to stockholder lawsuits, which are costly and time consuming to defend
against and which may adversely affect our ability to raise capital while the suits are pending, even if the suits are ultimately resolved in our favor. We have, from time to time, been a party to such suits and although none have been material to
date, there can be no assurance that any such suit will not have an adverse effect on us.
If our internal controls over financial
reporting are not considered effective, our business and stock price could be adversely affected.
Section 404 of the
Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal controls over financial reporting as of the end of each fiscal year, and to include a management report assessing the effectiveness of our internal controls over
financial reporting in our annual report on Form 10-K for that fiscal year. Section 404 also requires our independent registered public accounting firm to attest to, and report on, managements assessment of our internal controls over
financial reporting.
Our management, including our chief executive officer and principal financial officer, does not expect that our
internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objectives will
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be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud involving a company have been, or will be, detected. The design of any system of controls is based
in part on certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become ineffective because of
changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We cannot
assure you that we or our independent registered public accounting firm will not identify a material weakness in our internal controls in the future. A material weakness in our internal controls over financial reporting would require management and
our independent registered public accounting firm to consider our internal controls as ineffective. If our internal controls over financial reporting are not considered effective, we may experience a loss of public confidence, which could have an
adverse effect on our business and on the market price of our common stock.
Because we do not expect to pay dividends in the
foreseeable future, you must rely on stock appreciation for any return on your investment.
We have paid no cash dividends on our
common stock to date, and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future, and payment of cash
dividends, if any, will also depend on our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. In addition, under the terms of our Loan Agreement, we are
precluded from paying cash dividends without the prior written consent of the lenders. Accordingly, the success of your investment in our common stock will likely depend entirely upon any future appreciation. There is no guarantee that our common
stock will appreciate in value or even maintain the price at which you purchased your shares, and you may not realize a return on your investment in our common stock.
Our corporate governance documents and Delaware law may delay or prevent an acquisition of us that stockholders may consider favorable,
which could decrease the value of our common stock.
Our certificate of incorporation and bylaws and Delaware law contain provisions
that could make it more difficult for a third party to acquire us without the consent of our board of directors. These provisions include restrictions on the ability of our stockholders to remove directors and supermajority voting requirements for
stockholders to amend our organizational documents and a classified board of directors. In addition, our board of directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a
potential hostile acquirer. Delaware law, for instance, also imposes some restrictions on mergers and other business combinations between any holder of 15% or more of our outstanding common stock and us. Although we believe these provisions protect
our stockholders from coercive or otherwise unfair takeover tactics and thereby provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our board of directors, these provisions apply even if the offer
may be considered beneficial by some stockholders.