Item 1A. – RISK FACTORS
You should carefully consider the following risk factors
before you decide to invest in our Company and our business because these risk factors may have a significant impact on our business,
operating results, financial condition, and cash flows. The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business
operations. If any of the following risks actually occurs, our business, financial condition and results of operations could be
materially and adversely affected.
Risks Related To Our Business
We have a history of net losses, expect to incur additional
net losses and may never achieve or sustain profitability.
We have incurred net losses on an annual basis since our inception.
As of June 30, 2014 we had an accumulated deficit of approximately $542.7 million. We expect to incur additional net losses in
2014 and beyond, as our research, development, preclinical testing, clinical trial and commercial activities continue.
Currently, we generate a significant amount of our revenue from
product sales and it is possible that we will never have substantially more product sales revenue. We also generate limited revenue
from collaborators through license and milestone fees, and maintenance fees that we receive under the LFRP. To become profitable,
we must either generate higher product sales from the commercialization of KALBITOR and other product candidates, such as DX-2930,
increase receipts from our licensees’ product candidates in our LFRP, or reduce costs. It is possible that we will never
have sufficient product sales revenue or receive sufficient receipts on our licensed product candidates or licensed technology
in order to achieve or sustain future profitability.
Our revenues and operating results have fluctuated significantly
in the past, and we expect this to continue in the future.
Our revenues and operating results have fluctuated significantly
on a quarterly and year to year basis. We expect these fluctuations to continue in the future. Fluctuations in revenues and operating
results will depend on many factors including:
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the amount of future sales of KALBITOR, gross to net sales adjustments and costs to manufacture and commercialize the product;
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the rate and consistency of KALBITOR treatments by certain patients that experience and treat frequent HAE attacks during a
given period and over time;
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the amount of future sales of KALBITOR ordered by the distribution channel in a given period;
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the cost and timing of our research and development, manufacturing and commercialization activities;
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the establishment of new collaboration and licensing arrangements;
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the timing and results of the clinical trials for DX-2930;
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the timing, receipt and amount of payments, if any, from current and prospective collaborators and licensees, including the
completion of certain milestones by licensees with product candidates in the LFRP; and
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the effect of revenue recognition and other generally accepted accounting principles.
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Our revenues and costs in any period are not reliable indicators
of our future operating results. If the revenues we recognize are less than the revenues we expect for a given fiscal period, then
we may be unable to reduce our expenses quickly enough to compensate for the shortfall. In addition, our fluctuating operating
results may fail to meet the expectations of securities analysts or investors which may cause the price of our common stock to
decline.
We may need additional capital in the future and may be
unable to generate the funding that we will need to sustain our operations.
We require significant capital for our operations and to develop
and commercialize our product candidates. Our future funding requirements will depend on many factors, including:
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future sales levels of KALBITOR and any other commercial products that we may develop and the profitability of such sales,
if any;
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the timing, progress and cost to develop, obtain regulatory approvals for and commercialize our product candidates;
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maintaining or expanding our existing collaborative and license arrangements and entering into additional arrangements on terms
that are favorable to us;
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the amount and timing of milestone and royalty payments from our collaborators and licensees related to their progress in developing
and commercializing their products;
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the timing of any principal payments of the HC Royalty loans before or at maturity;
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the costs to manufacture, or have third parties manufacture, the materials used in KALBITOR, DX-2930 and any of our other product
candidates;
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competing technological and market developments;
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the costs of prosecuting, maintaining, defending and enforcing our patents and other intellectual property rights;
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the amount and timing of additional capital equipment purchases; and
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the overall condition of the financial markets.
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We expect that existing cash, cash equivalents and investments
together with anticipated cash flow from product sales and existing product development, collaborations and license fees will be
sufficient to support our current operations for at least the next twelve months. Existing funds may be used to prepay some
or all of the debt to HC Royalty, which would enable us to use cash flow from our LFRP to fund our research and development efforts.
We may need additional funds if our cash requirements exceed our current expectations, if we generate less revenue than we expect
or, if we pursue additional product development. We may seek additional funding through collaborative arrangements, public
or private financings, or other means. We may not be able to obtain financing on acceptable terms or at all, and we may not
be able to enter into additional collaborative arrangements. Arrangements with collaborators or others may require us to
relinquish rights to certain of our technologies, product candidates or products. The terms of any financing may adversely
affect the holdings or the rights of our stockholders. If we need additional funds and are unable to obtain funding on a
timely basis, we would curtail significantly our research, development or commercialization programs in an effort to provide sufficient
funds to continue our operations, which could adversely affect our business prospects.
Any new biopharmaceutical product candidates we develop,
including DX-2930, must undergo rigorous clinical trials which could substantially delay or prevent their development or marketing.
We are developing DX-2930, a fully human monoclonal
antibody inhibitor of plasma kallikrein, which is a product candidate to treat HAE prophylactically. Before we can
commercialize DX-2930, or any biopharmaceutical product candidate, we must engage in a rigorous clinical trial and regulatory
approval process mandated by the FDA and analogous foreign regulatory agencies. This process is lengthy and expensive, and
approval is never certain. Positive results from preclinical studies and early clinical trials do not ensure positive results
in late stage clinical trials designed to permit application for regulatory approval. We cannot accurately predict when
planned clinical trials will begin or be completed. Many factors affect patient enrollment, including the size of the patient
population, the proximity of patients to clinical sites, the eligibility criteria for the trial, alternative therapies,
competing clinical trials and new drugs approved for the conditions that we are investigating. Therefore, our future trials
may take longer to enroll patients than we anticipate. Such delays may increase our costs and slow down our product
development and the regulatory approval process. Our product development costs will also increase if we need to perform more
or larger clinical trials than planned. The occurrence of any of these events will delay our ability to commercialize
products, generate revenue from product sales and impair our ability to become profitable, which may cause us to have
insufficient capital resources to support our operations.
Products that we, or our collaborators, develop could take a
significantly longer time to gain regulatory approval than we expect or may never gain approval. If we or our collaborators do
not receive these necessary approvals we will not be able to generate substantial product or royalty revenues and may not become
profitable. We and our collaborators may encounter significant delays or excessive costs in our efforts to secure regulatory approvals.
Factors that raise uncertainty in obtaining these regulatory approvals include the following:
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we, or our collaborators, must demonstrate through clinical trials that the proposed product is safe and effective for its
intended use;
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we have limited experience in conducting the clinical trials necessary to obtain regulatory approval; and
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data obtained from preclinical and clinical activities are subject to varying interpretations, which could delay, limit or
prevent regulatory approvals.
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Regulatory authorities may delay, suspend or terminate clinical
trials at any time if they believe that the patients participating in trials are being exposed to unacceptable health risks or
if they find deficiencies in the clinical trial procedures. There is no guarantee that we will be able to resolve such issues,
either quickly, or at all. In addition, our or our collaborators' failure to comply with applicable regulatory requirements may
result in criminal prosecution, civil penalties and other actions that could impair our ability to conduct our business.
We depend heavily on sales of our lead product, KALBITOR,
which is approved in the United States for treatment of acute attacks of HAE in patients 12 years and older.
Our product sales depend on KALBITOR in the United States and
whether physicians, patients and healthcare payers choose KALBITOR over alternative treatments. The continuing product sales of
KALBITOR and our prospects for increasing product sales and cash flow will depend on multiple factors, including the following:
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the number of patients with HAE who are diagnosed with the disease and identified to us;
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the number of patients with HAE who may be treated with KALBITOR;
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acceptance of KALBITOR in the medical community;
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the frequency of HAE patients' use of KALBITOR to treat their acute attacks of HAE, in particular patients who experience and
treat frequent HAE attacks, and the consistency with which these patients treat with KALBITOR over time;
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HAE patients' ability to obtain and maintain sufficient coverage or reimbursement by third-party payers for the use of KALBITOR;
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our ability to effectively market and distribute KALBITOR in the United States;
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competition from other products approved for the treatment of HAE;
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the maintenance of marketing approval of KALBITOR in the United States and the receipt and maintenance of marketing approval
from foreign regulatory authorities;
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our maintenance of commercial manufacturing and distribution capabilities for KALBITOR through third-parties; and
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our ability to maintain sufficient inventories to supply KALBITOR for patient use.
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If we are unable to continue sales of KALBITOR in the United
States and commercialize ecallantide in additional countries or if we are significantly delayed or limited in doing so, our business
prospects would be adversely affected.
Because the target patient population of KALBITOR for
treatment of HAE is small and has not been definitively determined, we must be able to successfully identify HAE patients and achieve
a significant market share in order to achieve or maintain profitability.
The prevalence of HAE patients, which has been estimated at
approximately 1 in 50,000 people around the world, has not been definitively determined. There can be no guarantee that any of
our programs will be effective at identifying HAE patients. The number of HAE patients in the United States may turn out to be
lower than estimated or patients may not utilize treatment with KALBITOR for all or any of their acute HAE attacks. All or any
of these factors would adversely affect our results of operations and business prospects.
If HAE patients are unable to obtain and maintain reimbursement
for KALBITOR from government health administration authorities, private health insurers and other organizations, KALBITOR may be
too costly for regular use and our ability to generate product sales would be harmed.
We may not be able to sell KALBITOR on a profitable basis or
our profitability may be reduced if we are required to sell our product at lower than anticipated prices or if reimbursement is
unavailable or limited in scope or amount. KALBITOR is more expensive than traditional drug treatments and most patients require
some form of third party insurance coverage, patient financial assistance provided by us or by a charitable foundation in order
to afford its cost. Our future revenues and profitability will be adversely affected if HAE patients cannot depend on governmental,
private and other third-party payers, such as Medicare and Medicaid in the United States or any other country specific governmental
organizations, to defray the cost of KALBITOR. If these entities refuse to provide coverage and reimbursement with respect to KALBITOR
or impose restrictions on the level of coverage and reimbursement greater than anticipated, KALBITOR may be too costly for general
use, and physicians may not prescribe it.
In addition to potential restrictions on insurance coverage,
the amount of reimbursement for KALBITOR may also reduce our ability to profitably commercialize KALBITOR. In the United States
and elsewhere, there have been, and we expect there will continue to be, actions and proposals by third party payers, including
state and local government payers to control and reduce healthcare costs.
In
recent years, some states have considered legislation that would control the prices of drugs. State Medicaid programs are increasingly
requesting manufacturers to pay supplemental rebates and requiring prior authorization by the state program for use of any drug
for which supplemental rebates are not being paid. Managed care organizations continue to seek price discounts and, in some cases,
to impose restrictions on the coverage of particular drugs. Government efforts to reduce Medicaid expenses may lead to increased
use of managed care organizations by Medicaid programs.
It is possible that we will never have sufficient KALBITOR sales
revenue in order to achieve or sustain future profitability.
Competition and technological change may make our potential
products and technologies less attractive or obsolete.
We compete in the biopharmaceutical industry, which is characterized
by continuous intense competition and rapid technological change. New developments occur and are expected to continue to occur
constantly at a rapid pace. Discoveries or commercial developments by our competitors or others may render some or all of our technologies,
products or potential products obsolete or non-competitive. Many of our competitors have greater financial resources and experience
than we do.
Our business is focused on HAE and other PKM disorders. Therefore,
our principal competitors are companies that either are already marketing products in those indications or are developing new products
for those indications, as described below.
For KALBITOR as a treatment for HAE, our principal competitors
include:
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Manufacturers of corticosteroids, including danazol, which have been used historically and are still used to treat a significant
number of identified HAE patients prophylactically.
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Shire plc— Shire markets its bradykinin receptor antagonist, known as Firazyr® (icatibant), which is administered
subcutaneously. Firazyr is approved in the United States, Europe, and certain other countries for the treatment of acute HAE attacks
in adult patients. The U.S. and EU labels allow for patients to self-administer Firazyr following training by their healthcare
provider. Firazyr has orphan drug designations from the FDA and in Europe.
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In January 2014, Shire completed the acquisition of
ViroPharma Inc., which markets Cinryze
®
, an intravenously-administered, plasma-derived C1-esterase inhibitor. Cinryze
is approved in the US for routine prophylaxis against angioedema attacks in adolescent and adult patients with HAE, and has orphan
drug designation from the FDA. The FDA has also approved product labeling for Cinryze to include self-administration for routine
prophylaxis once a patient is properly trained by his or her healthcare provider. ViroPharma has also received approval in the
EU where the product is approved for the treatment and pre-procedure prevention of angioedema attacks in adults and adolescents
with HAE, and routine prevention of angioedema attacks in adults and adolescents with severe and recurrent attacks of HAE, who
are intolerant to or insufficiently protected by oral prevention treatments or patients who are inadequately managed with repeated
acute treatment. The EU approval includes a self-administration option for appropriately trained patients. ViroPharma is conducting
a Phase 2 trial evaluating subcutaneous administration of Cinryze.
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CSL Behring— CSL Behring markets a plasma-derived C1-esterase inhibitor, known as Berinert
®
, which is
administered intravenously. Berinert is approved in the U.S. for the treatment of acute abdominal, facial or laryngeal attacks
of HAE in adults and adolescents, and has orphan drug designation from the FDA. The FDA has also approved labeling for Berinert
to include self-administration after proper training by a healthcare professional. Berinert is also approved in the EU, Japan and
several rest-of-world markets for the treatment of acute attacks of HAE. CSL Behring announced in December 2013 that they had commenced
an international Phase 3 study of a volume-reduced subcutaneous formulation of C1-INH.
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Salix Pharmaceuticals, Ltd.— Rhucin® is a recombinant C1-esterase inhibitor, which is administered intravenously.
Rhucin was approved in July 2014 in the U.S. for the treatment of acute angioedema attacks in adult and adolescent patients with
HAE.
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Other competitors for the treatment of HAE are companies that
are developing small molecule plasma kallikrein inhibitors, including BioCryst, which completed a Phase 2 clinical trial evaluating
its investigational product for prophylaxis against HAE attacks.
Additionally, a significant number of companies compete with
us in the antibody technology space by offering licenses and/or research services to pharmaceutical and biotechnology companies.
Specifically, our phage display technology is one of several
in vitro
display technologies available to generate libraries
of compounds that can be leveraged to discover new antibody products. Companies that compete with us in the display technology
space include BioInvent, XOMA, Adimab and several others. Additional platforms that pharmaceutical and biotechnology companies
use to identify antibodies that bind to a desired target are in vivo technology platforms which use direct immunization of mice
or other species to generate fully human antibodies. Competitors in this space include GenMab, arGEN-X and several others. There
are also a number of new technologies directed to the generation of candidate compounds with novel scaffolds that may possess similar
properties to monoclonal antibodies.
In addition to the technologies described above, many pharmaceutical
companies have either acquired antibody discovery technologies or developed humanized murine antibodies derived from hybridomas.
Pharmaceutical companies also develop orally available small molecule compounds directed to the targets for which we and others
are seeking to develop antibody, peptide and/or protein products.
Furthermore, we may also experience competition from companies
that have acquired or may acquire other technologies from universities and other research institutions that may affect our competitive
position.
We are dependent on a single contract manufacturer to
produce ecallantide drug substance and another to fill, label and package ecallantide drug product into the final form, which may
adversely affect our ability to commercialize KALBITOR.
We currently rely on Fujifilm to produce the bulk drug substance
used in the manufacture of KALBITOR. Ecallantide drug substance is filled, labeled and packaged into the final form of KALBITOR
drug product by Jubilant Hollister-Stier (JHS) under a commercial supply agreement. Our business faces risks of difficulties with,
and interruptions in, performance by Fujifilm or JHS, the occurrence of which could adversely impact the availability and/or sales
of KALBITOR in the future. The failure of Fujifilm or JHS to supply manufactured product on a timely basis or at all, or to manufacture
our drug substance in compliance with our specifications or applicable quality requirements or in volumes sufficient to meet demand
could adversely affect our ability to sell KALBITOR, could harm our relationships with collaborators or customers and could negatively
affect our revenues and operating results. If the operations of Fujifilm or JHS are disrupted, we may be forced to secure alternative
sources of supply, which may be unavailable on commercially acceptable terms, may cause delays in our ability to deliver products
to customers, may increase our costs and negatively affect our operating results.
In addition, failure to comply with applicable current good
manufacturing practices and other governmental regulations and standards could be the basis for action by the FDA or corresponding
foreign agency to withdraw approval for KALBITOR and for other regulatory action, including recall or seizure of product, fines,
imposition of operating restrictions, total or partial suspension of production or injunctions. For example, in November 2013,
JHS received a Warning Letter from the FDA with respect to matters not specifically associated with KALBITOR, and a subsequent
FDA inspection identified additional issues. JHS is working to resolve the issues raised by the FDA. If JHS fails to correct these
issues, the FDA could impose restrictions on JHS’s manufacturing capabilities, which could adversely affect future “fill
and finish” activities with respect to KALBITOR.
We have a long-term commercial supply agreement with Fujifilm,
under which they have committed to be available to manufacture ecallantide drug substance through 2020, and our commercial supply
agreement with JHS runs through 2018. In addition, our current inventory of “filled and finished” drug product is sufficient
to meet anticipated KALBITOR market demand through late 2015 and our current inventory of unfilled drug substance is sufficient
to meet anticipated KALBITOR market demand through 2018. These estimates are subject to changes in market conditions and other
factors beyond our control. If Fujifilm or JHS is unable to dependably meet our demands for ecallantide drug substance or product,
it could adversely affect our ability to further develop and commercialize KALBITOR, generate revenue from product sales, increase
our costs and negatively affect our operating results.
We may not be able to maintain or expand market acceptance
among the medical community or patients for KALBITOR, which would prevent us from achieving or maintaining profitability in the
future.
We cannot be certain that KALBITOR will continue to maintain
or gain additional market acceptance among physicians, patients, healthcare payers, and others. We cannot predict whether physicians,
other healthcare providers, government agencies or private insurers will prefer other therapies for HAE. Medical doctors' willingness
to prescribe, and patients' willingness to accept and use KALBITOR depends on many factors, including prevalence and severity of
adverse side effects, effectiveness of our marketing strategies and the pricing of KALBITOR, publicity concerning KALBITOR or competing
products, HAE patients’ ability to obtain and maintain third-party coverage or reimbursement, and competition from alternative
treatments. In addition, the number of acute attacks that are treated with KALBITOR will vary from patient to patient depending
upon a variety of factors.
If KALBITOR fails to maintain or increase market acceptance
it would adversely affect our results of operations and business prospects.
If we fail to comply with continuing regulations, we could
lose our approvals to market KALBITOR, and our business would be adversely affected.
We cannot guarantee that we will be able to maintain our regulatory
approval for KALBITOR in the United States. We and our current and future partners, contract manufacturers and suppliers are subject
to rigorous and extensive regulation by the FDA, other federal and state agencies, and governmental authorities in other countries.
These regulations continue to apply after product approval, and cover, among other things, testing, manufacturing, quality control,
labeling, advertising, promotion, adverse event reporting requirements, and export of biologics.
As a condition of approval for marketing KALBITOR in the United
States and other jurisdictions, the FDA or governmental authorities in those jurisdictions may require us to conduct additional
clinical trials. For example, in connection with the approval of KALBITOR in the United States, we have agreed to conduct a Phase
4 clinical study to evaluate immunogenicity and hypersensitivity with exposure to KALBITOR for treatment of acute attacks of HAE.
The FDA can propose to withdraw approval if new clinical data or any other information shows that KALBITOR is not safe for use
or determines that such study is inadequate. We are required to report any serious and unexpected adverse experiences and certain
quality problems with KALBITOR to the FDA and other health agencies. We, the FDA or another health agency may have to notify healthcare
providers of any such developments. The discovery of any previously unknown problems with KALBITOR or its manufacturer may result
in updates to the product label, restrictions on KALBITOR commercialization and the manufacturer or manufacturing facility, including
withdrawal of KALBITOR from the market. Certain changes to an approved product, including the way it is manufactured or promoted,
often require prior regulatory approval before the product as modified may be marketed.
Our third-party manufacturing facilities were subjected to inspection
prior to grant of marketing approval and are subject to continued review and periodic inspections by the regulatory authorities.
Any third party vendor that we would use to manufacture KALBITOR for sale must also be licensed by applicable regulatory authorities.
Although we have established a corporate compliance program, we cannot guarantee that we or our third party vendors are and will
continue to be in compliance with all applicable laws and regulations. Failure to comply with the laws, including statutes and
regulations, administered by the FDA or other agencies could result in:
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administrative and judicial sanctions, including warning letters;
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fines and other civil penalties;
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withdrawal of a previously granted approval to sell;
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interruption of production;
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operating restrictions;
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product recall or seizure; injunctions; and
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The discovery of previously unknown problems with KALBITOR,
or with the facility used to produce the product, could result in a regulatory authority imposing restrictions on us, or could
cause us to voluntarily adopt such restrictions, including withdrawal of KALBITOR from the market.
If we do not maintain our regulatory approval to sell KALBITOR
in the United States, our results of operations and business prospects will be materially harmed.
If the use of KALBITOR is found to harm people, or is
perceived to harm patients even when such harm is unrelated to KALBITOR, our regulatory approvals could be revoked or otherwise
negatively affected and we could be subject to costly and damaging product liability claims.
The testing, manufacturing, marketing and sale of drugs for
use in humans exposes us to product liability risks. Side effects and other problems from using KALBITOR could:
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lessen the frequency with which physicians decide to prescribe KALBITOR;
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encourage physicians to stop prescribing KALBITOR to their patients who previously had been prescribed KALBITOR;
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cause serious adverse events and give rise to product liability claims against us; and
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result in our need to withdraw or recall KALBITOR from the marketplace.
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The likelihood of occurrence of these risks is unknown at this
time.
We have tested KALBITOR in only a limited number of patients.
As more patients begin to use KALBITOR, new risks and side effects may be discovered. Risks previously viewed as inconsequential
could be determined to be significant. Previously unknown risks and adverse effects of KALBITOR may be discovered in connection
with unapproved, or off-label, uses of KALBITOR. We do not promote, or in any way support or encourage the promotion of KALBITOR
for off-label uses in violation of relevant law, but current regulations allow physicians to use products for off-label uses. In
the event of any new risks or adverse effects discovered as new patients are treated for HAE, regulatory authorities may modify
or revoke their approvals and we may be required to conduct additional clinical trials, make changes in labeling of KALBITOR, reformulate
KALBITOR or make changes and obtain new approvals for our and our suppliers' manufacturing facilities. We may experience a significant
drop in the potential sales of KALBITOR, an increase in costs, experience harm to our reputation and the reputation of KALBITOR
in the marketplace or become subject to government investigations or lawsuits, including class actions. Any of these results could
decrease or prevent any sales of KALBITOR or substantially increase the costs and expenses of commercializing and marketing KALBITOR.
We may be sued by people who use KALBITOR, whether as a prescribed
therapy, during a clinical trial, during an investigator initiated study, or otherwise. Any informed consents or waivers obtained
from people who enroll in our trials or use KALBITOR may not protect us from liability or litigation. Our product liability insurance
may not cover all potential types of liabilities or may not cover certain liabilities completely. Moreover, we may not be able
to maintain our insurance on acceptable terms. Negative publicity relating to the use of KALBITOR or a product candidate, or to
a product liability claim, may make it more difficult, or impossible, for us to market and sell KALBITOR. As a result of these
factors, a product liability claim, even if successfully defended, could have a material adverse effect on our business, financial
condition or results of operations.
During the course of treatment, patients may suffer adverse
events, including death, for reasons that may or may not be related to KALBITOR. Such events could subject us to costly litigation,
require us to pay substantial amounts of money to injured patients, delay, negatively impact or end our opportunity to receive
or maintain regulatory approval to market KALBITOR, or require us to suspend or abandon our commercialization efforts. Even in
a circumstance in which we do not believe that an adverse event is related to KALBITOR, the investigation into the circumstance
may be time-consuming, costly or inconclusive. These investigations may interrupt our sales efforts, delay our regulatory approval
process in other countries, or impact and limit the type of regulatory approvals KALBITOR receives or maintains.
If we are unable to maintain effective sales, marketing
and distribution capabilities, or enter into agreements with third parties to do so, we will be unable to successfully commercialize
KALBITOR.
We are marketing and selling KALBITOR ourselves in the United
States and have only limited experience with marketing, sales or distribution of drug products. If we are unable to adequately
sell, market and distribute KALBITOR, either ourselves or by entering into agreements with others, or to maintain such capabilities,
we will not be able to successfully sell KALBITOR. In that event, we will not be able to generate significant product sales. We
cannot guarantee that we will be able to maintain our own capabilities or enter into and maintain any purchase and distribution
agreements with third-parties on acceptable terms, if at all.
In the United States, we sell KALBITOR to customers including
wholesalers, specialty pharmacies and a limited number of hospitals. Our distributors do not set or determine demand for KALBITOR.
We expect our distribution arrangements to continue for the foreseeable future through an extension or replacement of our current
agreements. Our ability to successfully commercialize KALBITOR will depend, in part, on the extent to which we are able to provide
adequate distribution of KALBITOR to patients through our distributors. It is possible that our distributors could change their
policies or fees, or both, sometime in the future. This could result in their refusal to distribute smaller volume products such
as KALBITOR, or cause higher product distribution costs, lower margins or the need to find alternative methods of distributing
KALBITOR. Although we have contractual remedies to mitigate these risks and we also believe we could find alternative distributors
on relatively short notice, our product sales during that period of time may suffer and we may incur additional costs to replace
a distributor. A significant reduction in product sales to our distributors, any cancellation of orders they have made with us
or any failure to pay for the products we have shipped to them could materially and adversely affect our results of operations
and financial condition.
We have hired sales and marketing professionals for the commercialization
of KALBITOR throughout the United States. Even with these sales and marketing personnel, we may not have the necessary size and
experience of the sales and marketing force and the appropriate distribution capabilities necessary to successfully market and
sell KALBITOR. Establishing and maintaining sales, marketing and distribution capabilities are expensive and time-consuming. Our
expenses associated with maintaining the sales force and distribution capabilities may be disproportional compared to the revenues
we may be able to generate on sales of KALBITOR. We cannot guarantee that we will be successful in commercializing KALBITOR and
a failure to do so would adversely affect our business prospects.
The timing of sales to our distributors and the amount
of KALBITOR they keep as inventory have a significant impact on the amount of our product sales in a particular period and we may
not be able to accurately predict future purchases by our distributors.
Our sales of KALBITOR are made primarily to a network of distributors,
which, in turn, resell KALBITOR to end user customers. Product in the distribution channel consists of supply held by these distributors.
Our product sales in a particular period may be affected by increases or decreases in the distribution channel inventory levels.
While we attempt to assist our distributors in maintaining targeted inventory levels of KALBITOR, we may not be successful in achieving
those targeted levels. Attempting to assist our distributors in maintaining targeted inventory levels of KALBITOR involves the
exercise of judgment and use of assumptions about future uncertainties including end user customer demand and, as a result, actual
demand may differ from our estimates.
Although our distributors typically buy KALBITOR from us in
quantities they consider necessary to satisfy projected end user demand, we may not be able to accurately predict their future
buying practices. For example, distributors may engage in speculative purchases of KALBITOR in excess of the current market demand
in anticipation of future price increases. Therefore, during any given period, sales to a distributor may be above or below actual
patient demand for KALBITOR during the same period, resulting in fluctuations in the amount of product in the distribution channel.
If distribution channel inventory levels are substantially different from end user demand, we could experience variability in product
sales from period to period.
If we market KALBITOR in a manner that violates healthcare
fraud and abuse laws, we may be subject to civil or criminal penalties.
In addition to FDA and related regulatory requirements, we are
subject to health care "fraud and abuse" laws, such as the federal False Claims Act, the anti-kickback provisions of
the federal Social Security Act, and other state and federal laws and regulations. Federal and state anti-kickback laws prohibit,
among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in return for
purchasing, leasing, ordering or arranging for the purchase, lease or order of any health care item or service reimbursable under
Medicare, Medicaid, or other federally or state financed health care programs. This statute has been interpreted to apply to arrangements
between pharmaceutical manufacturers and prescribers, patients, purchasers and formulary managers. Although there are a number
of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe
harbors are drawn narrowly. Practices that involve remuneration intended to induce prescribing, purchasing, or recommending may
be subject to scrutiny if they do not qualify for an exemption or safe harbor.
Federal false claims laws prohibit any person from knowingly
presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to
be made, a false statement to get a false claim paid. Pharmaceutical companies have been prosecuted under these laws for a variety
of alleged promotional and marketing activities, such as allegedly providing free product to customers with the expectation that
the customers would bill federal programs for the product; reporting to pricing services inflated average wholesale prices that
were then used by federal programs to set reimbursement rates; engaging in promotion for uses that the FDA has not approved, or
"off-label" uses, that caused claims to be submitted to Medicaid for non-covered off-label uses; and submitting inflated
best price information to the Medicaid Rebate Program.
Although based on their medical judgment, physicians are permitted
to prescribe products for indications other than those cleared or approved by the FDA, manufacturers are prohibited from promoting
their products for such off-label uses. We market KALBITOR in the U.S. according to its FDA approved label for acute attacks of
HAE in patients 12 years and older and provide promotional materials to physicians regarding the use of KALBITOR for this indication.
Although we believe our marketing, promotional materials do not constitute off-label promotion of KALBITOR, the FDA may disagree.
If the FDA determines that our promotional materials, training or other activities constitute off-label or misleading promotion
of KALBITOR, it could request that we modify our training or promotional materials or other activities or subject us to regulatory
enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine and criminal penalties. It is
also possible that other federal, state or foreign enforcement authorities might take action if they believe that the alleged improper
promotion led to the submission and payment of claims for an unapproved use. This could result in significant fines or penalties
under other statutory authorities, such as laws prohibiting false claims for reimbursement. Even if it is later determined we are
not in violation of these laws, we may be faced with negative publicity, incur significant expenses defending our position and
have to divert significant management resources from other matters.
The majority of states have statutes or regulations similar
to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state
programs, or, in several states, apply regardless of the payer. Sanctions under these federal and state laws may include civil
monetary penalties, exclusion of a manufacturer's products from reimbursement under government programs, criminal fines, and imprisonment.
Even if we ultimately are not determined to have violated these laws, government investigations into these issues typically require
the expenditure of significant resources and generate negative publicity, which would also harm our financial condition. Because
of the breadth of these laws and the narrowness of the safe harbors and because government scrutiny in this area is high, it is
possible that some of our business activities could come under scrutiny.
In recent years several states have enacted legislation requiring
pharmaceutical companies to establish marketing compliance programs, file periodic reports with the state or make periodic public
disclosures on sales, marketing, pricing, clinical trials, and other activities. In addition, as part of health care reform, the
federal government has enacted the Physician Payment Sunshine Act (the Act) and related regulations. Manufacturers of drugs are
required to publicly report gifts, payments or other transfers of value made to physicians and teaching hospitals. Although we
believe our submission of such report complies with the Act, many of these requirements are new and uncertain, and the penalties
for failure to comply with these requirements are unclear. We have established compliance policies that comport with the Code of
Interactions with Healthcare Providers adopted by Pharmaceutical Research Manufacturers of America (PhRMA Code), the Office of
Inspector General's (OIG) Compliance Program Guidance for Pharmaceutical Manufacturers and best practices in the pharmaceutical
industry. If we are found not to be in full compliance with these laws, we could face enforcement action and fines and other penalties,
and could receive negative publicity which could adversely affect our business.
If we fail to comply with our reporting and payment obligations
under U.S. governmental price reporting laws, we could be required to reimburse government programs for underpayments and could
pay penalties, sanctions and fines, which could have a material adverse effect on our business, financial condition and results
of operations.
We are required to calculate and report certain pricing data
to the U.S. federal government in connection with federal drug pricing programs. Compliance with these federal drug pricing programs
is a pre-condition to (i) the availability of federal funds to pay for our products under Medicaid and Medicare Part B;
and (ii) the procurement of our products by the Department of Veterans Affairs, and by covered entities under the federal
government’s drug pricing program administered under Section 340B of the Public Health Services Act, referred to as the 340B
program. The pricing data reported are used as the basis for establishing contracts for sales to the Department of Veterans Affairs,
the Section 340B program contract pricing and payment and rebate rates under the Medicare Part B and Medicaid programs, respectively.
Pharmaceutical manufacturers have been prosecuted under federal and state false claims laws for submitting inaccurate and/or incomplete
pricing information to the government that resulted in overcharges under these programs. The rules governing the calculation
of certain reported prices are highly complex. Although we maintain and follow strict procedures to ensure the maximum possible
integrity for our federal price calculations, the process for making the required calculations involves some subjective judgments
and the risk of errors always exists, and this creates the potential for exposure under the false claims laws. If we become
subject to investigations or other inquiries concerning our compliance with price reporting laws and regulations, and our methodologies
for calculating federal prices are found to include flaws or to have been incorrectly applied, we could be required to pay or be
subject to additional reimbursements, penalties, sanctions or fines, which could have a material adverse effect on our business,
financial condition and results of operations.
We rely on third-party manufacturers to produce our preclinical
and clinical drug supplies and commercial supplies of KALBITOR and we intend to rely on third parties to produce any future approved
product candidates. Any failure by a third-party manufacturer to produce supplies for us may delay or impair our ability to develop,
obtain regulatory approval for or commercialize our product candidates.
We have relied upon a small number of third-party manufacturers
for the manufacture of our product candidates for preclinical, clinical testing and commercial purposes and intend to continue
to do so in the future. As a result, we depend on collaborators, partners, licensees and other third parties to manufacture clinical
and commercial scale quantities of our biopharmaceutical candidates in a timely and effective manner and in accordance with government
regulations. If these third party arrangements are not successful, it will adversely affect our ability to develop, obtain regulatory
approval for or commercialize our product candidates.
We have identified only a few vendors with facilities that are
capable of producing material for preclinical, clinical studies and for commercial purposes. We cannot be assured that they will
be able to supply sufficient clinical materials on a timely basis during the clinical development or commercialization of our biopharmaceutical
candidates, including DX-2930. Reliance on third-party manufacturers entails risks which we would not be subject to if we manufactured
product candidates ourselves. These risks include reliance on the third party for regulatory compliance and quality assurance,
the possibility of breach of the manufacturing agreement by the third party because of factors beyond our control (including a
failure to synthesize and manufacture our product candidates in accordance with our product specifications) and the possibility
of termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly
or damaging to us. In addition, the FDA and other regulatory authorities require that our product candidates be manufactured according
to cGMP and similar foreign standards. Any failure by our third-party manufacturers to comply with cGMP or failure to scale up
manufacturing processes, including any failure to deliver sufficient quantities of product candidates in a timely manner, could
lead to a delay in, or failure to obtain, regulatory approval of DX-2930 or any of our product candidates.
In addition, as our drug development pipeline increases and
matures, we will have a greater need for clinical trial and commercial manufacturing capacity. We do not own or operate manufacturing
facilities for the production of clinical or commercial quantities of our product candidates and we currently have no plans to
build our own clinical or commercial scale manufacturing capabilities. To meet our projected needs for commercial manufacturing,
third parties with whom we currently work may need to increase their scale of production or we will need to secure alternate suppliers.
Although we obtained regulatory approval of KALBITOR for
the treatment of acute attacks of HAE in patients 12 years and older in the United States, we may be unable to obtain regulatory
approval for ecallantide in any other territory.
Governments in countries outside the United States also regulate
drugs distributed in such countries and facilities in such countries where such drugs are manufactured, and obtaining their approvals
can also be lengthy, expensive and highly uncertain. The approval process varies from country to country and the requirements governing
the conduct of clinical trials, product manufacturing, product licensing, pricing and reimbursement vary greatly from country to
country. In certain jurisdictions, we are required to finalize operational, reimbursement, price approval and funding processes
prior to marketing our products. We may not receive regulatory approval for ecallantide in countries other than the United States
on a timely basis, if ever. Even if approval is granted in any such country, the approval may require limitations on the indicated
uses for which the drug may be marketed. Failure to obtain regulatory approval for ecallantide in territories outside the United
States could have a material adverse effect on our business prospects.
We rely on third parties to conduct clinical trials and
to perform certain regulatory processes, which may adversely affect our ability to commercialize any biopharmaceuticals that we
may develop.
We have hired experienced clinical development and regulatory
staff to develop and supervise our clinical trials and regulatory processes. However, we will remain dependent upon third party
contract research organizations to carry out some of our clinical and preclinical research studies for the foreseeable future.
As a result, we will continue to have less control over the conduct of the clinical trials, the timing and completion of the trials,
the required reporting of adverse events and the management of data developed through the trials than would be the case if we were
relying entirely upon our own staff. Communicating with outside parties can also be challenging, potentially leading to mistakes
as well as difficulties in coordinating activities. Outside parties may have staffing difficulties, may undergo changes in priorities
or may become financially distressed, adversely affecting their willingness or ability to conduct our trials and regulatory processes.
We may also experience unexpected cost increases that are beyond our control.
Problems with the timeliness or quality of the work of third
parties may lead us to seek to terminate the relationship and use an alternative service provider. However, changing our service
provider may be costly and may delay our trials or regulatory processes. Contractual restrictions may make such a change difficult
or impossible. Additionally, it may be impossible to timely find a replacement organization that can conduct our trials in an acceptable
manner and at an acceptable cost.
Government regulation of drug development is costly, time
consuming and fraught with uncertainty, and our products in development cannot be sold if we do not gain regulatory approval.
We and our licensees and partners conduct research, preclinical
testing and clinical trials for our product candidates. These activities are subject to extensive regulation by numerous state
and federal governmental authorities in the United States, such as the FDA, as well as foreign countries, such as the EMEA in European
countries, Canada and Australia. We are required in the United States and in foreign countries to obtain approval from those countries'
regulatory authorities before we can manufacture (or have our third-party manufacturers produce), market and sell our products
in those countries. The FDA and other United States and foreign regulatory agencies have substantial authority to fail to approve
commencement of, suspend or terminate clinical trials, require additional testing and delay or withhold registration and marketing
approval of our product candidates.
Obtaining regulatory approval has been and continues to be increasingly
difficult and costly and takes many years. If obtained, approval is costly to maintain. With the occurrence of a number of high
profile safety events with certain pharmaceutical products, regulatory authorities, and in particular the FDA, members of Congress,
the United States Government Accountability Office (GAO), Congressional committees, private health/science foundations and organizations,
medical professionals, including physicians and investigators, and the general public are increasingly concerned about potential
or perceived safety issues associated with pharmaceutical and biological products, whether under study for initial approval or
already marketed.
This increasing concern has engendered greater scrutiny, which
may lead to longer time to approval, fewer treatments being approved by the FDA or other regulatory bodies, as well as restrictive
labeling of a product or a class of products for safety reasons, potentially including “boxed” warnings or additional
limitations on the use of products, post-approval pharmacovigilance programs for approved products or requirement of risk management
activities related to the promotion and sale of a product.
If regulatory authorities determine that we or our licensees
or partners or vendors conducting research and development activities on our behalf have not complied with regulations in the research
and development of a product candidate, a new indication for an existing product or information to support a current indication,
then they may not approve the product candidate or new indication or maintain approval of the current indication in its current
form or at all, and we will not be able to market and sell it. If we were unable to market and sell our product candidates, our
business and results of operations would be materially and adversely affected.
Product liability and other claims
arising in connection with the testing of our product candidates in human clinical trials may reduce demand for our products or
result in substantial damages.
We face an inherent risk of product liability exposure related
to KALBITOR and the testing of DX-2930 in human clinical trials.
An individual may bring a product liability claim against us
if KALBITOR, DX-2930, or one of our other product candidates causes, or merely appears to have caused, an injury. Moreover, in
some clinical trials, we test our product candidates in indications where the onset of certain symptoms or "attacks"
could be fatal. Although the protocols for these trials include emergency treatments in the event a patient appears to be suffering
a potentially fatal incident, patient deaths may nonetheless occur. As a result, we may face additional liability if we are found
or alleged to be responsible for any such deaths.
These types of product liability claims may result in, but are
not limited to:
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decreased demand for KALBITOR or any other product candidates;
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injury to our reputation;
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withdrawal of clinical trial volunteers;
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related litigation costs; and
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substantial monetary awards to plaintiffs.
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Although we currently maintain product liability insurance,
we may not have sufficient insurance coverage, and we may not be able to obtain sufficient coverage at a reasonable cost. Our inability
to obtain product liability insurance at an acceptable cost or to otherwise protect against potential product liability claims
could prevent or inhibit the commercialization of any products that we or our collaborators develop, including KALBITOR. If we
are successfully sued for any injury caused by our products or processes, then our liability could exceed our product liability
insurance coverage and our total assets.
If we fail to establish and maintain strategic license,
research and collaborative relationships, or if our collaborators are not able to successfully develop and commercialize product
candidates, our ability to generate revenues could be adversely affected.
Our business strategy includes leveraging certain product candidates
and our proprietary phage display technology through collaborations and licenses that are structured to generate revenues through
license fees, technical and clinical milestone payments, and royalties. We have entered into, and anticipate continuing to enter
into, collaborative and other similar types of arrangements with third parties to develop, manufacture and market drug candidates
and drug products.
In addition, for us to continue to receive any significant payments
from our LFRP related licenses and collaborations and generate sufficient revenues to meet the required payments under our agreement
with HC Royalty, the relevant product candidates must advance through clinical trials, establish safety and efficacy, and achieve
regulatory approvals, obtain market acceptance and generate revenues.
Reliance on license and collaboration agreements involves a
number of risks as our licensees and collaborators:
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are not obligated to develop or market product candidates discovered using our phage display technology;
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may not perform their obligations as expected, or may pursue alternative technologies or develop competing products;
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control many of the decisions with respect to research, clinical trials and commercialization of product candidates we discover
or develop with them or have licensed to them;
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may terminate their collaborative arrangements with us under specified circumstances, including, for example, a change of control,
with short notice; and
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may disagree with us as to whether a milestone or royalty payment is due or as to the amount that is due under the terms of
our collaborative arrangements.
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We cannot be assured we will be able to maintain our current
licensing and collaborative efforts, nor can we assure the success of any current or future licensing and collaborative relationships.
An inability to establish new relationships on terms favorable to us, work successfully with current licensees and collaborators,
or failure of any significant portion of our LFRP related licensing and collaborative efforts would result in a material adverse
impact on our business, operating results and financial condition.
Our success depends significantly upon our ability to
obtain and maintain intellectual property protection for our products and technologies and upon third parties not having or obtaining
patents that would limit or prevent us from commercializing any of our products.
We face risks and uncertainties related to our intellectual
property rights. For example:
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we may be unable to obtain or maintain patent or other intellectual property protection for any products or processes that
we may develop or have developed;
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third parties may obtain patents covering the manufacture, use or sale of these products or processes, which may prevent us
from commercializing any of our products under development globally or in certain regions; or
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our patents or any future patents that we may obtain may not prevent other companies from competing with us by designing their
products or conducting their activities so as to avoid the coverage of our patents.
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Patent rights relating to our phage display technology are central
to our LFRP. In countries where we do not have and/or have not applied for phage display patent rights, we will be unable to prevent
others from using phage display or developing or selling products or technologies derived using phage display. In jurisdictions
where we have phage display patent rights, we may be unable to prevent others from selling or importing products or technologies
derived elsewhere using phage display. Any inability to protect and enforce such phage display patent rights, whether by any invalidity
of our patents or otherwise, could negatively affect future licensing opportunities and revenues from existing agreements under
the LFRP. In all of our activities, we also rely substantially upon proprietary materials, information, trade secrets and know-how
to conduct our research and development activities and to attract and retain collaborators, licensees and customers. Although we
take steps to protect our proprietary rights and information, including the use of confidentiality and other agreements with our
employees and consultants and in our academic and commercial relationships, these steps may be inadequate, these agreements may
be violated, or there may be no adequate remedy available for a violation. Our trade secrets or similar technology may otherwise
become known to, or be independently developed or duplicated by, our competitors.
Before we and our collaborators can market some of our processes
or products, we and our collaborators may need to obtain licenses from other parties who have patent or other intellectual property
rights covering those processes or products. Third parties have patent rights related to phage display, particularly in the area
of antibodies. While we have gained access to key patents in the antibody area through the cross licenses with Affimed Therapeutics
AG, Affitech AS, Biosite Incorporated (now owned by Alere Inc.), Cambridge Antibody Technology Limited or CAT (now known as MedImmune
Limited and owned by AstraZeneca), Domantis Limited (a wholly-owned subsidiary of GlaxoSmithKline), Genentech, Inc. and XOMA Ireland
Limited, other third party patent owners may contend that we need a license or other rights under their patents in order for us
to commercialize a process or product. In addition, we may choose to license patent rights from other third parties. In order for
us to commercialize a process or product, we may need to license the patent or other rights of other parties. If a third party
does not offer us a needed license or offers us a license only on terms that are unacceptable, we may be unable to commercialize
one or more of our products. If a third party does not offer a needed license to our collaborators and as a result our collaborators
stop work under their agreement with us, we might lose future milestone payments and royalties, which would adversely affect us.
If we decide not to seek a license, or if licenses are not available on reasonable terms, we may become subject to infringement
claims or other legal proceedings, which could result in substantial legal expenses. If we are unsuccessful in these actions, adverse
decisions may prevent us from commercializing the affected process or products and could require us to pay substantial monetary
damages.
We seek affirmative rights of license or ownership under existing
patent rights relating to phage display technology of others. For example, through our patent licensing program, we have secured
a limited freedom to practice some of these patent rights pursuant to our standard license agreement, which contains a covenant
by the licensee that it will not sue us under certain of the licensee's phage display improvement patents. We cannot guarantee
that we will be successful in enforcing any agreements from our licensees, including agreements not to sue under their phage display
improvement patents, or in acquiring similar agreements in the future, or that we will be able to obtain commercially satisfactory
licenses to the technology and patents of others. If we cannot obtain and maintain these licenses and enforce these agreements,
this could have a material adverse impact on our business.
Proceedings to obtain, enforce or defend patents and to
defend against charges of infringement are time consuming and expensive activities. Unfavorable outcomes in these proceedings could
limit our patent rights and our activities, which could materially affect our business.
Obtaining, protecting and defending against patent and proprietary
rights can be expensive. For example, if a competitor files a patent application claiming technology also invented by us, we may
have to participate in an expensive and time-consuming interference proceeding before the United States Patent and Trademark Office
to address who was first to invent the subject matter of the claim and whether that subject matter was patentable. Moreover, an
unfavorable outcome in an interference proceeding could require us to cease using the technology or attempt to license rights to
it from the prevailing party. Our business would be harmed if a prevailing third party does not offer us a license on terms that
are acceptable to us. In patent offices outside the United States, we may be forced to respond to third party challenges to our
patents.
The issues relating to the validity, enforceability and possible
infringement of our patents present complex factual and legal issues that we periodically reevaluate. Third parties have patent
rights related to phage display, particularly in the area of antibodies. While we have gained access to key patents in the antibody
area through our cross-licensing agreements with Affimed, Affitech, Biosite, Domantis, Genentech, XOMA and CAT, other third party
patent owners may contend that we need a license or other rights under their patents in order for us to commercialize a process
or product. In addition, we may choose to license patent rights from third parties. While we believe that we will be able to obtain
any needed licenses, we cannot assure you that these licenses, or licenses to other patent rights that we identify as necessary
in the future, will be available on reasonable terms, if at all. If we decide not to seek a license, or if licenses are not available
on reasonable terms, we may become subject to infringement claims or other legal proceedings, which could result in substantial
legal expenses. If we are unsuccessful in these actions, adverse decisions may prevent us from commercializing the affected process
or products. Moreover, if we are unable to maintain the covenants with regard to phage display improvements that we obtain from
our licensees through our patent licensing program and the licenses that we have obtained to third party phage display patent rights,
it could have a material adverse effect on our business.
We would expect to incur substantial costs in connection with
any litigation or patent proceeding. In addition, our management's efforts would be diverted, regardless of the results of the
litigation or proceeding. An unfavorable result could subject us to significant liabilities to third parties, require us to cease
manufacturing or selling the affected products or using the affected processes, require us to license the disputed rights from
third parties or result in awards of substantial damages against us. Our business will be harmed if we cannot obtain a license,
can obtain a license only on terms we consider to be unacceptable or if we are unable to redesign our products or processes to
avoid infringement.
In all of our activities, we substantially rely on proprietary
materials and information, trade secrets and know-how to conduct research and development activities and to attract and retain
collaborative partners, licensees and customers. Although we take steps to protect these materials and information, including the
use of confidentiality and other agreements with our employees and consultants in both academic commercial relationships, we cannot
assure you that these steps will be adequate, that these agreements will not be violated, or that there will be an available or
sufficient remedy for any such violation, or that others will not also develop the same or similar proprietary information.
Failure to meet our HC Royalty debt service obligations
could adversely affect our financial condition and our loan agreement obligations could impair our operating flexibility.
Our loans from
an affiliate of HC Royalty have an aggregate
principal balance of $84.5 million at June 30, 2014. The loans
bear interest at a rate of 12% per annum, payable quarterly,
will mature in August 2018, and can be repaid without penalty beginning in August 2015.
In connection with this loan, we have entered into a security
agreement granting HC Royalty a security interest in the intellectual property related to the LFRP and the revenues generated
by us through
licenses
of
our
intellectual property related to the LFRP. We are required to repay the
loans
based on a percentage of LFRP-related revenues, including royalties, milestones, and license fees received by us for product
candidates in the LFRP. If the LFRP revenues for any quarterly period are insufficient to cover the cash interest due for that
period, the deficiency may be added to the outstanding loan principal or paid in cash by us. In the event of certain changes of
control or mergers or sales of all or substantially all of our assets, any or all of the
loans
may become due and payable at HC Royalty’s option, including a prepayment premium obligation, which will expire in
August 2015. We must comply with certain loan covenants which if not observed could make all loan principal, interest and all
other amounts payable under the
loans
immediately due and payable.
Our obligations under the HC Royalty agreement require that
we dedicate a substantial portion of cash flow from our LFRP receipts to service the
loans
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which will reduce the amount of cash flow available for other purposes while the loan is outstanding. If the LFRP fails to generate
sufficient receipts to fund quarterly principal and interest payments to HC Royalty, we will be required to fund such obligations
from cash on hand or from other sources, further decreasing the funds available to operate our business. In the event that amounts
due under the
loans
is accelerated, payment would significantly reduce our
cash, cash equivalents and short-term investments and we may not have sufficient funds to pay the debt if any of it is accelerated.
As a result of the security interest granted to HC Royalty,
we are restricted in our ability to sell our rights to part or all of those assets, or take certain other actions, without first
obtaining permission from HC Royalty. This requirement could delay, hinder or condition our ability to enter into corporate partnerships
or strategic alliances with respect to these assets.
The obligations and restrictions under the HC Royalty agreement
may limit our operating flexibility, make it difficult to pursue our business strategy and make us more vulnerable to economic
downturns and adverse developments in our business.
If we lose or are unable to hire and retain qualified
personnel, we may not be able to develop our products or processes.
We are highly dependent on qualified scientific and management
personnel, and we face intense competition from other companies and research and academic institutions for qualified personnel.
If we lose an executive officer, a manager of one of our principal business units or research programs, or a significant number
of any of our staff or are unable to hire and retain qualified personnel, then our ability to develop and commercialize our products
and processes may be delayed which would have an adverse effect on our business, financial condition, and results of operations.
We use and generate hazardous materials in our business,
and any claims relating to the improper handling, storage, release or disposal of these materials could be time-consuming and expensive.
Our phage display research and development involves the controlled
storage, use and disposal of chemicals and solvents, as well as biological and radioactive materials. We are subject to foreign,
federal, state and local laws and regulations governing the use, manufacture and storage and the handling and disposal of materials
and waste products. Although we believe that our safety procedures for handling and disposing of these hazardous materials comply
with the standards prescribed by laws and regulations, we cannot completely eliminate the risk of contamination or injury from
hazardous materials. If an accident occurs, an injured party could seek to hold us liable for any damages that result and any liability
could exceed the limits or fall outside the coverage of our insurance. We may not be able to maintain insurance on acceptable terms,
or at all. We may incur significant costs to comply with current or future environmental laws and regulations.
The FDA or similar agencies in other jurisdictions may
require us to restrict the distribution or use of KALBITOR or other future products or take other potentially limiting or costly
actions if we or others identify side effects after the product is on the market.
The FDA had required that we implement a Risk Evaluation and
Mitigation Strategy (REMS) for KALBITOR and conduct post-marketing studies to assess a risk of hypersensitivity reactions, including
anaphylaxis. The REMS consisted of a plan to communicate the safety risks of the product to healthcare providers. While the FDA
approved the removal of the REMS requirement for KALBITOR during 2013 because the FDA agreed that we met our obligations under
the communication plan, it or other regulatory agencies could impose new requirements or change existing regulations or promulgate
new ones at any time that may affect our ability to obtain or maintain approval of KALBITOR or future products or require significant
additional costs to obtain or maintain such approvals. For example, the FDA or similar agencies in other jurisdictions may require
us to restrict the distribution or use of KALBITOR if we or others identify side effects after KALBITOR and/or future products
are on the market. Changes in KALBITOR's approval or restrictions on its use could make it difficult to achieve market acceptance,
and we may not be able to market and sell KALBITOR, or continue to sell it successfully, or at all. This would limit our ability
to generate product sales and adversely affect our results of operations and business prospects.
Compliance with changing regulations relating to corporate
governance and public disclosure may result in additional expenses.
Remaining compliant with changing laws, regulations and standards
relating to corporate governance and public disclosure including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ
Global Market rules requires a significant amount of management attention and external resources. We intend to invest all reasonably
necessary resources to comply with evolving corporate governance and public disclosure standards. This investment may result in
increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities
to compliance activities.
We may not succeed in acquiring technology and integrating
complementary businesses.
We may acquire additional technology and complementary businesses
in the future. Acquisitions involve many risks, any one of which could materially harm our business, including:
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the diversion of management's attention from core business concerns;
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the failure to exploit acquired technologies effectively or integrate successfully the acquired businesses;
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the loss of key employees from either our current business or any acquired businesses; and
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the assumption of significant liabilities of acquired businesses.
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We may be unable to make any future acquisitions in an effective
manner. In addition, the ownership represented by the shares of our common stock held by our existing stockholders will be diluted
if we issue equity securities in connection with any acquisition. If we make any significant acquisitions using cash we may be
required to use a substantial portion of our available cash. If we issue debt securities to finance acquisitions, then the debt
holders could have rights senior to the holders of shares of our common stock to make claims on our assets. The terms of any debt
could restrict our operations, including our ability to pay dividends on our shares of common stock. Acquisition financing may
not be available on acceptable terms, or at all. We may be required to amortize significant amounts of intangible assets in connection
with future acquisitions. We might also have to recognize significant amounts of goodwill that will have to be tested periodically
for impairment. These amounts could be significant, which could harm our operating results.
Risks Related To Our Common Stock
Our common stock may continue to have a volatile public
trading price and low trading volume.
The market price of our common stock has been highly volatile.
Since our initial public offering, the price of our common stock on the NASDAQ Global Market has ranged between $54.12
and $1.05. The market has experienced significant price and volume fluctuations for many reasons, some of which may be unrelated
to our operating performance.
Many factors may have an effect on the market price of our common
stock, including:
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public announcements by us, our competitors or others;
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developments concerning proprietary rights, including patents and litigation matters;
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publicity regarding actual or potential clinical results or developments with respect to products or compounds we or our collaborators
are developing;
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regulatory decisions in both the United States and abroad;
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public concern about the safety or efficacy of new technologies;
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issuance of new debt or equity securities;
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general market conditions and comments by securities analysts; and
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quarterly fluctuations in our revenues and financial results.
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While we cannot predict the effect that these or other factors
may have on the price of our common stock, these factors, either individually or in the aggregate, could result in significant
variations in price during any given period of time.
Anti-takeover provisions in our governing documents and
under Delaware law may make an acquisition of us more difficult.
We are incorporated in Delaware. We are subject to various legal
and contractual provisions that may make a change in control of us more difficult. Our board of directors has the flexibility to
adopt additional anti-takeover measures.
Our charter authorizes our board of directors to issue up to
1,000,000 shares of preferred stock, all of which remains available for issuance and to determine the terms of those shares of
stock without any further action by our stockholders. If the board of directors exercises this power to issue preferred stock,
it could be more difficult for a third party to acquire a majority of our outstanding voting stock. Our charter also provides staggered
terms for the members of our board of directors. This may prevent stockholders from replacing the entire board in a single proxy
contest, making it more difficult for a third party to acquire control of us without the consent of our board of directors. Our
equity incentive plans generally permit our board of directors to provide for acceleration of vesting of options granted under
these plans in the event of certain transactions that result in a change of control. If our board of directors used its authority
to accelerate vesting of options this action could make an acquisition more costly, and it could prevent an acquisition from going
forward.
Section 203 of the Delaware General Corporation Law prohibits
a person from engaging in a business combination with any holder of 15% or more of its capital stock until the holder has held
the stock for three years unless, among other possibilities, the board of directors approves the transaction. This provision could
have the effect of delaying or preventing a change of control of Dyax, whether or not it is desired by or beneficial to our stockholders.
The provisions described above, as well as other provisions
in our charter and bylaws and under the Delaware General Corporation Law, may make it more difficult for a third party to acquire
our company, even if the acquisition attempt was at a premium over the market value of our common stock at that time.