Risks facing our business have not changed substantively from those
discussed in our Annual Report on Form 10-K for the year ended December 31, 2013, except for those risk factors below designated by an asterisk (*) and the removal of the risk factor regarding the purported securities class action lawsuit
previously filed against us, which has been dismissed with prejudice and so is formally concluded. Our business faces significant risks, some of which are set forth below to enable readers to assess, and be appropriately apprised of, many of the
risks and uncertainties applicable to the forward-looking statements made in this Quarterly Report. You should carefully consider these risk factors as each of these risks could adversely affect our business, operating results, cash flows and
financial condition. If any of the events or circumstances described in the following risk factors actually occurs, our business may suffer, the trading price of our common stock and our 2.625% convertible senior notes due April 1, 2017, or the
Convertible Notes, could decline and our financial condition or results of operations could be harmed. Given these risks and uncertainties, you are cautioned not to place undue reliance on forward-looking statements. These risks should be read in
conjunction with the other information set forth in this Quarterly Report. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not currently known to us, or that we currently believe to be
immaterial, may also adversely affect our business.
Risks Related to XTANDI
®
(enzalutamide) capsules
We may not be able to further commercialize XTANDI in the United States, and may fail to continue to
generate significant revenue from the sale of XTANDI in the United States.*
We only have one commercial product, XTANDI. The
further commercialization of XTANDI in the United States for the treatment of post-chemotherapy metastatic castration-resistant prostate cancer, or mCRPC, patients, and the commercialization of XTANDI in the United States for the treatment of mCRPC
patients who have not received chemotherapy (should it be approved by regulatory authorities for that population), or any other patient populations for which XTANDI may subsequently be approved may not be successful for a number of reasons,
including:
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we and our collaboration partner, Astellas Pharma, Inc., or Astellas, may not be able to establish or demonstrate in the medical community the safety and efficacy of XTANDI and its potential advantages over, and side
effects compared to, competing therapeutics and products currently in clinical development for each applicable patient population;
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our limited experience in marketing XTANDI for any patient population;
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reimbursement and coverage policies of government and private payors such as Medicare, Medicaid, insurance companies, health maintenance organizations and other plan administrators;
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the relative price of XTANDI as compared to alternative treatment options;
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changes or increases in regulatory restrictions;
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changes to the label for XTANDI that further restrict how we and Astellas market XTANDI, including as a result of data collected from the safety study in patients with known risk factor(s) for seizure that the FDA
required us to undertake as a post-marketing requirement or from any other ongoing or future studies;
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we and Astellas may not have adequate financial or other resources to successfully commercialize XTANDI; and
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we and Astellas may not be able to obtain adequate commercial supplies of XTANDI to meet demand or at an acceptable cost.
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If the further commercialization of XTANDI is unsuccessful, our ability to generate revenue from product sales and achieve profitability would
be adversely affected and our business could fail.
XTANDI may fail to obtain regulatory approval, be successfully commercialized
and generate significant revenue outside the United States.*
XTANDI is approved in more than 40 countries for the post-docetaxel
indication and marketing applications for this indication are under review in multiple countries worldwide. Unless we and Astellas can obtain additional regulatory approval and reimbursement outside the United States of XTANDI to treat
post-chemotherapy mCRPC patients, and for additional patient populations, e.g., mCRPC patients who have not received chemotherapy, Astellas ability to successfully commercialize XTANDI further and our ability to generate additional revenue
from XTANDI and fund our operations could be significantly limited.
If XTANDI fails to obtain regulatory approval for mCRPC
patients who have not received chemotherapy, the commercial potential of XTANDI will be harmed.*
XTANDI has not yet been approved
for the treatment of mCRPC patients who have not received chemotherapy in the United States or internationally. We believe that the commercial opportunity represented by mCRPC patients who have not received chemotherapy is substantially larger than
that represented by post-chemotherapy mCRPC patients, and thus any failure to successfully obtain approval of XTANDI for the treatment of mCRPC patients who have not received chemotherapy would have a negative impact on our business and future
prospects. If approved, the new label for XTANDI for mCRPC patients who have not received chemotherapy may have new safety risks, monitoring requirements, or warnings and precautions that may limit the commercial uptake of the product in this
patient population. In January 2014, the results of the PREVAIL trial, the Phase 3 trial of XTANDI for mCRPC patients who have not received chemotherapy, were presented at the American Society of Clinical Oncology 2014 Genitourinary Cancers
Symposium. Subsequently, we announced the acceptance of a supplemental New Drug Application, or sNDA, to the FDA with a FDA Prescription Drug User Fee Act (PDUFA) review date of September 18, 2014, to extend the indication for XTANDI for the
treatment of mCRPC patients who have not received chemotherapy and the submission of a variation to amend the European Marketing Authorization Application for XTANDI to the European Medicines Agency (which the European Medicines Agency accepted) for
the treatment of adult men with mCRPC who are asymptomatic or mildly symptomatic after failure of androgen deprivation therapy and in whom chemotherapy is not yet clinically indicated, but we do not know if the results of the PREVAIL trial are
robust enough to support regulatory approval by the FDA or the European Medicines Agency.
Even if we obtain regulatory approval for
the use of XTANDI to treat mCRPC patients who have not received chemotherapy, we will need to expand our sales and marketing efforts to include urologists, and if we are not successful in marketing to urologists, the commercial potential of XTANDI
will be harmed.*
In May 2014, we and Astellas announced the acceptance of the sNDA for the treatment of mCRPC patients who have
not received chemotherapy, by the FDA, with a FDA PDUFA review date of September 18, 2014. Even if the sNDA is approved by the FDA, our commercialization of XTANDI for such indication will require marketing and sales efforts directed to
urologists, who may have different prostate cancer treatment perspectives and require different sales and marketing efforts from oncologists, who have been the largest physician specialty prescribing XTANDI to date. Failure to successfully obtain
approval and commercialize XTANDI for the treatment of mCRPC patients who have not received chemotherapy with urologists, as well as with oncologists, would have a negative impact on our business and future prospects.
XTANDI may fail to compete effectively commercially with other approved products and other products in development.
Companies are currently marketing, or expected to be marketing in the near future, products that may compete directly with XTANDI. These
companies include some of the worlds largest and most experienced pharmaceutical companies, such as Johnson & Johnson, Sanofi, and Bayer Pharma AG, which have considerably more financial, development and commercialization resources
and experience than we have to develop and commercialize their products. We are competing, and expect to continue to compete, against these companies and against multiple drugs that currently exist, e.g., the approved hormonal agent, Zytiga
®
(abiraterone acetate), as well as against additional drugs currently in development, to treat post-chemotherapy mCRPC, and for upstream prostate cancer indications, e.g., ARN-509. Some
competitive drugs already have acquired substantial shares in these markets, which may make it
34
more difficult for us to compete successfully in these markets notwithstanding any positive results that we may generate from our clinical trials. Also, intense competition from products and
compounds in development could impact our ability to successfully conduct upstream clinical trials, as trials may become more difficult to enroll, or complete successfully, as patients may have more treatment options with demonstrated efficacy and
safety. Bases upon which XTANDI would have to compete successfully include efficacy, safety, price and cost effectiveness. We cannot guarantee that we and Astellas will be able to compete successfully in the context of any of these factors.
Price pressure from third party payors and price competition from approved competitors could substantially impact our ability to
generate revenue from XTANDI and negatively impact our business.
*
The realized price of XTANDI could be
subject to downward pressure from managed care organizations and institutional purchasers, who use cost considerations to restrict the sale of preferred drugs that their physicians may prescribe, and from aggressive competitive pricing activity. To
the extent, that payors think the price for XTANDI is too high, and/or prefer similar lower-priced, branded or generic competitors due to cost considerations, we and our partner Astellas may be forced either to reduce the price of XTANDI or be
subject to formulary restrictions, which could result in a loss of sales revenue and/or market share. Additionally, XTANDI currently competes against products and could compete in the future with products marketed by some of the worlds largest
and most experienced pharmaceutical companies, such as Johnson & Johnson, who have more resources and greater flexibility to engage in aggressive price competition in order to gain revenues and market share. It is uncertain whether we and
Astellas could compete with such competition, and our failure to compete or decision to reduce the price of XTANDI in order to compete could severely impact our business.
Competition from other approved products, including those that operate similarly to XTANDI, could impact the expected duration of
therapy with XTANDI, and impact our ability to generate revenue.
We are competing and will continue to compete against drugs that
operate similarly to XTANDI. To the extent XTANDI is used after drugs like Zytiga and/or potentially ARN-509, which operate on the same molecular signaling pathway or have the same mechanism of action as XTANDI, patients may not have as good a
response on XTANDI as would patients who are naïve of such drugs. If XTANDI is unable to successfully compete for a position in the prostate cancer treatment paradigm ahead of drugs like Zytiga and/or potentially ARN-509, which are now being
investigated in Phase 3 clinical studies in earlier stage prostate cancer, sales of XTANDI would be negatively impacted, due to decreased use or shorter duration of XTANDI therapy. In addition, the availability of multiple other approved agents to
treat the same patients being treated with XTANDI could cause the treating physicians to switch patients off of XTANDI and onto competing therapies more quickly than would otherwise be the case, which would also negatively impact XTANDI sales due to
shorter duration of use.
Competition from generic products could potentially harm our business.
Competition from manufacturers of generic drugs could be a major challenge for us, like other branded pharmaceutical companies, and the loss
or expiration of intellectual property rights on enzalutamide or a competitor product, e.g., Zytiga plus prednisone, could adversely affect on our business, and could put downward pressure on the price and market share of XTANDI. The FDA
approval process exempts generics from costly and time-consuming clinical trials to demonstrate their safety and efficacy, allowing generic manufacturers to rely on the safety and efficacy data of the branded product. Generic products need only
demonstrate a drug level availability in the body equivalent to that of the branded product.
XTANDI may not be commercially
successful if not widely-covered and appropriately reimbursed by third-party payors, and we are dependent upon Astellas for the execution of third-party payor access and reimbursement strategies for XTANDI.
Our ability to successfully commercialize XTANDI for its approved indication depends, in part, on the extent to which adequate coverage and
reimbursement for XTANDI is available from government and health administration authorities, private health insurers, managed care programs and other third-party payors, both domestically and globally. Significant uncertainty exists as to the
coverage and reimbursement of newly approved prescription drug products. For example, the U.K.s National Institute for Health and Care Excellence, or NICE, recommended limitations on coverage of XTANDI to cases in which mCRPC has progressed on
both docetaxel and Zytiga.
In addition, even if third-party payors ultimately elect to cover and reimburse for XTANDI, most payors will
not reimburse 100% of the cost, but rather require patients to pay a portion of the cost through a co-payment. Thus, even if reimbursement is available, the percentage of drug cost required to be borne by the patients may make use of XTANDI
financially difficult or impossible for certain patients, which would have a negative impact on sales of XTANDI. For example, in the United States there exists a coverage gap, or donut hole, in the Medicare Part D coverage for
prescription medications for participants, which renews annually each January 1st. While in the donut hole, Medicare Part D participants, including many patients in XTANDIs approved indication, may have to pay out of pocket a substantial
portion of their prescription drug costs, which may discourage physicians from prescribing or patients from accessing XTANDI. It is increasingly difficult to obtain coverage and adequate reimbursement levels
35
from third-party payors, and we may be unable to achieve these objectives. Moreover, our commercial prospects would be further weakened if payors approve coverage for XTANDI only as second- or
later-line treatments, or if they place XTANDI in tiers requiring unacceptably high patient co-payments. Since launch, several third-party payors and at least one government payor have approved coverage for XTANDI only after patient treatment on
Zytiga plus prednisone. Because XTANDI works via the same molecular signaling pathway as Zytiga does, patients who have already failed treatment with Zytiga may not have as good a response on XTANDI as would patients who are Zytiga-naïve.
Failure to overturn these coverage decisions or stop additional such coverage decisions could materially harm our or our partners ability to successfully market XTANDI in the United States. Achieving coverage and acceptable reimbursement
levels typically involves negotiating with individual payors and is a time-consuming and costly process. We are dependent upon Astellas globally for the achievement of such coverage and acceptable reimbursement, and negotiation with individual
payors.
Federal healthcare laws and regulations may substantially impact our ability to generate revenue from XTANDI.
In March 2010, the President of the United States signed the Patient Protection and Affordable Care Act, as amended by the Health Care and
Education Affordability Reconciliation Act, collectively, PPACA, which has the potential to substantially change health care delivery and financing by both governmental and private insurers, and to significantly impact the pharmaceutical industry.
The provisions of PPACA most relevant to the pharmaceutical industry include the following:
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an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government
healthcare programs, not including orphan drug sales;
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an increase in the rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13% of the average manufacturer price for branded and generic drugs, respectively;
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a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts to 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;
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extension of manufacturers Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;
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expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for certain
individuals with income at or below 133% of the Federal Poverty Level beginning in 2014, thereby potentially increasing manufacturers Medicaid rebate liability;
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expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;
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new requirements to report certain financial arrangements with physicians and teaching hospitals, as defined in PPACA and its implementing regulations, including reporting any payment or transfers of value
made or distributed to prescribers and teaching hospitals, and reporting any ownership and investment interests held by physicians and their immediate family members and applicable group purchasing organizations during the preceding calendar year,
with data collection that commenced on August 1, 2013, annual reporting beginning in the second quarter of 2014, and publication by CMS on a searchable website beginning September 30, 2014;
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expansion of health care fraud and abuse laws, including the federal false claims act and anti-kickback statute, new government investigative powers, and enhanced penalties for noncompliance;
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a licensure framework for follow-on biologic products; and
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a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.
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On June 28, 2012, the United States Supreme Court upheld the constitutionality of PPACA, excepting certain provisions that would have
required states to expand their Medicaid programs or risk losing all of the states Medicaid funding, as noted above. At this time, it remains unclear whether there will be any further changes made to PPACA, whether in part or in its entirety.
Moreover, other state and federal legislative and regulatory proposals aimed at reforming the health care system in the United States are periodically proposed, the effect of which, if enacted, could adversely impact our product sales and results of
operations.
Federal and state budget control legislation and spending reductions could substantially impact our ability to generate
revenue from XTANDI.
On August 2, 2011, the Budget Control Act of 2011 created, among other things, the Joint Select
Committee on Deficit Reduction, to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit
36
reduction of at least $1.2 trillion for the years 2013 through 2021, which triggered the legislations automatic reduction to several government programs. This includes aggregate reductions
to Medicare payments to providers of up to 2% per fiscal year, beginning on March 1, in 2013. Further, President Obamas proposed budget for fiscal year 2014, if enacted, would require drug manufacturers to pay to the Medicare program
new rebates for certain outpatient drugs covered under Medicare Part D. These proposals would allow the Medicare program to benefit from the same, relatively higher, rebates that Medicaid receives for brand name and generic drugs provided to
beneficiaries who receive the low-income subsidies under the Medicare Part D program and dual eligible beneficiaries (i.e., those who are eligible for both the Medicare and Medicaid programs.)
We expect that there will continue to be a number of federal and state proposals to implement spending reductions in government healthcare
programs, e.g., Medicare or government controls over drug product pricing. We are currently unable to predict what additional legislation or regulations, if any, relating to the pharmaceutical industry or third-party payor coverage and reimbursement
may be enacted in the future, or what effect PPACA or any such additional legislation or regulation will or would have on our business. However, spending reductions in government healthcare programs or additional government controls over drug
product pricing would likely negatively impact our business. In addition, we would face competition in such negotiations from other approved drugs against which we compete, and the marketers of such other drugs are likely to be significantly
larger than us and therefore enjoy significantly more negotiating leverage with respect to the individual payors than we may have.
We are dependent upon our collaborative relationship with Astellas to further develop, fund, manufacture and commercialize XTANDI, and
if such relationship is unsuccessful, or if Astellas terminates our Collaboration Agreement with them, it could negatively impact our ability to conduct our business and generate revenue from XTANDI.
Under our collaboration agreement with Astellas, Astellas is responsible for developing, seeking regulatory approval for, and commercializing
XTANDI outside the United States and is responsible globally for all manufacture of product for both clinical and commercial purposes. We and Astellas are jointly responsible for commercializing XTANDI in the United States. We and Astellas share
equally the costs (subject to certain exceptions), profits and losses arising from development and commercialization of XTANDI in the United States. For clinical trials useful both in the United States and in Europe or Japan, we are responsible for
one-third of the total costs and Astellas is responsible for the remaining two-thirds. We are subject to a number of risks associated with our dependence on our collaborative relationship with Astellas, including:
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Astellas right to terminate the collaboration agreement with us on limited notice for convenience (subject to certain limitations), or for other reasons specified in the collaboration agreement;
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the need for us to identify and secure on commercially reasonable terms the services of third parties to perform key activities currently performed by Astellas in the event that Astellas were to terminate its
collaboration with us, including development and commercialization activities outside of the United States and manufacturing activities globally;
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adverse decisions by Astellas regarding the amount and timing of resource expenditures for the commercialization of XTANDI;
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decisions by Astellas to prioritize other of its present or future products more highly than XTANDI for either development and/or commercial purposes;
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possible disagreements with Astellas as to the timing, nature and extent of our development plans, including clinical trials or regulatory approval strategy, which if we disagree could significantly delay or halt
development of XTANDI;
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the financial returns to us, if any, under our collaboration agreement with Astellas, depend in large part on the achievement of development and sales milestones and the generation of product sales, and if Astellas
fails to perform or satisfy its obligations to us, the development or commercialization of XTANDI would be delayed or may not occur and our business and prospects could be materially and adversely affected; and
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changes in key management personnel that are members of the collaborations various committees.
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Due to these factors and other possible disagreements with Astellas, we may be delayed or prevented from further developing, manufacturing or
commercializing XTANDI or we may become involved in litigation or arbitration, which would be time consuming and expensive.
If Astellas
were to terminate our collaborative relationship unilaterally, we would need to undertake development and commercialization activities for XTANDI solely at our own expense and/or seek one or more other partners for some or all of these activities,
worldwide. If we pursued these activities on our own, it would significantly increase our capital and infrastructure requirements, might limit the indications we are able to pursue for XTANDI, and could prevent us from effectively commercializing
XTANDI. If we sought to find one or more other pharmaceutical company partners for some or all of these activities, we may not be successful in such efforts, or they may result in collaborations that have us expending greater funds and efforts than
our current relationship with Astellas.
37
We are dependent on third party manufacturers for commercial supply of XTANDI and for
clinical study materials and if we fail to receive such adequate supplies, global sales of XTANDI could be limited and clinical trials could be delayed.
We require adequate supplies of enzalutamide for commercial supply of XTANDI, and for use in clinical trials. Under our collaboration
agreement, Astellas has the responsibility to manufacture commercial supplies of XTANDI for all markets and provide material for clinical studies. Astellas fulfills its manufacturing and supply obligations largely through third-party contract
manufacturers. Consequently, we are, and expect to remain, dependent on Astellas and its contract manufacturers for commercial and clinical materials. If Astellas cannot provide the materials on a timely basis due to, for example, raw materials
availability, quality issues or failure of the contracting facilities to perform, it could result in decreased sales or put at risk on-going clinical studies. If Astellas or its contract manufacturers do not perform, we may be forced to incur
additional expenses, delays, or both, to arrange or take responsibility for contract manufacturers to manufacture or package XTANDI or enzalutamide on our behalf, as we do not have any internal manufacturing or packaging capabilities.
We also rely on our own third-party vendors for clinical supplies. If clinical supplies cannot be provided on a timely basis it could put
at risk our sponsored clinical studies.
We are dependent on Astellas to distribute and sell XTANDI, and if Astellas fails to
adequately perform, our business would be negatively impacted.
Under our collaboration agreement with Astellas, we and Astellas
have the right to jointly promote XTANDI to customers in the United States. However, Astellas has the sole right to distribute and sell XTANDI to customers in the United States and the sole right to promote, distribute and sell XTANDI to customers
outside the United States. We are thus partially dependent on Astellas to successfully promote XTANDI in the United States, and solely dependent on Astellas to successfully distribute and sell XTANDI in the United States and to promote, distribute
and sell XTANDI outside of the United States. In the United States, we depend on customer support from specialty pharmaceutical distributors and wholesalers in Astellas network. Astellas has contracted with a limited number of specialty
pharmaceutical distributors and wholesalers to deliver XTANDI to end users. The use of specialty pharmacies and wholesalers requires significant coordination with Astellas sales and marketing, medical affairs, regulatory affairs, legal and
finance organizations and involves risks, including but not limited to risks that these specialty pharmacies and wholesalers will:
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not provide Astellas accurate or timely information regarding their inventories, patient- or account-level data or safety complaints regarding XTANDI;
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not effectively sell or support XTANDI;
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not devote the resources necessary to sell XTANDI in the volumes and within the timeframes that we expect; or
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We generally do not have control over the resource or degree of effort that
any of the specialty pharmacies and distributors may devote to XTANDI, and if their performance is substandard, this will adversely affect sales of XTANDI. If Astellas network of specialty pharmacies and distributors fails to adequately
perform, it could negatively impact sales of XTANDI, which would negatively impact our business, results of our operations, cash flows and liquidity.
We and Astellas are required to undertake certain studies to comply with post-marketing requirements or commitments in the EU and the
United States, which could result in adverse modifications to XTANDIs existing labeling, and risk XTANDIs ability to obtain additional regulatory approvals for additional patient populations.
In the European Union, we and Astellas are required to collect efficacy data on mCRPC patients previously treated with Zytiga to determine
XTANDIs efficacy response in such patients, which we do not expect to be as good as in patients naïve to Zytiga. In the United States, we and Astellas are required to conduct an open-label safety study of XTANDI in patients with known
risk factor(s) for seizure and to report the results of that study to the FDA in 2019. If the results of this study reveal unacceptable safety risks, this could result in decreased commercial utilization of XTANDI for post-chemotherapy mCRPC and in
mCRPC patients who have not received chemotherapy if approved, failure to obtain approval in other indications (including mCRPC patients who have not received chemotherapy and breast cancer), and modifications to the existing label for
post-chemotherapy mCRPC, including potentially a boxed warning, or additional clinical testing. Any one or more of these outcomes would seriously harm our business. Additionally, we could receive additional post-marketing requirements as we seek
approval of XTANDI in additional patient populations. Failure to conduct the post-marketing requirements or commitments in a timely manner may result in withdrawal of approval for XTANDI and substantial civil and/or criminal penalties.
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Even though we have obtained approval to market XTANDI in the United States, we are subject
to ongoing regulatory obligations and review, including post-approval requirements, which may result in the withdrawal of XTANDI from the market. Further, we are seeking approval in additional patient populations through the submission of clinical
trial data in such populations that could result in negative changes to XTANDIs product labeling and additional post-approval requirements.*
Even though we have obtained approval to market XTANDI in the United States, we are seeking approval in additional patient populations through
the submission of clinical trial data in such populations, and we are subject to extensive ongoing obligations and continued regulatory review from the FDA and other applicable regulatory agencies, including continued adverse event reporting
requirements and expensive post-marketing requirements for clinical and non-clinical studies. Regulatory review of filings seeking approval for additional patient populations, and the required post-marketing clinical and non-clinical studies may
result in negative changes to XTANDIs product labeling that may limit our ability to commercialize XTANDI in the United States or potentially other jurisdictions.
We and the manufacturers of XTANDI are also required to comply with current good manufacturing practices, or cGMP, regulations which include
requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation. In addition, regulatory agencies subject an approved product, its manufacturer and the manufacturers
facilities to continual review and inspections. The subsequent discovery of previously unknown problems with XTANDI, or problems with the facilities where XTANDI is manufactured, may result in restrictions on the marketing of XTANDI, up to and
including withdrawal of XTANDI from the market. If our manufacturing facilities or those of our suppliers fail to comply with applicable regulatory requirements, such noncompliance could result in regulatory action and additional costs to us.
Failure to comply with applicable FDA and other regulatory requirements may subject us to administrative or judicially imposed sanctions, including:
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issuance of Form 483 notices or Warning Letters by the FDA or other regulatory agencies;
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imposition of fines and other civil penalties;
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injunctions, suspensions or revocations of regulatory approvals;
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suspension of any ongoing clinical trials;
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total or partial suspension of manufacturing;
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delays in commercialization;
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refusal by the FDA to approve pending applications or supplements to approved applications filed by us or Astellas;
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refusals to permit drugs to be imported into or exported from the United States;
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restrictions on operations, including costly new manufacturing requirements; and
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product recalls or seizures.
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The policies of the FDA and other regulatory agencies may change
and additional government regulations may be enacted that could prevent or delay regulatory approval of XTANDI in other indications or further restrict or regulate post-approval activities. We cannot predict the likelihood, nature or extent of
adverse government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are not able to maintain regulatory compliance, we or Astellas might not be permitted to market XTANDI and
our business would suffer.
Risks Related to Our Future Product Development Candidates
Our business strategy depends on our ability to identify and acquire additional product candidates which we may never acquire or identify
for reasons that may not be in our control, or are otherwise unforeseen or unforeseeable to us.
A key component of our business
strategy is to diversify our product development risk by identifying and acquiring new product opportunities for development. However, we may not be able to identify promising new technologies. In addition, the competition to acquire promising
biomedical technologies is fierce, and many of our competitors are large, multinational pharmaceutical, biotechnology and medical device companies with considerably more financial, development and commercialization resources and experience than we
have. Thus, even if we succeed in identifying promising technologies, we may not be able to acquire rights to them on acceptable terms or at all. If we are unable to identify and acquire new technologies, we will be unable to diversify our product
risk. We believe that any such failure would have a significant negative impact on our prospects.
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Because we depend on our management to oversee the execution of commercialization plans for
XTANDI and continued development activities for enzalutamide, and to identify and acquire promising new product candidates, the loss of any of our executive officers could harm our business.
Our future success depends upon the continued services of our executive officers. We are particularly dependent on the continued services of
David Hung, M.D., our president and chief executive officer and a member of our board of directors. Dr. Hung identified enzalutamide for acquisition and has primary responsibility for identifying and evaluating other potential product
candidates. We believe that Dr. Hungs services in this capacity would be difficult to replace. None of our executive officers is bound by an employment agreement for any specific term, and they may terminate their employment at any time.
In addition, we do not have key person life insurance policies covering any of our executive officers. The loss of the services of any of our executive officers could delay the commercialization of XTANDI and continued development
activities for enzalutamide and adversely affect or preclude the identification and acquisition of new product candidates, either of which events could harm our business.
Pharmaceutical product candidates require extensive, time-consuming and expensive preclinical and clinical testing to establish safety
and efficacy, and regulatory approval. If we are unable to successfully develop and test our product candidates, we will not be successful.
The research and development of pharmaceuticals is an extremely risky industry. Only a small percentage of product candidates that enter the
development process ever receive regulatory approval. The process of conducting the preclinical and clinical testing required to establish safety and efficacy and obtain regulatory approval is expensive and uncertain and takes many years. If we are
unable to complete preclinical or clinical trials of current or future product candidates, due to safety concerns with a product candidate, or if the results of these trials are not satisfactory to convince regulatory authorities of their safety or
efficacy, we will not be able to obtain regulatory approval for commercialization. We cannot be certain if any of our product candidates will be approved by regulatory authorities. Furthermore, even if we are able to obtain regulatory approvals for
any of our product candidates, those approvals may be for indications that are not as broad as desired or may contain other limitations that would adversely affect our ability to generate revenue from sales of those products. If this occurs, our
business would be materially harmed and our ability to generate revenue would be severely impaired.
Enrollment and retention of
patients in clinical trials is an expensive and time-consuming process, could be made more difficult or rendered impossible by competing treatments or clinical trials of competing drugs in the same or other indications, and could result in
significant delays, cost overruns, or both, in our product development activities, or in the failure of such activities.
We may
encounter delays in enrolling, or be unable to enroll, a sufficient number of patients to complete any of our clinical trials, and even once enrolled we may be unable to retain a sufficient number of patients to complete any of our trials. Patient
enrollment and retention in clinical trials depends on many factors, including the size of the patient population, the nature of the trial protocol, the existing body of safety and efficacy data with respect to the study drug, the number and nature
of competing treatments and ongoing clinical trials of competing drugs for the same indication, the proximity of patients to clinical sites and the eligibility criteria for the study. Furthermore, any negative results we may report in clinical
trials of enzalutamide or any potential future product candidates may make it difficult or impossible to recruit and retain patients in other clinical studies of that same product candidate. Delays or failures in planned patient enrollment and/or
retention may result in increased costs, program delays or both, which could have a harmful effect on our ability to develop enzalutamide or any product candidates, or could render further development impossible.
Our reliance on third parties for the operation of our business may result in material delays, cost overruns and/or quality deficiencies
in our development programs.
We rely on third party vendors to perform key product development tasks, such as conducting
preclinical and clinical studies and manufacturing our product candidates at appropriate scale for preclinical and clinical trials and, in situations where we are unable to transfer those responsibilities to a corporate partner, for commercial use
as well. To manage our business successfully, we will need to identify, engage and properly manage qualified third party vendors that will perform these development activities. For example, we need to monitor the activities of our vendors closely to
ensure that they are performing their tasks correctly, on time, on budget and in compliance with strictly enforced regulatory standards. Our ability to identify and retain key vendors with the requisite knowledge is critical to our business and the
failure to do so could negatively impact our business. Because all of our key vendors perform services for other clients in addition to us, we also need to ensure that they are appropriately prioritizing our projects. If we fail to manage our key
vendors well, we could incur material delays, cost overruns or quality deficiencies in our development and commercialization programs, as well as other material disruptions to our business.
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Risks Related to the Pharmaceutical Industry, Including the Activities of Medivation, Inc.
Our industry is highly regulated by the FDA and comparable foreign regulatory agencies. We must comply with extensive, strictly enforced
regulatory requirements to develop and obtain marketing approval for any of our product candidates.
Before we, Astellas or any
potential future partners can obtain regulatory approval for the sale of our product candidates, our product candidates must be subjected to extensive preclinical and clinical testing to demonstrate their safety and efficacy for humans.
The preclinical and clinical trials of any product candidates that we develop must comply with regulation by numerous federal, state and local
government authorities in the United States, principally the FDA, and by similar agencies in other countries. We are required to obtain and maintain an effective investigational new drug application to commence human clinical trials in the United
States and must obtain and maintain additional regulatory approvals before proceeding to successive phases of our clinical trials. Securing FDA approval requires the submission of extensive preclinical and clinical data and supporting information
for each therapeutic indication to establish the product candidates safety and efficacy for its intended use. It takes years to complete the testing of a new drug or medical device and development delays and/or failure can occur at any stage
of testing. Any of our present and future clinical trials may be delayed, halted or approval of any of our products may be delayed or may not be obtained due to any of the following:
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any preclinical test or clinical trial may fail to produce safety and efficacy results satisfactory to the FDA or foreign regulatory authorities;
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preclinical and clinical data can be interpreted in different ways, which could delay, limit or prevent regulatory approval;
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negative or inconclusive results from a preclinical test or clinical trial or adverse medical events during a clinical trial could cause a preclinical study or clinical trial to be repeated or a program to be
terminated, even if other studies or trials relating to the program are ongoing or have been completed and were successful;
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the FDA or foreign regulatory authorities can place a clinical hold on a trial if, among other reasons, it finds that patients enrolled in the trial are or would be exposed to an unreasonable and significant risk of
illness or injury;
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the facilities that we utilize, or the processes or facilities of our consultants, including without limitation the contract manufacturers who will be manufacturing drug substance and drug product for us or any
potential collaborators, may not complete successful inspections by the FDA or foreign regulatory authorities; and
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we may encounter delays or rejections based on changes in FDA policies or the policies of foreign regulatory authorities during the period in which we develop a product candidate or the period required for review of any
final regulatory approval before we are able to market any product candidate.
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In addition, information generated during the
clinical trial process is susceptible to varying interpretations that could delay, limit, or prevent regulatory approval at any stage of the approval process. Moreover, early positive preclinical or clinical trial results may not be replicated in
later clinical trials. Failure to demonstrate adequately the quality, safety and efficacy of any of our product candidates would delay or prevent regulatory approval of the applicable product candidate. There can be no assurance that if clinical
trials are completed, either we or our collaborative partners will submit applications for required authorizations to manufacture or market potential products or that any such application will be reviewed and approved by appropriate regulatory
authorities in a timely manner, if at all. Moreover, any regulatory approval we, Astellas or any potential future collaborators ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the product not
commercially viable.
If XTANDI or any potential future product candidates cannot be manufactured in a cost-effective manner and in
compliance with cGMP and other applicable regulatory standards, they will not be commercially successful.
All pharmaceutical and
medical device products in the United States, Europe and other countries must be manufactured in strict compliance with cGMP and other applicable regulatory standards. Establishing a cGMP-compliant process to manufacture pharmaceutical products
involves significant time, cost and uncertainty. Furthermore, to be commercially viable, any such process would have to yield product on a cost-effective basis, using raw materials that are commercially available on acceptable terms. We face the
risk that our contract manufacturers may have interruptions in raw material supplies, be unable to comply with strictly enforced regulatory requirements, or, for other reasons beyond their or our control, be unable to complete their manufacturing
responsibilities on time, on budget, or at all. This risk could adversely affect our commercial sales and delay our clinical trials. Under our Collaboration Agreement with Astellas, Astellas is responsible for all manufacture of XTANDI for
commercial purposes, but we cannot guarantee that Astellas will be able to supply XTANDI in a timely manner or at all, or that continued commercial-scale cGMP manufacture of XTANDI using a validated manufacturing process will be possible on a
cost-effective basis, which would materially and adversely affect the value of our XTANDI program.
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We are subject to certain healthcare laws, regulation and enforcement that may impact the
commercialization of XTANDI and our product candidates. Failure to comply with such laws, regulations and enforcement could subject us to significant fines and penalties and result in a material adverse effect on our results of operations and
financial conditions.*
We are subject to several healthcare regulations and enforcement by the federal government and the states
in which we conduct our business. These laws may impact our business activities, including, among other things, the sales, marketing and education programs for XTANDI or any of our potential future product candidates that may be approved for
commercial sale:
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the federal Health Insurance Portability and Accountability Act of 1996, (HIPAA), as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH) which
governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information;
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the federal healthcare programs Anti-Kickback Law, which prohibits, among other things, persons from knowingly and willfully 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 payors that
are false or fraudulent;
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the Federal Food, Drug, and Cosmetic Act, which, among other things, strictly regulates drug product marketing, prohibits manufacturers from marketing drug products for off-label use, and regulates the distribution of
drug samples;
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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 which may apply to items or services reimbursed by any third-party payor, including commercial insurers.
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Additionally, the compliance environment is changing, with more states, such as California, Massachusetts, Vermont, and
Minnesota, mandating implementation of compliance programs, compliance with industry ethics codes, and implementation of gift bans and spending limits, and/or gifts, compensation, and other remuneration to healthcare professionals. Moreover,
Section 6002 of PPACA included new requirements for pharmaceuticals manufacturers, among others, to report certain payments or transfers of value made or distributed to physicians and teaching hospitals, and to report any ownership
and investment interests held by physicians and their immediate family members during the preceding calendar year. Section 6002 of PPACA includes in its reporting requirements a broad range of transfers of value, including, but not limited to
consulting fees, charitable contributions, payments for research, and grants. The Centers for Medicare & Medicaid Services, or CMS, issued its final rule implementing Section 6002 of PPACA in February 2013, and required data collection
commenced as of August 1, 2013. Manufacturers were required to report unaggregated data for August through December of 2013 to CMS by June 30, 2014. CMS will release the data on a public website by the end of 2014. Failure to so report
could subject companies to significant financial penalties. Several states currently have similar laws and more states may enact similar legislation. Reporting and public disclosure of these payments and transfers of value may make it more difficult
to recruit physicians for assistance with activities that would be helpful to our business. Tracking and reporting the required payments and transfers of value may result in considerable expense and additional resources.
If our operations are found to be in violation of any of the laws described above or any other healthcare laws that apply to us, we may be
subject to penalties, including, but limited to, civil, criminal penalties, and administrative penalties, damages, fines, the curtailment or restructuring of our operations, and the exclusion from participation in federal and state healthcare
programs and imprisonment, any of which could adversely affect our ability to operate our business and our financial results.
If
any promotional activities that we undertake fail to comply with the regulations and guidelines of the FDA and applicable foreign regulatory agencies, we may be subject to warnings or enforcement actions that could harm our business.
Physicians may prescribe drugs for uses that are not described in the drugs labeling or for uses that differ from those tested in
clinical studies and approved by the FDA or foreign regulatory authorities. Regulatory authorities generally do not regulate the behavior of physicians in their choice of treatments. Regulatory authorities do, however, restrict communications on the
subject of uses outside of the approved labeling, or off-label uses. Companies cannot actively promote approved drugs for off-label uses. If our promotional activities for XTANDI and any other potential future product candidate for which
we may receive regulatory approval fail to comply with applicable regulations or guidelines, we may be subject to warnings from, or enforcement by, these authorities, including potentially civil and criminal penalties.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and other worldwide anti-bribery laws.
We are subject to the U.S. Foreign Corrupt Practices Act, or FCPA, which generally prohibits companies and their intermediaries
from making payments to non-U.S. government officials for purpose of obtaining or retaining business or securing any
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other improper advantage. We are also subject to similar anti-bribery laws in the jurisdictions in which we operate. Failure to comply with the FCPA or related laws governing the conduct of
business with foreign government entities could disrupt our business and lead to severe criminal and civil penalties, including criminal and civil fines, denial of government reimbursement for our products and exclusion from participation in
government healthcare programs. Other remedial measures could include further changes or enhancements to our procedures, policies, and controls and potential personnel changes and/or disciplinary actions, any of which could have a material adverse
impact on our business, financial condition, results of operations and liquidity. We could also be affected by any allegation that we violated such laws.
We may be subject to product liability or other litigation, which could harm our ability to efficiently and effectively conduct our
business, and, if successful, could materially and adversely harm our business and financial condition as a result of the costs of liabilities that may be imposed thereby.
*
Our business exposes us to the risk of product liability claims that is inherent in the development, manufacturing, distribution and sale of
pharmaceutical products. If XTANDI or any potential future product candidate harms people, or is alleged to be harmful, we may be subject to costly and damaging product liability claims brought against us by clinical trial participants, consumers,
health care providers, corporate partners or others. We have product liability insurance covering commercial sales of XTANDI and our ongoing clinical trials. However, the amount of insurance we maintain may not be adequate to cover all liabilities
that we may incur. If we are unable to obtain insurance at an acceptable cost or otherwise protect against potential product liability claims, we may be exposed to significant litigation costs and liabilities, which may materially and adversely
affect our business and financial position. If we are sued for injuries allegedly caused by XTANDI or any of our current or future product candidates, our litigation costs and liability could exceed our total assets and our ability to pay.
Regardless of merit or eventual outcome, liability claims may result in:
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decreased demand for XTANDI and any potential future product candidate that we may develop;
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injury to our reputation;
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withdrawal of clinical trial participants;
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significant costs to defend the related litigation;
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substantial monetary awards to trial participants or patients;
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the inability to commercialize any other products that we may develop.
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In addition, we may
from time to time become involved in various lawsuits and legal proceedings which arise in the ordinary course of our business, such as our litigation with the Regents of the University of California. On April 11, 2014, The Regents of the
University of California, or UCLA, filed a complaint against us and one of our subsidiaries in the Superior Court of the State of California, County of San Francisco. The complaint arises from the parties 2005 Exclusive License Agreement, or
ELA, which grants our subsidiary rights in certain UCLA patents, including the UCLA patents covering XTANDI. The complaint centers on two allegations. The first allegation is that we and our subsidiary have failed to pay UCLA ten percent of
Operating Profits we received (and will continue to receive) from Astellas Pharma, Inc. as a result of the 2009 Collaboration Agreement between us and Astellas. UCLA alleges that such Operating Profits are Sublicensing Income
under the ELA and that UCLA is entitled to ten percent of such payments. The second allegation is that we breached our fiduciary duties to UCLA, as a minority shareholder of our subsidiary. UCLA owns a fraction of one percent of the outstanding
shares of our subsidiary. The complaint seeks a declaration and judgment for breach of contract related to the allegation that Operating Profits payments received from Astellas are Sublicensing Income under the ELA, a
judgment that we have breached our fiduciary duties and an injunction requiring us to comply with our fiduciary duties. At the time of this filing, UCLAs second allegation that we breached our fiduciary duties to UCLA, as a minority
shareholder of MPT, had been dismissed without prejudice. Although the UCLA complaint does not seek termination of the ELA, if we are not successful in this litigation we may be required to pay UCLA ten percent of the Operating Profits
and be subject to other liabilities, any of which could have a material adverse effect on our financial condition and results of operations. See Part II, Item 1, Legal Proceedings for additional information on this
litigation. Any litigation to which we are subject could require significant involvement of our senior management and may divert managements attention from our business and operations. Litigation costs or an adverse result in any litigation
that may arise from time to time may adversely impact our operating results or financial condition.
We may be subject to damages or
injunctions resulting from qui tam or whistleblower actions that individuals may bring against us.
Although we have
developed and are in the process of implementing a program for compliance with all federal and state laws, we cannot guarantee that our compliance program will be sufficient or effective, that our employees will comply with our policies, that our
employees will notify us of any violation of our policies, that we will have the ability to take appropriate and timely corrective action in response to any such violation, or that we will make decisions and take actions that will necessarily limit
or avoid liability for qui tam or whistleblower claims that individuals, such as employees or former employees, may bring against us or that governmental authorities may prosecute against us based on information provided by individuals.
Qui tam or whistleblower claims
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against a defendant are brought by individuals or governmental authorities based on information from individuals have increased substantially in recent years. In any qui tam or
whistleblower action that results in the payment of a fine imposed by a court or a settlement, the individual who brought the claim or furnished information allowing the governmental authority to prosecute the claim is rewarded with a
percentage of the fine or settlement amount collected from the defendant. The prospect of sharing in the proceeds of any fine collected from the defendant motivates individuals to bring qui tam or whistleblower claims or to furnish
information to a governmental authority for the prosecution of such claims. In addition, the enactment of new federal and state laws, the amendment of existing federal and state laws, and the interpretation of existing or future laws by court
decision could further expand the grounds on which individuals may pursue qui tam or whistleblower claims. If one or more of individuals bring a qui tam or whistleblower claim against us or if a governmental authority
prosecutes a claim against us on the basis of information provided by one or more individuals, and if we are found liable and a fine and/or an injunction is imposed on us or we agree to pay a fine and/or accept an injunction in settlement of the
claim, the payment of the fine and/or the curtailment of our activities consequent to the injunction could have a material adverse effect on our financial condition and impair or prevent us from continuing our business. In addition, the costs and
fees associated with defending a qui tam or whistleblower claim would be significant.
Risks Related to the Operation of our Business
We have a history of net losses and we may incur substantial losses in the foreseeable future as we continue our development and
commercialization activities and may never achieve, maintain, or increase profitability on a quarterly or annual basis.*
We have
incurred significant losses since our inception and as of June 30, 2014, we have an accumulated deficit of $299.9 million. We have incurred these losses principally from costs incurred in funding our research and development activities, from
general and administrative expenses and from our XTANDI commercialization activities. We may incur substantial costs in the future as we continue to finance the commercialization of XTANDI in the U.S. market, clinical and preclinical studies of
enzalutamide and our early-stage research and drug discovery projects, potential business development activities, and our corporate overhead costs, which could impact our ability to achieve, maintain, or increase profitability on a quarterly or
annual basis. Our ability to generate revenue to achieve, maintain, or increase profitability on a quarterly or annual basis is dependent on our ability, alone or with collaboration partners, to successfully commercialize products for which we have
received marketing approval.
Our significant level of indebtedness and lease obligations could adversely affect our financial
condition. In addition, we may not have sufficient funds to service our indebtedness and lease obligations when payments are due.
At June 30, 2014, we had outstanding $258.7 million of the Convertible Notes, and approximately $68.6 million of minimum lease
commitments. We may also incur additional indebtedness to meet future financing needs, including in connection with any licensing or acquisition transactions that we may elect to assume to diversify our product risk. Our substantial indebtedness
could have significant effects on our business, results of operations and financial condition. For example, it could:
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make it more difficult for us to satisfy our financial obligations, including with respect to the Convertible Notes and leases;
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increase our vulnerability to general adverse economic, industry and competitive conditions;
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reduce the availability of our cash resources to fund our operations because we will be required to dedicate a substantial portion of our cash resources to the payment of principal and interest on our indebtedness and
lease payments;
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limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
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prevent us from raising funds necessary to repurchase the Convertible Notes following a fundamental change, which includes a non-stock takeover of our company and certain other merger and business combination
transactions;
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place us at a competitive disadvantage compared to our competitors that are less highly leveraged and that, therefore, may be able to take advantage of opportunities that our leverage prevents us from exploring; and
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limit our ability to obtain additional financing.
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Each of these factors may have a material
and adverse effect on our financial condition and viability.
We have funded our operations primarily through public offerings of our
common stock, proceeds from the issuance of the Convertible Notes and from upfront, milestone and cost-sharing payments received under agreements with current and former collaboration partners, and subsequent to September 13, 2012, from
collaboration revenue related to XTANDI sales. At June 30, 2014, we had cash and cash equivalents totaling $290.0 million available to fund our operations. We expect to continue to spend substantial amounts of capital for our operations in the
future. Our ability to generate a sufficient amount of profit and positive cash flows from sales of XTANDI could impact our ability to make payments on the Convertible Notes and our leases when they become due and to satisfy our other cash
requirements and will depend on our existing cash resources and future financing activity, if any.
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We may need additional funds to support our operations, and such funding may not be
available to us on acceptable terms, or at all, which would force us to delay, scale back or eliminate some or all of our development programs and other operations, restructure or refinance our indebtedness, or any combination of the foregoing.
Raising additional capital may subject us to unfavorable terms, cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our product candidates and technologies.
We have a history of net losses and we may incur additional losses in the future. Our future capital requirements will depend on many factors,
including without limitation:
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costs associated with commercialization of XTANDI for post-chemotherapy mCRPC patients, and if the FDA approves, mCRPC patients who have not received chemotherapy in the United States;
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the timing and magnitude of sales of XTANDI for post-chemotherapy mCRPC patients, and if the FDA approves, mCRPC patients who have not received chemotherapy;
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whether any changes are made to the scope of our ongoing clinical development activities;
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the scope and results of our and our collaboration partners preclinical programs and clinical studies;
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whether we experience delays in our preclinical and clinical development programs;
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whether opportunities to acquire additional product candidates arise and the timing and costs of acquiring and developing those product candidates;
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whether we are able to enter into additional third-party collaborative partnerships to develop and/or commercialize potential future product candidates on terms, including development and commercialization cost share
terms, that are acceptable to us;
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the timing and requirements of, and the costs involved in, conducting studies required to obtain regulatory approvals for XTANDI or potential future product candidates from the FDA and comparable foreign regulatory
agencies;
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the availability of third parties to perform the key development tasks for XTANDI and potential future product candidates, including conducting preclinical and clinical studies and manufacturing our product candidates
to be tested in those studies, and the associated costs of those services;
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expenses associated with, and the outcome of, ongoing litigation;
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the costs involved in preparing, filing, prosecuting, maintaining, defending the validity of and enforcing patent claims and other costs related to patent rights and other intellectual property rights, including
litigation costs and the results of such litigation; and
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interest payments and potential cash settlement of the Convertible Notes and lease payments;
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Based on our current expectations, we believe our capital resources at June 30, 2014, combined with our anticipated future cash flows,
will be sufficient to fund our currently planned operations for at least the next 12 months. This estimate is based on a number of assumptions that may prove to be wrong, including assumptions regarding net sales of XTANDI, potential XTANDI
approvals in new markets and for other indications, and potential receipt of profit sharing, royalty, and milestone payments under our Astellas Collaboration Agreement, and we could exhaust our available cash and cash equivalents earlier than
presently anticipated. For example, we may be required or choose to seek additional capital to fund the costs of commercialization of XTANDI in the United States, to expand our preclinical and clinical development activities for XTANDI and other
existing or potential future product candidates, or to license additional product, product candidates or companies, if we face challenges or delays in connection with our clinical trials, to maintain minimum cash balances that we deem reasonable and
prudent, or in the event a fundamental change occurs under the terms of the Convertible Notes, which would give the holders of the Convertible Notes the right to require us to purchase their Convertible Notes in cash. Our ability to raise additional
funds on acceptable terms will be dependent on the climate of worldwide capital markets, which could be challenging.
Our failure to raise
capital when needed may harm our business and operating results. If we are unable to raise additional funds when needed, we could be required to delay, scale back or eliminate some or all of our development programs and other operations, restructure
or refinance our indebtedness, or any combination of the foregoing. We may seek to raise additional funds through public or private financing or other arrangements. We cannot assure you that any of these actions could be effected on satisfactory
terms, if at all, or that they would yield sufficient funds to make required payments on the Convertible Notes or to fund our other liquidity needs. We cannot assure you that our business will have access to sufficient cash resources to enable us to
pay our indebtedness, including the Convertible Notes, or to fund our other liquidity needs.
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The proposed changes to financial accounting standards, if adopted, could require our
operating leases to be recognized on our consolidated balance sheet.
In addition to our significant level of indebtedness, we
have significant obligations relating to our leases. At June 30, 2014, we had minimum lease commitments of approximately $68.6 million. Leases that are classified as operating leases are disclosed in the footnotes to our consolidated financial
statements, but are not reflected as liabilities on our consolidated balance sheets.
The FASB, and the International Accounting Standards
Board, or IASB, have been in deliberation on their conveyed lease project regarding proposed changes to financial accounting standards for leases. Currently, Accounting Standards Codification 840, or ASC 840, Leases, requires that
operating leases are classified as off-balance sheet transactions and only operating lease expense is included in the consolidated statements of operations. The proposed changes to lease accounting could potentially require recognition of our
operating leases as assets and liabilities on our consolidated balance sheets. The right to use the leased property would be capitalized as an asset and the present value of future lease payments would be accounted for as a liability. A retroactive
adoption may be required when the changes become effective. We have not quantified the impact of this proposed standard on our consolidated financial statements. If our operating leases are recognized on our consolidated financial statements, it
could likely result in a significant increase in the liabilities reflected on our consolidated balance sheets and an increase in the interest expense and depreciation and amortization expense reflected in our consolidated statements of operations.
We may have additional tax liabilities.*
We are subject to income taxes in various jurisdictions. Significant judgment is required in determining our provision for income taxes and
other tax liabilities. Our effective income tax rate in the future is subject to volatility and could be adversely affected by a number of factors, including: interpretations of existing tax laws, changes in tax laws and rates, future levels of
research and development expenditures, changes in the mix of earnings in countries with differing statutory tax rates in which we may conduct business, changes in the valuation of deferred tax assets and liabilities, state income taxes, the tax
impact of stock-based compensation, changes in estimates of prior years items, tax costs for acquisition-related items, changes in accounting standards, and overall levels of income before taxes. The impact of our income tax provision
resulting from these items may be significant and could have a negative impact on our net income.
We are also subject to non-income based
taxes, such as payroll, sales, use, net worth, property, and goods and services taxes in the United States. We may have additional exposure to non-income based tax liabilities.
We are regularly subject to audits by tax authorities in the jurisdictions in which we conduct business. Although we believe our tax positions
are reasonable, the final outcome of tax audits and related litigation could be materially different than that reflected in our historical income tax provisions and accruals, and we could be subject to assessments of additional taxes and/or
substantial fines or penalties. The resolution of any audits or litigation could have an adverse effect on our financial position and results of operations.
We and our subsidiaries are engaged in a number of intercompany transactions. Although we believe that these transactions reflect arms
length terms and that proper transfer pricing documentation is in place, which should be respected for tax purposes, the transfer prices and terms and conditions of such transactions may be scrutinized by tax authorities, which could result in
additional tax and/or penalties becoming due.
Intellectual property protection for our product candidates is crucial to our
business, and is subject to a significant degree of legal risk, particularly in the life sciences industry.*
The success of our
business will depend in part on our ability to maintain and obtain intellectual property protection, primarily patent protection for the XTANDI product and any potential future product candidates, as well as successfully asserting and defending
these patents against third-party challenges. We and our collaborators will only be able to protect the XTANDI product and our potential future product candidates from unauthorized commercialization by third parties to the extent that valid and
enforceable patents or trade secrets cover them. Furthermore, future protection of our proprietary rights is uncertain because legal means may afford only limited protection and may not adequately protect our rights or permit us or our potential
future collaborators to gain or keep our competitive advantage.
The patent positions of life sciences companies can be highly uncertain
and involve complex legal and factual questions for which important legal principles remain unresolved. Further, changes in either the patent laws or in interpretations of patent laws in the United States or other countries may diminish the value of
our intellectual property rights. Accordingly, we cannot predict the breadth of claims that may be granted or enforced for our patents or for third-party patents that we have licensed. For example:
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we or our licensors might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;
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we or our licensors might not have been the first to file patent applications for these inventions;
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others may independently develop similar or alternative technologies or duplicate any of our technologies;
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it is possible that none of our pending patent applications or the pending patent applications of our licensors will result in issued patents;
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our issued patents and future issued patents, or those of our licensors, may not provide a basis for protecting commercially viable products, may not provide us with any competitive advantages, or may be challenged by
third parties and invalidated or rendered unenforceable; and
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we may not develop additional proprietary technologies or product candidates that are patentable.
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Further, even if we can obtain protection for and defend the intellectual property position of the XTANDI product or any potential future
product candidates, we or any of our potential future collaborators still may not be able to exclude competitors from developing or marketing competing drugs. Should this occur, we and our potential future collaborators may not generate any revenues
or profits from the XTANDI product or any potential future product candidates or our revenue or profits would be significantly decreased.
We could become subject to litigation or other challenges regarding intellectual property rights, which could divert management
attention, cause us to incur significant costs, prevent us from selling or using the challenged technology and/or subject us to competition by lower priced generic products.
Generic and other pharmaceutical manufacturers are and have been very aggressive in challenging the validity of patents held by proprietary
pharmaceutical companies, especially if these patents are commercially significant. We are facing a patent opposition in Europe and two pre-grant oppositions in India, and we may face additional challenges to our existing or future patents covering
the XTANDI product or any potential future product candidates. If a generic pharmaceutical company or other third party were able to successfully invalidate any of our present or future patents, the XTANDI product and any potential future product
candidates that may ultimately receive marketing approval could face additional competition from lower priced generic products that would result in significant price and revenue erosion and have a significantly negative impact on the commercial
viability of the affected product candidate(s).
In the future, we may be a party to litigation to protect our intellectual property or to
defend our activities in response to alleged infringement of a third partys intellectual property. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages and invalidation, or a narrowing of
the scope, of our proprietary rights. These lawsuits, regardless of their success, would likely be time-consuming and expensive to litigate and resolve and would divert management time and attention. Any potential intellectual property litigation
also could force us or our licensees to do one or more of the following:
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discontinue our products that use or are covered by the challenged intellectual property; or
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obtain from the owner of the allegedly infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all.
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If we or our licensees are forced to take any of these actions, our business may be seriously harmed. Although we carry general liability
insurance, our insurance does not cover potential claims of this type.
In addition, our patents and patent applications, or those of our
licensors, could face other challenges, such as interference proceedings, opposition proceedings, re-examination proceedings, inter parties review, post-grant review, derivation proceedings and pre-grant submissions. Any such challenge, if
successful, could result in the invalidation of, or in a narrowing of the scope of, any of our patents and patent applications subject to the challenge. Any such challenges, regardless of their success, would likely be time-consuming and expensive
to defend and resolve and would divert our managements time and attention.
We may in the future initiate claims or litigation
against third parties for infringement to protect our proprietary rights or to determine the scope and validity of our proprietary rights or the proprietary rights of competitors. These claims could result in costly litigation and the diversion of
our technical and management personnel and we may not prevail in making these claims.
We rely on license agreements for certain
aspects of our product candidates and our technology, and failure to meet our obligations under those agreements could severely negatively impact our business, and ability to generate revenue.
We have entered into agreements with third-party commercial and academic institutions to license intellectual property rights and technology.
For example, we have a license agreement with UCLA pursuant to which we were granted exclusive worldwide rights to certain UCLA patents related to XTANDI and a family of related compounds. Some of these license agreements, including our license
agreement with UCLA, contain diligence and milestone-based termination provisions, in which case our failure to meet any agreed upon diligence requirements or milestones may allow the licensor to terminate the agreement. If our licensors terminate
our license agreements or if we are unable to maintain the exclusivity of our exclusive license agreements, we may be unable to continue to develop and commercialize XTANDI or any potential future product candidates based on licensed intellectual
property rights and technology.
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In the future, we may need to obtain additional licenses of third-party technology that may
not be available to us or are available only on commercially unreasonable terms, and which may cause us to operate our business in a more costly or otherwise adverse manner that was not anticipated.
From time to time we may be required to license technology from additional third parties to further develop XTANDI and any future product
candidates. Should we be required to obtain licenses to any third-party technology, including any such patents based on biological activities or required to manufacture our product candidates, such licenses may not be available to us on commercially
reasonable terms, or at all. The inability to obtain any third-party license required to develop any of our product candidates could cause us to abandon any related development efforts, which could seriously harm our business and operations.
We may become involved in disputes with Astellas or any potential future collaborators over intellectual property ownership, and
publications by our research collaborators and scientific advisors could impair our ability to obtain patent protection or protect our proprietary information, which, in either case, could have a significant impact on our business.
Inventions discovered under research, material transfer or other such collaboration agreements, including the Astellas Collaboration
Agreement, may become jointly owned by us and the other party to such agreements in some cases and the exclusive property of either party in other cases. Under some circumstances, it may be difficult to determine who owns a particular invention, or
whether it is jointly owned, and disputes could arise regarding ownership of those inventions. These disputes could be costly and time consuming and an unfavorable outcome could have a significant adverse effect on our business if we were not able
to protect or license rights to these inventions. In addition, our research collaborators and scientific advisors generally have contractual rights to publish our data and other proprietary information, subject to our prior review. Publications by
our research collaborators and scientific advisors containing such information, either with our permission or in contravention of the terms of their agreements with us, may impair our ability to obtain patent protection or protect our proprietary
information, which could significantly harm our business.
Trade secrets may not provide adequate protection for our business and
technology.
We also rely on trade secrets to protect our technology, especially where we believe patent protection is not
appropriate or obtainable. However, trade secrets are difficult to protect. While we use reasonable efforts to protect our trade secrets, our or any potential collaborators employees, consultants, contractors or scientific and other advisors
may unintentionally or willfully disclose our information to competitors. If we were to enforce a claim that a third party had illegally obtained and was using our trade secrets, our enforcement efforts would be expensive and time consuming, and the
outcome would be unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, if our competitors independently develop equivalent knowledge, methods or know-how, it will be more
difficult or impossible for us to enforce our rights and our business could be harmed.
Significant disruptions of information
technology systems or breaches of data security could adversely affect our business.
Our business is increasingly dependent on
critical, complex and interdependent information technology systems to support business processes as well as internal and external communications. The size and complexity of our computer systems make them vulnerable to breakdown, malicious intrusion
and computer viruses. We have experienced at least one successful intrusion into our computer systems, and although it did not have a material adverse effect on our operations, there can be no assurance of a similar result in the future. We have
developed systems and processes that are designed to protect our information and prevent data loss and other security breaches, including systems and processes designed to reduce the impact of a security breach; however, such measures cannot provide
absolute security, and we have taken and are taking additional security measures to protect against any future intrusion. Any failure to protect against breakdowns, malicious intrusions and computer viruses may result in the impairment of production
and key business processes. In addition, our systems are potentially vulnerable to data security breaches, whether by employees or others, which may expose sensitive data to unauthorized persons. Such data security breaches could lead to the loss of
trade secrets or other intellectual property, or could lead to the public exposure of personal information of our employees, clinical trial patients, customers, and others. Such disruptions and breaches of security could expose us to liability and
have a material adverse effect on the operating results and financial condition of our business.
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Risks Related to Ownership of Our Common Stock and Convertible Notes
Our operating results are unpredictable and may fluctuate. If our operating results are below the expectations of securities analysts or
investors, the market value of our common stock and the trading price of the Convertible Notes could decline.
Our operating
results are difficult to predict and will likely fluctuate from quarter to quarter and year to year. Due to the competitive market for mCRPC therapies, XTANDI sales will be difficult to predict from period to period. As a result, you should not rely
on XTANDI sales results in any period as being indicative of future performance and sales of XTANDI may be below the expectation of securities analysts or investors in the future. Additionally, you should not place undue reliance on the forward
looking statements about expectations for future XTANDI sales from our partner Astellas, as we may not agree with such statements, or from us, as XTANDI sales results are difficult to predict. We believe that our quarterly and annual results of
operations may be affected by a variety of factors, including:
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the level of demand for XTANDI;
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the extent to which coverage and reimbursement for XTANDI is available from government and health administration authorities, private health insurers, managed care programs and other third-party payors;
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the timing, cost and level of investment in our and Astellas sales and marketing efforts to support XTANDI sales;
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the timing, cost and level of investment in our research and development activities involving XTANDI and our product candidates;
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the cost of manufacturing XTANDI, and the amount of legally mandated discounts to government entities, other discounts and rebates, product returns and other gross-to-net deductions;
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the risk/benefit profile, cost and reimbursement of existing and potential future drugs which compete with XTANDI;
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the timeliness and accuracy of financial information we receive from Astellas regarding XTANDI net sales globally, and shared U.S. development and commercialization costs for XTANDI incurred by Astellas, including the
accuracy of the estimates Astellas uses in calculating any such financial information; and
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expenditures that we will or may incur to acquire or develop additional technologies, product candidates and products.
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In addition, our revenues will also depend on the achievement of development and sales milestones that trigger milestone payments under our
existing collaboration with Astellas, as well as any upfront and milestone payments under potential future collaboration and license agreements. These upfront and milestone payments may vary significantly from quarter to quarter and any such
variance could cause a significant fluctuation in our operating results from one quarter to the next. Further, we measure compensation cost for stock-based awards made to employees at the grant date of the award, based on the fair value of the
award, and recognize the cost as an expense over the employees requisite service period. As the variables that we use as a basis for valuing these awards change over time, including our underlying stock price and stock price volatility, the
magnitude of the expense that we must recognize may vary significantly.
For these and other reasons, it is difficult for us to accurately
forecast future profits or losses. As a result, it is possible that in some quarters our operating results could be below the expectations of securities analysts or investors.
Sales fluctuations of XTANDI as a result of inventory levels at pharmaceutical wholesalers and distributors may cause our revenue to
fluctuate, which could adversely affect our financial results, the market value of our common stock and the trading price of our Convertible Notes.
The pharmaceutical wholesalers and distributors with whom Astellas has entered into inventory management agreements make estimates to
determine end user demand and may not be completely effective in matching their inventory levels to actual end user demand. As a result, changes in inventory levels held by those wholesalers and distributors can cause our operating results to
fluctuate unexpectedly if sales of XTANDI to these wholesalers do not match end user demand. Adverse changes in economic conditions or other factors may cause wholesalers and distributors to reduce their inventories of XTANDI. As inventory
of XTANDI in the distribution channel fluctuates from quarter to quarter, we may see fluctuations in collaboration revenue from XTANDI sales.
If our operating results are below the expectations of securities analysts, our stock price may decline.
Various securities analysts follow our financial results and issue reports on us. These reports include information about our historical
financial results as well as the analysts estimates of our future performance. The analysts estimates are based upon their own opinions and are often different from our estimates or expectations. If our operating results are below the
expectations of securities analysts, the market value of our common stock and the trading price of the Convertible Notes could decline, perhaps substantially.
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Our stock price has been and may continue to be volatile, and our stockholders
investment in our stock could decline in value.
The market prices for our securities and those of other life sciences companies
have been highly volatile and often unrelated or disproportionate to the operating performance of those companies, and may continue to be highly volatile in the future. There has been particular volatility in the market prices of securities of life
sciences companies because of problems or successes in a given market segment or because investor interest has shifted to other segments. These broad market and industry factors may cause the market price of our common stock to decline, regardless
of our operating performance. We have no control over this volatility and can only focus our efforts on our own operations, and even these may be affected due to the state of the capital markets.
In the past, following periods of large price declines in the public market price of a companys securities, securities class action
litigation has often been initiated against that company. New litigation of this type could result in substantial costs and diversion of managements attention and resources, which would hurt our business. Any adverse determination in
litigation could also subject us to significant liabilities.
The following factors, in addition to other risk factors described herein,
may have a significant impact on the market price of our common stock:
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our ability to meet the expectations of investors related to the commercialization of XTANDI;
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inaccurate sales forecasting of XTANDI;
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the timing and amount of revenues generated from sales of XTANDI;
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actual or anticipated variations in quarterly operating results;
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legislation or regulatory actions or decisions affecting XTANDI or product candidates, including those of our competitors;
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changes in laws or regulations applicable to XTANDI;
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the receipt or failure to receive the additional funding necessary to conduct our business;
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the progress and results of preclinical studies and clinical trials of our product candidates conducted by us, Astellas or any future collaborative partners or licensees, if any, and any delays in enrolling a sufficient
number of patients to complete clinical trials of our product candidates;
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the announcement by our competitors of results from clinical trials of their products or product candidates;
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selling by existing stockholders and short-sellers;
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announcements of technological innovations or new commercial products by our competitors or us;
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developments concerning proprietary rights, including patents;
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developments concerning our collaboration with Astellas or any future collaborations;
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publicity regarding us, our product candidates or those of our competitors, including research reports published by securities analysts;
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regulatory developments in the United States and foreign countries;
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litigation, including the purported securities class action lawsuits pending against us and certain of our officers;
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hedging or arbitrage trading activity involving our common stock, including in connection with arbitrage strategies employed or that may be employed by investors in the Convertible Notes;
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economic and other external factors or other disaster or crisis; and
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period-to-period fluctuations in financial results.
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These factors and fluctuations, as well
as political and other market conditions, may adversely affect the market price of our common stock. Securities-related class action litigation is often brought against a company following periods of volatility in the market price of its securities.
Securities-related litigation, whether with or without merit, could result in substantial costs and divert managements attention and financial resources, which could harm our business and financial condition, as well as the market price of our
common stock. Additionally, volatility or lack of positive performance in our stock price may adversely affect our ability to retain or recruit key employees, all of whom have been or will be granted stock options as a part of their compensation.
A decrease in the market price of our common stock would also likely adversely impact the trading price of the Convertible Notes. The
market price of our common stock could also be affected by possible sales of our common stock by investors who view the Convertible Notes as a more attractive means of equity participation in us and by hedging or arbitrage trading activity that we
expect to develop involving our common stock. This trading activity could, in turn, affect the trading prices of the notes. This may result in greater volatility in the trading price of the Convertible Notes than would be expected for
non-convertible debt securities.
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We rely on Astellas to timely deliver important financial information relating to net sales
of XTANDI. In the event that this information is inaccurate, incomplete, or not timely, we will not be able to meet our financial reporting obligations as required by the SEC.
Under the Astellas Collaboration Agreement, Astellas has exclusive control over the flow of information relating to net sales of XTANDI that
we are dependent upon to meet our SEC reporting obligations. Astellas is required under the Astellas Collaboration Agreement to provide us with timely and accurate financial data related to net sales of XTANDI so that we may meet our reporting
requirements under federal securities laws. In the event that Astellas fails to provide us with timely and accurate information, we may incur significant liability with respect to federal securities laws, our internal controls and procedures under
the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, may be inadequate, and we may be required to restate our financial statements, any of which could adversely affect the market price of our common stock and Convertible Notes and subject us to
securities litigation.
To the extent that we create any joint ventures or have any variable interest entities for which we are
required to consolidate, we would need to rely on those entities to timely deliver important financial information to us. In the event that the financial information is inaccurate, incomplete, or not timely, we would not be able to meet our
financial reporting obligations as required by the SEC.*
To the extent we create joint ventures or have any variable interest
entities that we are required to consolidate and the financial statements of such entities are not prepared by us, we will not have direct control over their financial statement preparation. As a result, we will, for our financial reporting, depend
on what these entities report to us, which could result in us adding monitoring and audit processes, which could increase the difficulty of implementing and maintaining adequate controls over our financial processes and reporting in the future. This
may be particularly true when such entities do not have sophisticated financial accounting processes in place, or where we are entering into new relationships at a rapid pace, straining our integration capacity. Additionally, if we do not receive
the information from the joint venture or variable interest entity on a timely basis, this could cause delays in our external reporting obligations as required by the SEC.
Failure to maintain effective internal control over financial reporting in accordance with Sarbanes-Oxley could have a material adverse
effect on our stock price and the trading price of the Convertible Notes.
Section 404 of Sarbanes-Oxley and the related
rules and regulations of the SEC require an annual management assessment of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm attesting to the effectiveness of our
internal control over financial reporting at the end of the fiscal year. If we fail to maintain the adequacy of our internal control over financial reporting, as such standards are modified, supplemented or amended from time to time, we may not be
able to ensure that we can conclude on an ongoing basis that we have effective control over financial reporting in accordance with Sarbanes-Oxley and the related rules and regulations of the SEC. If we cannot in the future favorably assess, or our
independent registered public accounting firm is unable to provide an unqualified attestation report on, the effectiveness of our internal control over financial reporting, investor confidence in the reliability of our financial reports may be
adversely affected, which could have a material adverse effect on our stock price and the trading price of our outstanding Convertible Notes.
We do not intend to pay dividends on our common stock for the foreseeable future.
We do not expect for the foreseeable future to pay dividends on our common stock. Any future determination to pay dividends on or repurchase
shares of our common stock will be at the discretion of our board of directors and will depend upon, among other factors, our success in completing sales or partnerships of our programs, our results of operations, financial condition, capital
requirements, contractual restrictions and applicable law.
Provisions of our charter documents, our stockholder rights plan and
Delaware law could make it more difficult for a third party to acquire us, even if the offer may be considered beneficial by our stockholders.
Provisions of the Delaware General Corporation Law could discourage potential acquisition proposals and could delay, deter or prevent a change
in control. The anti-takeover provisions of the Delaware General Corporation Law impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders.
Specifically, Section 203 of the Delaware General Corporation Law, unless its application has been waived, provides certain default anti-takeover protections in connection with transactions between us and an interested stockholder.
Generally, Section 203 prohibits stockholders who, alone or together with their affiliates and associates, own more than 15% of the subject company from engaging in certain business combinations for a period of three years following the
date that the stockholder became an interested stockholder of such subject company without approval of the board or the vote of two-thirds of the shares held by the independent stockholders. Our board of directors has also adopted a stockholder
rights plan, or poison pill, which would significantly dilute the ownership of a
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hostile acquirer. Additionally, provisions of our amended and restated certificate of incorporation and bylaws could deter, delay or prevent a third party from acquiring us, even if doing so
would benefit our stockholders, including without limitation, the authority of the board of directors to issue, without stockholder approval, preferred stock with such terms as the board of directors may determine.
We may issue additional shares of our common stock or instruments convertible into shares of our common stock, including additional
shares associated with the potential conversion of the Convertible Notes, which could cause our stock price to fall and cause dilution to existing stockholders.
We may from time to time issue additional shares of common stock or other instruments convertible into, or exchangeable or exercisable for,
shares of our common stock, including in connection with potential in-licensing and acquisition transactions entered into to diversify our product risk. In addition, we may elect to satisfy all or a portion of our conversion obligations under the
Convertible Notes with shares of our common stock. The issuance of additional shares of our common stock, including upon conversion of some or all of the Convertible Notes, would dilute the ownership interests of existing holders of our common
stock. Dilution will be greater if the conversion rate of the Convertible Notes is adjusted upon the occurrence of certain events specified in the indenture to the Convertible Notes.
The issuance of a substantial number of shares of our common stock, the sale of a substantial number of shares of our common stock that were
previously restricted from sale in the public market, or the perception that these issuances or sales might occur, could depress the market price of our common stock and in turn adversely impact the trading price of the Convertible Notes. In
addition, holders of the Convertible Notes may hedge their investment in the Convertible Notes by short selling our common stock, which could depress the price of our common stock. As a result, investors may not be able to sell their shares of our
securities at a price equal to or above the price they paid to acquire them.
Furthermore, the issuance of additional shares of our common
stock, or the perception that such issuances might occur, could impair our ability to raise capital through the sale of additional equity securities.
Provisions in the indenture for the Convertible Notes may deter or prevent a business combination.
Under the terms of the indenture governing the Convertible Notes, the occurrence of a fundamental change would require us to repurchase all or
a portion of the Convertible Notes in cash, or, in some circumstances, increase the conversion rate applicable to the Convertible Notes. In addition, the indenture for the Convertible Notes prohibits us from engaging in certain mergers or business
combination transactions unless, among other things, the surviving entity assumes our obligations under the Convertible Notes. These and other provisions could prevent or deter a third party from acquiring us even where the acquisition could be
beneficial to our stockholders.
Any adverse rating of the Convertible Notes may negatively affect the price of our common stock.
We do not intend to seek a rating on the Convertible Notes. However, if a rating service were to rate the Convertible Notes and
if such rating service were to assign the Convertible Notes a rating lower than the rating expected by investors or were to lower its rating on the Convertible Notes below the rating initially assigned to the Convertible Notes or otherwise announce
its intention to put the Convertible Notes on credit watch, the price of our common stock could decline.
The conditional conversion
feature of the Convertible Notes may adversely affect our financial condition and operating results.*
Holders of the Convertible
Notes are entitled to convert their notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Notes, unless we satisfy our conversion obligation by delivering solely shares of our common
stock (other than cash in lieu of any fractional share), we would be required to settle all or a portion of our conversion obligation through the payment of cash, which could adversely affect our liquidity. We may, at any time prior to the final
settlement method election date, irrevocably elect to satisfy our conversion obligation with respect to each subsequent conversion date in a combination of cash and shares of our common stock, if any, with a specified dollar amount of $1,000, in
which case we will no longer be permitted to settle the principal portion of any converted Convertible Notes in shares of our common stock. In addition, even if holders do not elect to convert their Convertible Notes, we could be required under
applicable accounting rules to reclassify all or a portion of the outstanding principal of the notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
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The accounting method for convertible debt securities that may be settled in cash, such as
the Convertible Notes, could have a material effect on our reported financial results.
Under Financial Accounting Standards Board
Accounting Standards Codification 470-20, Debt with Conversion and Other Options, or ASC 470-20, an entity must separately account for the liability and equity components of convertible debt instruments (such as the Convertible
Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuers economic interest cost. The effect of ASC 470-20 on the accounting for the Convertible Notes is that the equity component is
required to be included in the additional paid-in capital section of stockholders equity on our consolidated balance sheet and the value of the equity component would be treated as original issue discount for purposes of accounting for the
debt component of the Convertible Notes. As a result, we are required to record a greater amount of non-cash interest expense as a result of the amortization of the discounted carrying value of the Convertible Notes to their face amount over the
term of the Convertible Notes. We report lower net income in our financial results because ASC 470-20 requires interest to include both the current periods amortization of the debt discount and the instruments coupon interest, which
could adversely affect our reported or future financial results, the market price of our common stock and the trading price of the Convertible Notes.
The repurchase rights and events of default features of the Convertible Notes, if triggered, may adversely affect our financial
condition and operating results.
Following a fundamental change under the indenture governing the Convertible Notes, dated as of
March 19, 2012 between us and Wells Fargo Bank, National Association as Trustee, as supplemented by the first supplemental indenture dated as of March 19, 2012, or the Indenture, holders of the Convertible Notes will have the right to
require us to purchase their Convertible Notes for cash. In addition, if an event of default under the Convertible Notes is triggered, the trustee or the holders of the Convertible Notes may declare the principal amount of the Convertible Notes,
plus accrued and unpaid interest thereon, to be immediately due and payable. In either event, we would be required to make cash payments to satisfy our obligations, which could adversely affect our liquidity. In addition, even if the repurchase
rights are not exercised or the payment of principal and interest of Convertible Notes is not accelerated, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as
a current rather than long-term liability, which could result in a material reduction of our net working capital.
Changes in, or
interpretations of, accounting principles could have a significant impact on our financial position and results of operations.*
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America,
or U.S. GAAP. These principles are subject to interpretation by the SEC and various other bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and
may even retroactively affect previously reported transactions.
For example, the Financial Accounting Standards Board, or FASB, is
currently working together with the International Accounting Standards Board, or IASB, on several projects to further align accounting principles and facilitate more comparable financial reporting between companies who are required to follow U.S.
GAAP under SEC regulations and those who are required to follow International Financial Reporting Standards outside of the U.S. These efforts by the FASB and the IASB may result in different accounting principles under U.S. GAAP that may result in
materially different financial results for us in areas including, but not limited to, principles for recognizing revenue and lease accounting.