Item 1A. Risk Factors
This Quarterly Report on Form 10-Q contains forward-looking information based on our current expectations. Because our actual results may differ materially from any forward-looking statements made by
or on behalf of us, this section includes a discussion of important factors that could affect our actual future results, including, but not limited to, our revenues, expenses, net loss and loss per share. You should carefully consider these risk
factors, together with all of the other information included in this Quarterly Report on Form 10-Q as well as our other publicly available filings with the U.S. Securities and Exchange Commission, or SEC.
We have marked with an asterisk (*) those risks described below that reflect substantive changes from, or additions to, the risks described in
our Annual Report on Form 10-K for the year ended December 31, 2013.
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Risks Related to Clinical Development and Regulatory Approval
We depend substantially on the success of Zalviso, which may not receive regulatory approval or be successfully commercialized.
Since our inception in 2005, we have focused primarily on development of our lead product candidate, Zalviso
TM
. Zalviso consists of sufentanil tablets delivered by the Zalviso
System, a needle-free, handheld, patient-administered, pain management system (together, Zalviso). The success of our business depends primarily upon our ability to develop, receive regulatory approval for and commercialize Zalviso for
the management of moderate-to-severe acute pain in adult patients in the hospital setting. We have not marketed, distributed or sold any products to date. Our Phase 3 program for Zalviso consisted of three Phase 3 clinical trials. We reported
positive top-line data from each of these trials and submitted an NDA for Zalviso to the FDA on September 27, 2013, which the FDA then accepted for filing in December 2013.
On July 25, 2014, the U.S. Food and Drug Administration, or FDA, issued a Complete Response Letter, or CRL, for our NDA for Zalviso. Since the receipt of the CRL, we have been working on a reply and
intend to meet with the FDA to discuss the items contained in the CRL. The CRL contains requests for additional information on the Zalviso System to ensure proper use of the device. The requests include submission of data demonstrating a reduction
in the incidence of optical system errors, changes to the Instructions for Use for the device to address inadvertent dosing, among other items, and submission of additional data to support the shelf life of the product. We believe certain of the
requests were addressed in amendments to the NDA that were submitted prior to the receipt of the CRL but, as acknowledged by the FDA, have not yet been reviewed by the FDA. While we anticipate that additional bench testing and human factors testing
may be required to address certain items in the CRL, there were no requests to conduct additional human clinical studies. We believe we can satisfy all of the FDAs requests contained in the CRL and resubmit the NDA by the end of 2014, although
we will have more clarity on the process and timing after our discussion with FDA. However, there is no guarantee that the information previously provided, or to be provided, to the FDA will be adequate to address the issues in the CRL. While we
plan to resubmit the NDA for Zalviso, there is no guarantee that we will be successful in obtaining FDA approval of Zalviso. For example, the FDA could require us to complete further clinical, human factors, pharmaceutical, reprocessing or other
studies, which could delay or preclude any approval of the NDA and would require us to obtain significant additional funding.
Our proposed
trade name of Zalviso has been approved by the FDA, which must approve all drug trade names to avoid medication errors and misbranding. However, the FDA may withdraw this approval in which case any brand recognition or goodwill that we establish
with the name Zalviso prior to commercialization may be worthless.
Any delay in approval by the FDA of the Zalviso NDA, may negatively impact
our stock price and harm our business operations. For example, our stock price declined by more than 40% on July 28, 2014, the first trading day following the announcement of the receipt of the CRL from the FDA. Any delay in obtaining, or inability
to obtain, regulatory approval would prevent us from commercializing Zalviso in the United States, generating revenues and achieving profitability. If any of these events occur, we may be forced to delay or abandon our development efforts for
Zalviso, which would have a material adverse effect on our business and could potentially cause us to cease operations. In addition, Grünenthal may never achieve regulatory approval for Zalviso in their licensed territories, including the EU
and Australia, in which case, we would not receive development or sales milestones, or product royalties, which could have a material adverse effect on our business.
Positive clinical results obtained to date for our product candidates may be disputed in FDA review, do not guarantee regulatory approval and may not be obtained from future clinical trials.
We have reported positive top-line data from each of our three Zalviso Phase 3 clinical trials. However, even if we believe that the
data from required Phase 3 clinical trials is positive, the FDA could analyze our data using alternative strategies and determine that the data from our trials was negative or inconclusive. Negative or inconclusive results of a Phase 3 clinical
trial could cause the FDA to require us to repeat the trial or conduct additional clinical trials prior to obtaining approval for commercialization, and there is no guarantee that additional trials would achieve positive results. Any such
determination by the FDA would delay the timing of our commercialization plan for Zalviso and adversely affect our business operations.
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Delays in clinical trials are common and have many causes, and any delay could result in increased
costs to us and jeopardize or delay our ability to obtain regulatory approval and commence product sales.
We have experienced and may
in the future experience delays in clinical trials of our product candidates. While we have completed pre-commercial trials for Zalviso, and the Phase 2 clinical trial for ARX-04, potential future clinical trials, such as the planned ARX-04 Phase 3
clinical trials, may not begin on time, have an effective design, enroll a sufficient number of patients or be completed on schedule, if at all. Our clinical trials for any of our product candidates could be delayed for a variety of reasons,
including:
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inability to raise funding necessary to initiate or continue a trial;
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delays in obtaining regulatory approval to commence a trial;
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delays in reaching agreement with the FDA on final trial design;
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imposition of a clinical hold following an inspection of our clinical trial operations or trial sites by the FDA or other regulatory authorities;
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delays in reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites;
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delays in obtaining required institutional review board approval at each site;
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delays in recruiting suitable patients to participate in a trial;
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delays in the testing, validation, manufacturing and delivery of the device components of our product candidates;
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delays in having patients complete participation in a trial or return for post-treatment follow-up;
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clinical sites dropping out of a trial to the detriment of enrollment or being delayed in entering data to allow for clinical trial database closure;
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time required to add new clinical sites; or
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delays by our contract manufacturers to produce and deliver sufficient supply of clinical trial materials.
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If any future clinical trials are delayed for any of the above reasons, our development costs may increase, our approval process could be delayed and our
ability to commercialize and commence sales of our product candidates could be materially harmed, which could have a material adverse effect on our business.
Our product candidates may cause adverse effects or have other properties that could delay or prevent their regulatory approval or limit the scope of any approved label or market acceptance.
Adverse events, or AEs, caused by our product candidates could cause us, other reviewing entities, clinical trial sites or regulatory
authorities to interrupt, delay or halt clinical trials and could result in the denial of regulatory approval. In our Phase 3 active comparator clinical trial (IAP 309), 7.9% of Zalviso treated patients dropped out of the trial prematurely due to an
AE, and we observed one serious adverse event, or SAE, that was assessed as possibly or probably related to Zalviso. In our Phase 3, double-blind, placebo-controlled, abdominal surgery trial (IAP 310), adverse events reported in the trial were
generally mild or moderate in nature and similar in both placebo and treatment groups. In addition, one patient in the trial, who was in the sufentanil group, experienced an SAE, which was determined to be unrelated to the trial drug. In our Phase
3, double-blind, placebo-controlled, orthopedic surgery trial (IAP 311), treatment-emergent adverse events were generally mild-to-moderate in nature and similar for the majority of adverse events between sufentanil and placebo treated
patients. Two patients (one each in the sufentanil group and placebo group) experienced a serious adverse event considered possibly or probably related to the trial drug by the investigator.
In our Phase 2 ARX-04 trial, two serious adverse events (SAEs), both in the 20 mcg-dose group, occurred one week after the study (surgical infections)
and were deemed unrelated to study drug. All but two adverse events reported in the study were mild-to-moderate in nature with 58 patients (58%) reporting a total of 135 adverse events. The most frequently reported adverse events for all
patients were nausea (30%), vomiting (17%), dizziness (14%) and somnolence (11%). Two patients discontinued treatment, one unrelated to study drug (anxiety/chest pain) and the other probably related to study drug (somnolence/respiratory
depression); however, both patients recovered without medical intervention.
Phase 2 clinical trials conducted by us with our Zalviso, ARX-02,
ARX-03 and ARX-04 product candidates have to date generated some AEs, but no SAEs, related to the trial drug.
Further, if any of our future
products, including Zalviso, cause serious or unexpected side effects after receiving marketing approval, a number of potentially significant negative consequences could result, including:
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regulatory authorities may withdraw their approval of the product or impose restrictions on its distribution in the form of a modified Risk Evaluation
and Mitigation Strategy, or REMS;
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regulatory authorities may require the addition of labeling statements, such as warnings or contraindications;
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we may be required to change the way the product is administered or conduct additional clinical trials;
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we could be sued and held liable for harm caused to patients; or
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our reputation may suffer.
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Any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidate and could substantially increase
the costs of commercializing our product candidates.
Additional time may be required to obtain regulatory approval for Zalviso because
it is a drug/device combination.
Zalviso is a combination product candidate with both drug and device. Zalviso is viewed as a
combination product by the FDA, and both drug and device components were required for review as part of our NDA submission. There are very few examples of the FDA approval process for drug/device combination products such as Zalviso. As a result, we
have in the past, and may in the future, experience delays in the development and commercialization of Zalviso due to regulatory uncertainties in the product development and approval process, in particular as it relates to a drug/device combination
product approval under an NDA. For example, the Zalviso CRL received from the FDA in July 2014 contains requests for additional information on the Zalviso System to ensure proper use of the device.
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After the completion of our clinical trials, we cannot predict whether or when we will obtain
regulatory approval to commercialize any of our product candidates, and we cannot, therefore, predict the timing of any future revenue.
We cannot commercialize any of our product candidates, including Zalviso, until the appropriate regulatory authorities, such as the FDA or the European
Medicines Agency, or EMA, have reviewed and approved the product candidate. The regulatory agencies may not complete their review processes in a timely manner, or we may not be able to obtain regulatory approval for our product candidates.
Additional delays may result if any of our product candidates is taken before an FDA Advisory Committee which may recommend restrictions on approval or recommend non-approval. In addition, we may experience delays or rejections based upon additional
government regulation from future legislation or administrative action, or changes in regulatory agency policy during the period of product development, clinical trials and the review process.
The process for obtaining approval of an NDA is time consuming, subject to unanticipated delays and costs, and requires the commitment of
substantial resources.
If the FDA determines that the clinical trials submitted for a product candidate, including Zalviso, in support
of an NDA were not conducted in full compliance with the applicable protocols for these trials, as well as with applicable regulations and standards, or if the FDA does not agree with our interpretation of the results of such trials, the FDA may
reject the data from such trials. The FDA may audit some of our clinical trial sites to determine the integrity of our clinical data. Any rejection of our data would negatively impact our ability to obtain marketing authorization for a product
candidate and would have a material adverse effect on our business and financial condition.
In addition, an NDA may not be approved, or
approval may be delayed, as a result of changes in FDA policies for drug approval during the review period. For example, although many products have been approved by the FDA in recent years under Section 505(b)(2) of the Federal Food, Drug and
Cosmetic Act, or FDCA, objections have been raised to the FDAs interpretation of Section 505(b)(2). If challenges to the FDAs interpretation of Section 505(b)(2) are successful, the FDA may be required to change its
interpretation, which could delay or prevent the approval of such an NDA. Any significant delay in the acceptance, review or approval of an NDA that we have submitted would have a material adverse effect on our business and financial condition.
Regulatory authorities may not approve our product candidates even if they meet safety and efficacy endpoints in clinical trials.
The FDA and other foreign regulatory agencies, such as the EMA, can delay, limit or deny marketing approval for many reasons,
including:
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a product candidate may not be considered safe or effective;
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the manufacturing processes or facilities we have selected may not meet the applicable requirements; and
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changes in their approval policies or adoption of new regulations may require additional work on our part.
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Part of the regulatory approval process includes compliance inspections of manufacturing facilities to ensure adherence to applicable regulations and
guidelines. The regulatory agency may delay, limit or deny marketing approval of our product candidates as a result of such inspections.
Any
delay in, or failure to receive or maintain, approval for any of our product candidates could prevent us from generating meaningful revenues or achieving profitability. Our product candidates may not be approved even if they achieve their endpoints
in clinical trials. Regulatory agencies, including the FDA, or their advisors may disagree with our trial design and our interpretations of data from preclinical trials and clinical trials. Regulatory agencies may change requirements for approval
even after a clinical trial design has been approved. The FDA exercises significant discretion over the regulation of combination products, including the discretion to require separate marketing applications for the drug and device components in a
combination product. To date, our product candidates are being regulated as drug products under the NDA process administered by the FDA. The FDA could in the future require additional regulation of our product candidates under the medical device
provisions of the FDCA. Our systems are designed to comply with the Quality Systems Regulation, or QSR, which sets forth the FDAs current good manufacturing practice, or cGMP, requirements for medical devices, and other applicable government
regulations and corresponding foreign standards for drug cGMPs. If we fail to comply with these regulations, it could have a material adverse effect on our business and financial condition.
Regulatory agencies also may approve a product candidate for fewer or more limited indications than requested or may grant approval subject to the performance of post-marketing trials. In addition,
regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates. For example, we intend to resubmit our NDA, seeking approval of Zalviso for the management of
moderate-to-severe acute pain in adult patients in the hospital setting; however, our clinical trial data was generated exclusively from the post-operative segment of this population, and the FDA may restrict any approval to post-operative patients
only, which would reduce our commercial opportunity.
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Even if we obtain regulatory approval for Zalviso and our other product candidates, we and our
collaborators face extensive regulatory requirements and our products may face future development and regulatory difficulties.
Even if
we obtain regulatory approval in the United States, the FDA may impose significant restrictions on the indicated uses or marketing of our product candidates, or impose ongoing requirements for potentially costly post-approval trials or post-market
surveillance. Additionally, the labeling ultimately approved for Zalviso and our other product candidates, if approved, will likely include restrictions on use due to the opioid nature of sufentanil.
Zalviso and our other product candidates, if approved in the future, will also be subject to ongoing FDA requirements governing the labeling, packaging,
storage, distribution, safety surveillance, advertising, promotion, record-keeping and reporting of safety and other post-market information. The holder of an approved NDA is obligated to monitor and report AEs and any failure of a product to meet
the specifications in the NDA. The holder of an approved NDA must also submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. Advertising and
promotional materials must comply with FDA rules and are subject to FDA review, in addition to other potentially applicable federal and state laws.
We must also register and obtain various state prescription drug distribution licenses and controlled substance permits, and any delay or failure to obtain or maintain these licenses or permits may limit
our market and materially impact our business. In addition, manufacturers of drug products and their facilities are subject to payment of user fees and continual review and periodic inspections by the FDA and other regulatory authorities for
compliance with cGMPs and adherence to commitments made in the NDA. If we, or a regulatory agency, discover previously unknown problems with a product, such as AEs of unanticipated severity or frequency, or problems with the facilities where the
product is manufactured, a regulatory agency may impose restrictions relative to that product or the manufacturing facilities, including requiring recall or withdrawal of the product from the market or suspension of manufacturing.
If we fail to comply with applicable regulatory requirements following approval of our product candidates, a regulatory agency may:
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issue a warning letter asserting that we are in violation of the law;
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seek an injunction or impose civil or criminal penalties or monetary fines;
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suspend or withdraw regulatory approval;
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suspend any ongoing clinical trials;
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refuse to approve a pending NDA or supplements to an NDA submitted by us;
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refuse to allow us to enter into supply contracts, including government contracts.
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Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate
negative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize any future approved products and generate revenues.
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Even if we obtain FDA approval for Zalviso or any of our product candidates in the United States, we
may never obtain approval for or commercialize our products outside of the United States, which would limit our ability to realize their full market potential.
In order to market any products outside of the United States, our collaborator, Grünenthal, and we must establish and comply with numerous and varying regulatory requirements of other countries
regarding safety and efficacy. In October 2012, we received notice from the EMA that Zalviso was eligible for centralized European review, and in July 2014, Grünenthal filed Marketing Authorization Application, or MAA, under the centralized
procedure in the EU. Outside of Europe, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not mean that regulatory approval will be obtained in any
other country. Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approval could result in difficulties and costs for us and
require additional non-clinical trials or clinical trials, which could be costly and time consuming. Regulatory requirements can vary widely from country-to-country and could delay or prevent the introduction of our products in those countries.
While Grünenthal does have products approved in international markets, we do not have any product candidates approved for sale in any jurisdiction, including international markets, and we do not have experience in obtaining regulatory approval
in international markets. Grünenthals experience in international markets does not guarantee regulatory approval or compliance with regulatory requirements in international markets. If we fail to comply with regulatory requirements in
international markets or to obtain and maintain required approvals, or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the full market potential of our products will be
harmed.
Zalviso and our other product candidates will require Risk Evaluation and Mitigation Strategies.
The FDA Amendments Act of 2007 implemented safety-related changes to product labeling and require the adoption of REMS. Our product candidates, if
approved, will require REMS. The REMS may include requirements for special labeling or medication guides for patients, special communication plans to health care professionals and restrictions on distribution and use. While we have received
information from the FDA regarding certain aspects of the required REMS for Zalviso, we cannot predict the final REMS to be required as part of any FDA approval of Zalviso. Depending on the extent of the REMS requirements, the launch may be delayed,
the costs to commercialize Zalviso may increase substantially and the potential commercial market could be restricted. ARX-02, ARX-03 and ARX-04, if approved, will also require REMS programs that may significantly increase our costs to commercialize
these product candidates. Furthermore, risks of sufentanil that are not adequately addressed through proposed REMS for our future product candidates, if approved, may also prevent or delay their approval for commercialization.
Recently enacted and future legislation may increase the difficulty and cost for us to commercialize our product candidates, and affect the prices
we may obtain. *
In the United States and some foreign jurisdictions, the legislative landscape continues to evolve. There have been a
number of legislative and regulatory changes and proposed changes regarding healthcare systems that could prevent or delay marketing approval of our product candidates, including Zalviso restrict or regulate post-approval activities and affect our
ability to profitably sell any products for which we obtain marketing approval.
In the United States, the Health Care Reform Law (as defined
below) was enacted in an effort to, among other things, broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, impose new taxes and fees on the health industry and impose
additional health policy reforms. Aspects of the Health Care Reform Law that may impact our business include:
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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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new methodologies by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused,
instilled, implanted or injected, and for drugs that are line extensions;
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expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;
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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 133.0% of the Federal Poverty Level beginning in 2014, thereby potentially increasing manufacturers Medicaid rebate liability;
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expansion of healthcare fraud and abuse laws, including the federal False Claims Act and the federal Anti-Kickback Statute, new government
investigative powers and enhanced penalties for non-compliance;
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a new requirement to annually report drug samples that manufacturers and distributors provide to physicians;
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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; and
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creation of the Independent Payment Advisory Board which, beginning in 2014, will have authority to recommend certain changes to the Medicare program
that could result in reduced payments for prescription drugs.
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The Health Care Reform Law has the potential to substantially
change health care financing and delivery by both governmental and private insurers, and may also increase our regulatory burdens and operating costs.
In addition, other legislative changes have been proposed and adopted in the United States since the Health Care Reform Law was enacted. On August 2, 2011, the Budget Control Act of 2011 created
measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby
triggering the legislations automatic reduction to several government programs. This included aggregate reductions of Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and will stay in
effect through 2024 unless additional Congressional action is taken. On January 2, 2013, the American Tax Payer Relief Act was signed into law, which, among other things, further reduced Medicare payments to several providers, including
hospitals.
Moreover, the recently enacted Drug Supply Chain Security Act of 2013, imposes new obligations on manufacturers of pharmaceutical
products, among others, related to product tracking and tracing. Among the requirements of this new legislation, manufacturers will be required to provide certain information regarding the drug product to individuals and entities to which product
ownership is transferred, label drug product with a product identifier, and keep certain records regarding the drug product.
Legislative and
regulatory proposals have been made to expand post-approval requirements and further restrict sales and promotional activities for pharmaceutical products. We are not sure whether additional legislative changes will be enacted, or whether the FDA
regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of Zalviso or any of our other product candidates, if any, may be.
We expect that additional healthcare reform measures will be adopted within and outside the United States in the future, any of which could negatively impact our business. The continuing efforts of the
government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare may adversely affect the demand for any drug products for which we may obtain regulatory approval, our
ability to set a price that we believe is fair for our products, our ability to obtain coverage and reimbursement approval for a product, our ability to generate revenues and achieve or maintain profitability, and the level of taxes that we are
required to pay.
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Risks Related to Our Financial Condition and Need for Additional Capital
We have incurred significant losses since our inception, anticipate that we will continue to incur significant losses in 2014 and may continue to
incur losses for the foreseeable future.*
Since our inception in 2005, we have focused primarily on development
of our lead product candidate, Zalviso
. We have three
additional product candidates in development, the Sufentanil Tablet BTP Management System, or ARX-02, the Sufentanil/Triazolam Tablet, or ARX-03, and Sufentanil Single-Dose Acute Pain Tablet, or ARX-04. We have incurred significant net losses in
each year since our inception in July 2005, and as of December 31, 2013, we had an accumulated deficit of $145.5 million. For the six months ended June 30, 2014, we had a net loss of $20.2 million and as of June 30, 2014 we had an
accumulated deficit of $165.7 million.
We have devoted most of our financial resources to research and development, including our
non-clinical development activities and clinical trials. To date, we have financed our operations primarily through the sale of equity securities, debt, government grant funding and proceeds from our collaboration with Grünenthal. The size of
our future net losses will depend, in part, on the rate of future expenditures and our ability to generate revenues. We expect to continue to incur substantial expenses as we prepare for the potential commercialization of Zalviso and continue our
research and development activities for our product candidates. To date, none of our product candidates, including Zalviso, have been commercialized, and if Zalviso or our other product candidates are not successfully developed or commercialized, or
if revenues are insufficient following marketing approval, we will not achieve profitability and our business may fail. Our success is also dependent on obtaining regulatory approval to market our product candidates outside of the United States
through current and future collaborations which may not materialize or prove to be successful.
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We have never generated product revenue and may never be profitable.
Our ability to generate revenue from commercial sales and achieve profitability depends on our ability, alone or with collaborators, to successfully
complete the development of, obtain the necessary regulatory approvals for, and commercialize our product candidates. We do not anticipate generating revenues from sales of Zalviso in the United States until 2015, if ever. While we have a
collaboration with Grünenthal for potential commercialization of Zalviso in Europe and Australia, we may never achieve the development milestones associated with the collaboration, and Grünenthal may never achieve regulatory approval or
recognize commercial sales of Zalviso, for which we would receive sales milestone payments and product royalties. In addition, we do not anticipate generating revenues from our other product candidates for the foreseeable future, if ever. Our
ability to generate future revenues from product sales depends heavily on our success in:
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obtaining and maintaining regulatory approval for Zalviso;
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launching and commercializing Zalviso, including building or contracting out, a hospital-directed sales force in the U.S. and collaborating with third
parties internationally, including Grünenthal, which may require additional funding; and
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completing the clinical development of, obtaining regulatory approval for, and launching and commercializing ARX-04, ARX-02 and ARX-03, which may
require additional funding or corporate partnership resources.
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Because of the numerous risks and uncertainties associated
with pharmaceutical product development and the regulatory environment, we are unable to predict the timing or amount of increased expenses, or when, or if, we will be able to achieve or maintain profitability. In addition, our expenses could
increase beyond expectations if we are delayed in obtaining approval of, or launching Zalviso, or we are required by the FDA to perform trials in addition to those that we have completed.
Even if one or more of our product candidates is approved for commercial sale, we anticipate incurring significant costs associated with commercializing any approved product candidate. Even if we are able
to generate revenues from the sale of any future approved products, we may not become profitable and may need to obtain additional funding to continue operations.
We have a limited operating history that may make it difficult to predict our future performance or evaluate our business and prospects.
We were incorporated in 2005. Since inception, our operations have been primarily limited to organizing and staffing our company, developing our
technology and undertaking preclinical studies and clinical trials for our product candidates, and more recently, preparing for the potential commercialization of our lead product candidate, Zalviso. We have not yet obtained regulatory approval of
any of our product candidates including Zalviso. Consequently, any predictions that are made about our future success, or viability, or evaluation of our business and prospects, may not be accurate.
We may require additional capital and may be unable to raise capital, which would force us to delay, reduce or eliminate our product development
programs and could cause us to cease operations. *
Developing pharmaceutical products, including conducting preclinical studies and
clinical trials, is expensive. We expect to incur significant expenditures in connection with our ongoing activities, particularly preparation for the potential commercialization of Zalviso and advancement of our other product candidates, including
the ARX-04 Phase 3 clinical trials.
Future events and circumstances, including those beyond our control, may cause us to consume capital more
rapidly than we currently anticipate. For example, if we are not able to launch Zalviso for sale in the United States in 2015, due to a delay in approval by the FDA, technical difficulties in our commercialization efforts or otherwise, or revenues
or expenses associated with the commercialization of Zalviso are not as estimated, we will likely need to seek additional capital to continue operations. Such capital demands could be substantial. In addition, if we do not receive FDA approval to
market Zalviso by March 15, 2015, we cannot draw the third tranche of $15.0 million associated with our Amended Loan Agreement with Hercules.
To raise capital, we may seek to sell additional equity or debt securities, obtain a credit facility, or enter into product development, license or
distribution agreements with third parties, or divest one or more of our product candidates. Such arrangements may not be available on favorable terms, if at all. Furthermore, any product development, licensing, distribution or sale agreements that
we enter into may require us to relinquish valuable rights. We may not be able to obtain sufficient additional funding or enter into a strategic transaction in a timely manner. If adequate funds are not available, we would be required to reduce our
workforce, delay, reduce the scope of, or eliminate, one or more of our research and development programs in advance of the date on which we exhaust our cash resources to ensure that we have sufficient capital to meet our obligations and continue on
a path designed to preserve stockholder value.
Securing additional financing may divert our management from our day-to-day activities, which
may adversely affect our ability to develop and commercialize our product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we are unable to raise
additional capital when required or on acceptable terms, we may be required to:
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significantly delay, scale back or discontinue the development or commercialization of our product candidates;
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seek additional corporate partners for Zalviso on terms that might be less favorable than might otherwise be available; or
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relinquish, or license on unfavorable terms, our rights to technologies or product candidates that we otherwise would seek to develop or commercialize
ourselves.
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We may sell additional equity or debt securities to fund our operations, which may result in dilution to
our stockholders and impose restrictions on our business. *
In order to raise additional funds to support our operations, we may sell
additional equity or debt securities which would result in dilution to our stockholders or impose restrictive covenants that may adversely impact our business. The sale of additional equity or convertible debt securities would result in the issuance
of additional shares of our capital stock and dilution to all of our stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such as limitations on our
ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we are unable to expand our
operations or otherwise capitalize on our business opportunities, our business, financial condition and results of operations could be materially adversely affected and we may not be able to meet our debt service obligations.
We might be unable to service our existing debt due to a lack of cash flow and might be subject to default. *
In December 2013, we entered into an amended loan and security agreement, or the Amended Loan Agreement, with Hercules Technology II, L.P. and Hercules
Technology Growth Capital, Inc., collectively referred to as Hercules, under which we may borrow up to $40.0 million in three tranches, represented by secured convertible promissory notes. We drew the first tranche of $15.0 million at the closing of
the new credit facility and the second tranche of $10 million on June 16, 2014. The third tranche of up to $15.0 million is conditioned upon the approval of Zalviso by the FDA, and if approved, can be drawn at our option at any time between
December 15, 2014 and March 15, 2015. The scheduled maturity date is October 1, 2017, which would be extended until January 1, 2018, if we obtain FDA approval of Zalviso on or prior to April 1, 2015.
We granted Hercules a first priority security interest in substantially all of our assets, with the exception of our intellectual property, where the
security interest is limited to proceeds of intellectual property if it is licensed or sold.
If we do not make the required payments when
due, either at maturity, or at applicable installment payment dates, or if we breach the agreement or become insolvent, Hercules could elect to declare all amounts outstanding, together with accrued and unpaid interest and penalty, to be immediately
due and payable. Additional capital may not be available on terms acceptable to us, or at all. Even if we were able to repay the full amount in cash, any such repayment could leave us with little or no working capital for our business. If we are
unable to repay those amounts, Hercules will have a first claim on our assets pledged under the Amended Loan Agreement. If Hercules should attempt to foreclose on the collateral, it is unlikely that there would be any assets remaining after
repayment in full of such secured indebtedness. Any default under the Amended Loan Agreement and resulting foreclosure would have a material adverse effect on our financial condition and our ability to continue our operations.
Risks Related to Our Reliance on Third Parties
We rely on third party manufacturers to produce our preclinical and clinical drug supplies, and intend to rely on third parties to produce commercial supplies of any approved product candidates.
Reliance on third party manufacturers entails many risks including:
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the inability to meet our product specifications and quality requirements consistently;
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a delay or inability to procure or expand sufficient manufacturing capacity;
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manufacturing and product quality issues related to scale-up of manufacturing;
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costs and validation of new equipment and facilities required for scale-up;
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a failure to comply with cGMP and similar foreign standards;
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the inability to negotiate manufacturing agreements with third parties under commercially reasonable terms;
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termination or nonrenewal of manufacturing agreements with third parties in a manner or at a time that is costly or damaging to us;
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the reliance on a limited number of sources, and in some cases, single sources for product components, such that if we are unable to secure a
sufficient supply of these product components, we will be unable to manufacture and sell our product candidates in a timely fashion, in sufficient quantities or under acceptable terms;
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the lack of qualified backup suppliers for those components that are currently purchased from a sole or single source supplier;
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operations of our third party manufacturers or suppliers could be disrupted by conditions unrelated to our business or operations, including the
bankruptcy of the manufacturer or supplier;
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carrier disruptions or increased costs that are beyond our control; and
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the failure to deliver our products under specified storage conditions and in a timely manner.
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Any of these events could lead to stock outs, inability to successfully commercialize our products, clinical trial delays, or failure to obtain
regulatory approval. Some of these events could be the basis for FDA action, including injunction, recall, seizure, or total or partial suspension of production.
We rely on limited sources of supply for the drug component of our product candidates and any disruption in the chain of supply may cause delay in developing and commercializing our product
candidates.
Currently, we use two established suppliers of sufentanil citrate for our tablets. We only have one supplier qualified for
our manufacture of Zalviso. For each product candidate, only one of the two suppliers will be qualified as a vendor with the FDA. If supply from the approved vendor is interrupted, there could be a significant disruption in commercial supply. The
alternative vendor would need to be qualified through an NDA supplement which could result in further delay. The FDA or other regulatory agencies outside of the United States may also require additional trials if a new sufentanil supplier is relied
upon for commercial production. In addition, the Drug Enforcement Administration, or the DEA, may reduce, delay or refuse our quota for sufentanil, which would disrupt our supply of sufentanil citrate and cause delay in the development and
commercialization of our product candidates, including Zalviso.
Manufacture of sufentanil tablets requires specialized equipment and
expertise.
Ethanol, which is used in the manufacturing process for our sufentanil tablets, is flammable, and sufentanil is a highly
potent, Schedule II compound. These factors necessitate the use of specialized equipment and facilities for manufacture of sufentanil tablets. There are a limited number of facilities that can accommodate our manufacturing process and we need to use
dedicated equipment throughout development and commercial manufacturing to avoid the possibility of cross-contamination. If our equipment breaks down or needs to be repaired or replaced, it may cause significant disruption in clinical or commercial
supply, which could result in delay in the process of obtaining approval for or sale of our products. Furthermore, we are using one manufacturer to produce our sufentanil tablets and have not identified a back-up commercial facility to date. Any
problems with our existing facility or equipment, including ongoing expansion, may delay or impair our ability to complete our clinical trials or commercialize our product candidates and increase our cost.
Manufacturing issues may arise that could delay or increase costs related to product and regulatory approval and commercialization.
As we scale up manufacturing of our product candidates and conduct required stability testing, product, packaging, equipment and
process-related issues may require refinement or resolution in order to obtain regulatory approval for commercial marketing. In the past we have identified impurities in our product candidates. In the future we may identify significant impurities,
which could result in increased scrutiny by the regulatory agencies, delays in clinical program and regulatory approval, increases in our operating expenses, or failure to obtain or maintain approval for our products.
Early stage development and manufacture of clinical supplies were conducted at Patheon in Toronto, Canada. Because the DEA requires that sufentanil be
manufactured in the United States if our product candidates are marketed in the United States, we transferred our manufacturing capability in the third quarter of 2011 from Patheon in Toronto, Canada to Patheons production facility in
Cincinnati, Ohio, where we initially built out a suite within their existing buildings, and where we have conducted late stage development and manufacture of Zalviso registration stability lots, which were utilized in Phase 3 clinical trials. We
have expanded, and continue to expand, the manufacturing facilities at Patheon in Cincinnati, Ohio in order to increase our production capabilities and these expansions require qualifications. Potential complications regarding the expansion of the
facility and related qualifications could adversely impact our ability to produce commercial supplies in sufficient quantities, or at all. We have not yet produced commercial product out of this facility and we may encounter difficulties in
production, which may adversely affect our commercial plans.
We have limited experience manufacturing the Zalviso device on a clinical
scale, no experience on a commercial scale and do not own or operate a manufacturing facility.
Related to the Zalviso device, we have
conducted multiple Design Validation, Software Verification and Validation, Reprocessing and Human Factors studies, and have manufactured for and completed Phase 3 clinical trials using the intended commercial device. As mentioned above, the CRL
from the FDA contains a request for additional information on the Zalviso System to ensure proper use of the device. The request includes provision of data demonstrating a reduction in the incidence of optical system errors which require premature
drug cartridge change requirement. We have made modifications to the design of the Zalviso device subsequent to the original submission of the Zalviso NDA, which we plan to include as a part of our resubmitted NDA. We do not believe these design
modifications would require additional Phase 3 clinical trials. If we are required to further modify the Zalviso device, we may incur higher costs and experience delays in the approval and ultimate commercialization of Zalviso. Furthermore, if the
identified changes to the device are substantial, we may need to conduct further clinical trials in order to have the commercial device approved by the FDA.
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We have manufactured Zalviso devices and supplies on a small scale, including those needed for our Phase 3
clinical trials. We, however, have not yet manufactured Zalviso devices and supplies on a large scale, for commercial purposes. We will not begin commercial scale production of the device until after approval by the FDA. We will continue to rely on
contract manufacturers, component fabricators and third party service providers to produce the necessary Zalviso devices for the commercial marketplace. We currently outsource manufacturing and packaging of the controller, dispenser and cartridge
components of the Zalviso device to third parties and intend to continue to do so. These purchases and components were made and will continue to be made utilizing short-term purchase agreements and we may not be able to enter into long-term
agreements for commercial supply of Zalviso devices with third party manufacturers, or may be unable to do so on acceptable terms. In addition, we may encounter production issues with our current or future contract manufacturers and other third
party service providers, including the quality of the components produced, their inability to meet demand or other unanticipated delays including the scale-up and automation process, which would adversely impact our ability to supply our customers
with Zalviso, if approved.
We may not be able to establish additional sources of supply for device manufacture. Such suppliers are subject to
FDA regulations requiring that materials be produced under cGMPs or Quality System Regulations, or QSR, and subject to ongoing inspections by regulatory agencies. Failure by any of our suppliers to comply with applicable regulations may result in
delays and interruptions to our product candidate supply while we seek to secure another supplier that meets all regulatory requirements.
Reliance on third party manufacturers entails risks to which we would not be subject if we manufactured the product candidates ourselves, including the
possible breach of the manufacturing agreements by the third parties because of factors beyond our control; and the possibility of termination or nonrenewal of the agreements by the third parties because of our breach of the manufacturing agreement
or based on their own business priorities.
We rely on third parties to conduct, supervise and monitor our clinical trials, and if those
third parties perform in an unsatisfactory manner, it may harm our business.
We utilized contract research organizations, or CROs, for
the conduct of our Phase 3 clinical trials of Zalviso, the Phase 2 clinical trial of ARX-04, and our planned Phase 3 clinical program for ARX-04. We rely on CROs, as well as clinical trial sites, to ensure the proper and timely conduct of our
clinical trials and document preparation. While we have agreements governing their activities, we have limited influence over their actual performance. We have relied and plan to continue to rely upon CROs to monitor and manage data for our clinical
programs for Zalviso and our other product candidates, as well as the execution of nonclinical and clinical trials. We control only certain aspects of our CROs activities. Nevertheless, we are responsible for ensuring that each of our trials
is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards and our reliance on the CROs does not relieve us of our regulatory responsibilities.
We, and our CROs, are required to comply with the FDAs current good clinical practices, or cGCPs, which are regulations and guidelines enforced by the FDA for all of our product candidates in
clinical development. The FDA enforces these cGCPs through periodic inspections of trial sponsors, principal investigators and clinical trial sites. If we or our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical
trials may be deemed unreliable and the FDA may require us to perform additional clinical trials before approving our marketing applications. Upon inspection, the FDA may determine that our clinical trials do not comply with cGCPs. Accordingly, if
our CROs or clinical trial sites fail to comply with these regulations, we may be required to repeat clinical trials, which would delay the regulatory process.
Our CROs are not our employees, and we cannot control whether or not they devote sufficient time and resources to our ongoing clinical and nonclinical programs. These CROs may also have relationships with
other commercial entities, including our competitors, for whom they may also be conducting clinical trials, or other drug development activities which could harm our competitive position. We face the risk of potential unauthorized disclosure or
misappropriation of our intellectual property by CROs, which may allow our potential competitors to access our proprietary technology. If our CROs do not successfully carry out their contractual duties or obligations, fail to meet expected
deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements, or for any other reasons, our clinical trials may be extended, delayed or
terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize Zalviso, or our other product candidates. As a result, our financial results and the commercial prospects for Zalviso and any future product
candidates for which we may obtain approval would be harmed, our costs could increase, and our ability to generate revenues could be delayed.
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Risks Related to Commercialization of Our Product Candidates
The commercial success of Zalviso and our other product candidates, if approved, will depend upon the acceptance of these products by the medical
community, including physicians, nurses, patients, and pharmacy and therapeutics committees. *
The degree of market acceptance of
Zalviso and our other product candidates, if approved, will depend on a number of factors, including:
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demonstration of clinical safety and efficacy compared to other products;
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the relative convenience, ease of administration and acceptance by physicians, patients and health care payors;
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the prevalence and severity of any AEs or SAEs;
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overcoming the perception of sufentanil as a potentially unsafe drug due to its high potency;
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limitations or warnings contained in the FDA-approved label for Zalviso;
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restrictions or limitations placed on Zalviso due to the REMS;
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availability of alternative treatments;
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existing capital investment by hospitals in IV PCA technology;
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pricing and cost-effectiveness;
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the effectiveness of our or any future collaborators sales and marketing strategies;
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our ability to obtain hospital formulary approval;
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our ability to obtain and maintain sufficient third party coverage or reimbursement.
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If Zalviso is approved, but does not achieve an adequate level of acceptance by physicians, nurses, patients and pharmacy and therapeutics committees, or
P&T Committees, we may not generate sufficient revenue from Zalviso and we may not become or remain profitable.
If we are unable to
establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, we may be unable to generate any revenue. *
In order to commercialize any products that may be approved, including Zalviso, we must build our internal sales, marketing, distribution, managerial and other capabilities or make arrangements with third
parties to perform these services. We are currently building out our commercial capabilities, including internal sales, marketing, supply chain and medical affairs departments and are active in the recruitment process; however, if delays in, or the
inability to, recruit and hire the appropriate individuals occurs, the potential success of approved product candidates, including Zalviso, could be adversely affected. In addition, we plan to enter into agreements with third parties for the
distribution of approved product candidates, including Zalviso; however, if there are delays in establishing such relationships or those third parties do not perform as expected, our ability to effectively distribute products would suffer.
We have entered into a collaboration with Grünenthal for the commercialization of Zalviso in Europe and Australia and intend to enter
into additional strategic partnerships with third parties to commercialize our product candidates outside of the United States. We will also consider the option to enter into strategic partnerships for our product candidates in the United States. We
face significant competition in seeking appropriate strategic partners, and these strategic partnerships can be intricate and time consuming to negotiate and document.
We may not be able to negotiate future strategic partnerships on acceptable terms, or at all. We are unable to predict when, if ever, we will enter into any strategic partnerships because of the numerous
risks and uncertainties associated with establishing strategic partnerships. Our strategy for Zalviso is to develop a hospital-directed sales force to promote the product to healthcare professionals and third-party payors in the United States. Our
current or future collaboration partners, if any, may not dedicate sufficient resources to the commercialization of Zalviso or our other product candidates, if approved, or may otherwise fail in their commercialization due to factors beyond our
control. If we are unable to establish effective
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collaborations to enable the sale of Zalviso or our product candidates, if approved, to healthcare professionals and in geographical regions, including the United States, that will not be covered
by our own marketing and sales force, or if our potential future collaboration partners do not successfully commercialize our product candidates, if approved, our ability to generate revenues from product sales will be adversely affected.
If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, we may
not be able to generate sufficient product revenue and may not become profitable. We will be competing with many companies that currently have extensive and well-funded marketing and sales operations. Without an internal team or the support of a
third party to perform marketing and sales functions, we may be unable to compete successfully against these more established companies.
A key part of our business strategy is to establish collaborative relationships to commercialize and fund development and approval of our product
candidates, particularly outside of the United States. We may not succeed in establishing and maintaining collaborative relationships, which may significantly limit our ability to develop and commercialize our products successfully, if at all.
We will need to establish and maintain successful collaborative relationships to obtain international sales, marketing and
distribution capabilities for our product candidates. The process of establishing and maintaining collaborative relationships is difficult, time-consuming and involves significant uncertainty, including:
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our partners may seek to renegotiate or terminate their relationships with us due to unsatisfactory clinical or regulatory results, manufacturing
issues, a change in business strategy, a change of control or other reasons;
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our contracts for collaborative arrangements are terminable at will on written notice and may otherwise expire or terminate and we may not have
alternatives available to achieve the potential for our products in those territories or markets;
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our partners may choose to pursue alternative technologies, including those of our competitors;
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we may have disputes with a partner that could lead to litigation or arbitration;
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we have limited control over the decisions of our partners and they may change the priority of our programs in a manner that would result in
termination of the agreement or add significant delays to the partnered program;
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our ability to generate future payments and royalties from our partners depends upon the abilities of our partners to establish the safety and efficacy
of our drug candidates, obtain regulatory approvals and our ability to successfully manufacture and achieve market acceptance of products developed from our product candidates;
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we or our partners may fail to properly initiate, maintain or defend our intellectual property rights, where applicable, or a party may use our
proprietary information in such a way as to invite litigation that could jeopardize or potentially invalidate our proprietary information or expose us to potential liability;
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our partners may not devote sufficient capital or resources towards our product candidates; and
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our partners may not comply with applicable government regulatory requirements necessary to successfully market and sell our products.
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If any collaborator fails to fulfill its responsibilities in a timely manner, or at all, any research, clinical
development, manufacturing or commercialization efforts pursuant to that collaboration could be delayed or terminated, or it may be necessary for us to assume responsibility for expenses or activities that would otherwise have been the
responsibility of our collaborator. If we are unable to establish and maintain collaborative relationships on acceptable terms or to successfully and timely transition terminated collaborative agreements, we may have to delay or discontinue further
development of one or more of our product candidates, undertake development and commercialization activities at our own expense or find alternative sources of capital.
If we obtain approval to commercialize our products outside of the United States, a variety of risks associated with international operations could materially adversely affect our business.
If any of our product candidates, including Zalviso, are approved for commercialization, we intend to enter into agreements with third
parties to market our product candidates outside the United States, which may require us to supply products to the third party such as our existing collaboration with Grünenthal for marketing Zalviso in European countries and Australia. We may
be required to establish international operations in connection with those collaborations and in that regard may be subject to additional risks related to entering into international business relationships, including:
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different regulatory requirements for drug approvals in foreign countries;
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reduced protection for intellectual property rights;
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unexpected changes in tariffs, trade barriers and regulatory requirements;
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economic weakness, including inflation, or political instability in particular foreign economies and markets;
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compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
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foreign taxes, including withholding of payroll taxes;
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foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing
business in another country;
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workforce uncertainty in countries where labor unrest is more common than in the United States;
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production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
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business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods
and fires.
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If we, or current and potential partners, are unable to compete effectively, our product candidates may
not reach their commercial potential. *
The market for Zalviso and our other product candidates is characterized by intense
competition and rapid technological advances. If our product candidates obtain FDA approval, they will compete with a number of existing and future pharmaceuticals and drug delivery devices developed, manufactured and marketed by others. We or our
current and potential partners will compete against fully integrated pharmaceutical companies and smaller companies that are collaborating with larger pharmaceutical companies, academic institutions, government agencies and other public and private
research organizations.
We believe that Zalviso would compete with a number of opioid-based treatment options that are currently available.
The hospital market for opioids for moderate-to-severe acute pain is large and competitive. The primary competition for Zalviso is the IV PCA pump, which is widely used in the moderate-to-severe acute pain in the hospital setting. Leading
manufacturers of IV PCA pumps include Hospira Inc., CareFusion Corporation, Baxter International Inc., Curlin Medical, Inc. and Smiths Medical. The most common opioids used to treat moderate-to-severe acute pain are morphine, hydromorphone and
fentanyl, all of which are available as generics. Also available on the market is the Avancen Medication on Demand, or MOD, Oral PCA Device developed by Avancen MOD Corporation.
Additional potential competitors for Zalviso include products in development, including the fentanyl iontophoretic transdermal system, IONSYS, originally developed by ALZA Corporation and Ortho-McNeil
Pharmaceutical, Inc., both Johnson & Johnson subsidiaries, and currently under development by The Medicines Company.
Our potential
competitors for ARX-02 include products approved in the United States for cancer breakthrough pain, including: ACTIQ and FENTORA, currently manufactured by Teva Pharmaceuticals; Onsolis, currently manufactured by BioDelivery Sciences International,
Inc.; Abstral, currently manufactured by ProStrakan Group plc; Lazanda, currently manufactured by Archimedes Pharma Limited; Subsys, currently manufactured by Insys Therapeutics, Inc., as well as products approved in Europe, including Instanyl,
currently manufactured by Nycomed International Management GmbH. The active ingredient in all approved products for cancer breakthrough pain is fentanyl. Additional potential competitors for ARX-02 include products in late stage development for
cancer breakthrough pain, such as Fentanyl TAIFUN, currently manufactured by Akela Pharma, Inc.
We are not aware of any approved or
development stage non-IV sedative/analgesic products that would present competition to ARX-03. In the future, there may be products developed or approved for this market which could directly compete with ARX-03.
Competitors for ARX-04 within the military environment include intramuscular morphine injections which are marketed by a variety of generic
manufacturers. Within the civilian environment, there are a wide variety of approved injectable and oral opioid products to treat moderate-to-severe acute pain, including IV opioids such as morphine, fentanyl, hydromorphone and meperidine or oral
opioids such as oxycodone and hydrocodone.
It is possible that any of these competitors could develop or improve technologies or products
that would render our product candidates obsolete or non-competitive, which could adversely affect our revenue potential. Key competitive factors affecting the commercial success of our product candidates are likely to be efficacy, safety profile,
reliability, convenience of dosing, price and reimbursement.
Many of our potential competitors have substantially greater financial,
technical and human resources than we do and significantly greater experience in the discovery and development of drug candidates, obtaining FDA and other regulatory
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approval of products and the commercialization of those products. Accordingly, our competitors may be more successful than we are in obtaining FDA approval for drugs and achieving widespread
market acceptance. Our competitors drugs or drug delivery systems may be more effective, have fewer adverse effects, be less expensive to develop and manufacture, or be more effectively marketed and sold than any product candidate we may
commercialize. This may render our product candidates obsolete or non-competitive before we can recover our losses. We anticipate that we will face intense and increasing competition as new drugs enter the market and additional technologies become
available. These entities may also establish collaborative or licensing relationships with our competitors, which may adversely affect our competitive position. Finally, the development of different methods for the treatment of moderate-to-severe
acute pain or breakthrough pain could render Zalviso and ARX-02, respectively, non-competitive or obsolete. These and other risks may materially adversely affect our ability to attain or sustain profitable operations.
Hospital formulary approval may not be available for Zalviso and our other product candidates, which could make it difficult for us to sell our
products profitably. *
Obtaining formulary approval can be an expensive and time-consuming process. We cannot be certain if and when
we will obtain formulary approval to allow us to sell our products into our target markets. Failure to obtain timely formulary approval will limit our commercial success.
Coverage and adequate reimbursement may not be available for Zalviso and our other product candidates, if approved which could make it difficult for us to sell our products profitably. *
Our ability to commercialize Zalviso, or any of our other drug candidates, if approved, successfully will depend, in part, on the
extent to which coverage and adequate reimbursement will be available from government payor programs at the federal and state levels authorities, including Medicare and Medicaid, private health insurers, managed care plans and other third-party
payors.
No uniform policy requirement for coverage and reimbursement for drug products exists among third-party payors in the United States.
Therefore, coverage and reimbursement can differ significantly from payor to payor. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the
use of our products to each payor separately, with no assurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance. Our inability to promptly obtain coverage and adequate reimbursement rates from
third party payors could significantly harm our operating results, our ability to raise capital needed to commercialize any future approved drugs and our overall financial condition.
A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and other third-party payors have attempted to control costs by limiting coverage and the amount
of reimbursement for particular medical products. There have been a number of legislative and regulatory proposals to change the healthcare system in the United States and in some foreign jurisdictions that could affect our ability to sell our
products profitably. These legislative and/or regulatory changes may negatively impact the reimbursement for our products, following approval. The availability of numerous generic pain medications may also substantially reduce the likelihood of
reimbursement for Zalviso or any of our other product candidates, if approved. The application of user fees to generic drug products may expedite the approval of additional pain medication generic drugs. We expect to experience pricing pressures in
connection with the sale of Zalviso and any of our other product candidates, if approved, due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative changes. If we fail to
successfully secure and maintain reimbursement coverage for our products or are significantly delayed in doing so, we will have difficulty achieving market acceptance of our products and our business will be harmed.
Furthermore, market acceptance and sales of our product candidates, if approved, will depend on reimbursement policies and may be affected by future
healthcare reform measures. Government authorities and third party payors, such as private health insurers, hospitals and health maintenance organizations, decide which drugs they will pay for and establish reimbursement levels. We cannot be sure
that reimbursement will be available for Zalviso, or any of our other product candidates, if approved. Also, reimbursement amounts may reduce the demand for, or the price of, our products. If reimbursement is not available, or is available only to
limited levels, we may not be able to successfully commercialize Zalviso, or any of our other product candidates, if approved.
Additionally,
the regulations that govern marketing approvals, pricing, coverage and reimbursement for new drugs vary widely from country to country. Current and future legislation may significantly change the approval requirements in ways that could involve
additional costs and cause delays in obtaining approvals. Some countries require approval of the sale price of a product before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is
granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain marketing approval for a product in a particular country,
but then be subject to price regulations that delay commercial launch of the product, possibly for lengthy
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time periods, and negatively impact the revenues able to be generated from the sale of the product in that country. Adverse pricing limitations may hinder our ability to recoup our investment in
Zalviso and our other drug candidates, even if those drug candidates obtain marketing approval.
The FDA and other regulatory agencies
actively enforce the laws and regulations prohibiting the promotion of off-label uses. *
If we are found to have improperly promoted
off-label uses of our product candidates, including Zalviso, if approved, we may become subject to significant liability. Such enforcement has become more common in the industry. The FDA and other regulatory agencies strictly regulate the
promotional claims that may be made about prescription drug products. In particular, a product may not be promoted for uses that are not approved by the FDA or such other regulatory agencies as reflected in the products approved labeling. If
we receive marketing approval for our product candidates for our proposed indications, physicians may nevertheless use our products for their patients in a manner that is inconsistent with the approved label, if the physicians personally believe in
their professional medical judgment it could be used in such manner. However, if the FDA determines that our promotional materials or training constitutes promotion of an off-label use, it could request that we modify our training or promotional
materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement
authorities might take action if they consider our promotional or training materials to constitute promotion of an off-label use, which could result in significant civil, criminal and/or administrative penalties, damages, fines, disgorgement,
individual imprisonment, exclusion from government-funded healthcare programs, such as Medicare and Medicaid, contractual damages, reputational harm, increased losses and diminished profits and the curtailment or restructuring of our operations, any
of which could adversely affect our ability to operate our business and our financial results. The FDA or other regulatory authorities could also request that we enter into a consent decree or a corporate integrity agreement, or seek a permanent
injunction against us under which specified promotional conduct is monitored, changed or curtailed. If we cannot successfully manage the promotion of our product candidates, including Zalviso, if approved, we could become subject to significant
liability, which would materially adversely affect our business and financial condition.
Guidelines and recommendations published by
government agencies can reduce the use of our product candidates, including Zalviso, if approved. *
Government agencies promulgate
regulations and guidelines applicable to certain drug classes which may include the product candidates that we are developing. Recommendations of government agencies may relate to such matters as usage, dosage, route of administration and use of
concomitant therapies. Regulations or guidelines suggesting the reduced use of certain drug classes which may include the product candidates that we are developing or the use of competitive or alternative products as the standard of care to be
followed by patients and healthcare providers could result in decreased use of our product candidates, or negatively impact our ability to gain market acceptance and market share.
If we are unable to establish relationships with group purchasing organizations, or GPOs, any future revenues or future profitability could be jeopardized. *
Many end-users of pharmaceutical products have relationships with GPOs whereby such GPOs provide such end-users access to a broad range of pharmaceutical
products from multiple suppliers at competitive prices and, in certain cases, exercise considerable influence over the drug purchasing decisions of such end-users. Hospitals and other end-users contract with the GPO of their choice for their
purchasing needs. We expect to derive revenue from end-user customers that are members of a small number of GPOs if Zalviso is approved by the FDA. Establishing and maintaining strong relationships with these GPOs will require us to be a reliable
supplier, remain price competitive and comply with FDA regulations. The GPOs with whom we have relationships may have relationships with manufacturers that sell competing products, and such GPOs may earn higher margins from these products or
combinations of competing products or may prefer products other than ours for other reasons. If we are unable to establish or maintain our GPO relationships, sales of our products and revenue could be negatively impacted.
We intend to rely on a limited number of pharmaceutical wholesalers to distribute our product candidates, including Zalviso, if approved. *
We intend to rely upon pharmaceutical wholesalers in connection with the distribution of our product candidates, including Zalviso, if
approved. If we are unable to establish or maintain our business relationships with these pharmaceutical wholesalers on commercially acceptable terms, it could have a material adverse effect on our sales and may prevent us from achieving
profitability.
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Risks Related to Our Business Operations and Industry
Failure to comply with the Drug Enforcement Administration regulations, or the cost of compliance with these regulations, may adversely affect our
business.
Our sufentanil-based products are subject to extensive regulation by the DEA, due to their status as scheduled drugs.
Sufentanil is a Schedule II opioid, considered to present the highest risk of abuse. The manufacture, shipment, storage, sale and use of controlled substances are subject to a high degree of regulation, including security, record-keeping and
reporting obligations enforced by the DEA and also by comparable state agencies. This high degree of regulation can result in significant costs in order to comply with the required regulations, which may have an adverse effect on the development and
commercialization of our product candidates.
The DEA limits the availability and production of all Schedule II substances, including
sufentanil, through a quota system. The DEA requires substantial evidence and documentation of expected legitimate medical and scientific needs before assigning quotas to manufacturers. Our contract manufacturers have applied annually for a quota on
our behalf. We will need significantly greater amounts of sufentanil to implement our commercialization plans for any of our products that may be approved by the FDA in the future, including Zalviso. Any delay or refusal by the DEA in establishing
the procurement quota or a reduction in our quota for sufentanil or a failure to increase it over time to meet anticipated increases in demand could delay or stop the clinical development of any of our product candidates or the commercial sale of
any approved products. This could have a material adverse effect on our business, results of operations, financial condition and prospects.
Our relationships with investigators, health care professionals, consultants, commercial partners, third-party payors, hospitals, and other
customers are subject to applicable anti-kickback, fraud and abuse and other healthcare laws, which could expose us to penalties. *
Healthcare providers, physicians and others play a primary role in the recommendation and prescribing of any products for which we may obtain marketing
approval. Our business operations and arrangements with investigators, healthcare professionals, consultants, commercial partners, hospitals, third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare
laws. These laws may constrain the business or financial arrangements and relationships through which we research, market, sell and distribute the products for which we obtain marketing approval. Restrictions under applicable federal and state
healthcare laws, include, but are not limited to, the following:
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the federal healthcare Anti-Kickback Statute prohibits, among other things, persons or entities from knowingly and willfully soliciting, offering,
receiving or paying any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, lease, order or
recommendation of, any good, facility, item or service, for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid;
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the federal civil and criminal false claims laws and civil monetary penalties, including civil whistleblower or qui tam actions, which prohibit, among
other things, individuals or entities from knowingly presenting, or causing to be presented, to the federal government, claims for payment or approval that are false or fraudulent or from knowingly making a false statement to improperly avoid,
decrease or conceal an obligation to pay money to the federal government;
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the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which, among other things, imposes criminal liability for knowingly
and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or to obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody
or control of, any healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly or willfully falsifying, concealing, or covering up by any trick or device a material fact or making any materially false statement in
connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters;
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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations, impose
certain obligations, including mandatory contractual terms, on covered healthcare providers, health plans and clearinghouses, as well as their respective business associates that perform services for them that involve the use, or disclosure of,
individually identifiable health information, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;
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the federal transparency law, enacted as part of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education
Reconciliation Act of 2010 (collectively, the Health Care Reform Law), and its implementing regulations, requires certain manufacturers of drugs, devices, biologicals and medical supplies to report to the U.S. Department of Health and Human Services
information related to payments and other transfers of value provided to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members; and
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analogous state laws that may apply to our business practices, including but not limited to, state laws that require pharmaceutical companies to
implement compliance programs and/or comply with the pharmaceutical industrys voluntary compliance guidelines; state laws that impose restrictions on pharmaceutical companies marketing practices and require manufacturers to track and
file reports relating to pricing and marketing information, which requires tracking and reporting gifts, compensation and other remuneration and items of value provided to healthcare professionals and entities.
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Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws will involve substantial costs. It is
possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations, agency guidance or case law involving applicable fraud and abuse or other healthcare laws. If our
operations are found to be in violation of any of these or any other healthcare regulatory laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages,
fines, disgorgement, individual imprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid, contractual damages, reputational harm, increased losses and diminished profits and the curtailment or restructuring
of our operations any of which could adversely affect our ability to operate our business and our financial results. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant
legal expenses or divert our managements attention from the operation of our business.
We have not yet produced commercial
supplies of Zalviso and we may encounter difficulties in production, which may adversely affect our commercial plans it Zalviso is approved for sale in the United States.
Early development and clinical trial manufacturing of Zalviso was conducted at Patheon in Toronto, Canada. Because the DEA requires that sufentanil be manufactured in the United States if our product
candidates are marketed in the United States, we transferred our manufacturing capability in the third quarter of 2011 from Patheon in Toronto, Canada to Patheons production facility in Cincinnati, Ohio, where we have built out a suite within
their existing buildings that will serve as a manufacturing facility for clinical and commercial supplies of sufentanil tablets. Late stage development and manufacture of registration stability lots, which were utilized in clinical trials, were
manufactured at Patheon, Cincinnati. However, we have not yet produced commercial supplies at this facility and we may encounter difficulties in production at the new facility, which may adversely affect our clinical and commercial plans.
In January 2013, we entered into a Manufacturing Services Agreement, or the Services Agreement, with Patheon under which Patheon has agreed
to manufacture, supply, and provide certain validation and stability services with respect to Zalviso for potential sales in the United States, Canada, Mexico and other countries, subject to agreement by the parties to any additional fees for such
other countries. There is no guarantee that Patheons services will be satisfactory or that they will continue to meet the strict regulatory guidelines of the FDA or other regulatory agencies. In addition, in January 2013, we entered into a
Capital Expenditure and Equipment Agreement, or the Capital Agreement, with Patheon, relating to the manufacture of sufentanil tablets. Under the terms of the Capital Agreement, we have made and plan to make certain future modifications to
Patheons Cincinnati facility.
If Patheon cannot provide us with an adequate supply of sufentanil tablets, we may be required to pursue
alternative sources of manufacturing capacity. Switching or adding commercial manufacturing capability can involve substantial cost and require extensive management time and focus, as well as additional regulatory filings. In addition, there is a
natural transition period when a new manufacturing facility commences work. As a result, delays may occur, which can materially impact our ability to meet our desired commercial timelines, thereby increasing our costs and reducing our ability to
generate revenue.
The facilities of any of our future manufacturers of sufentanil-containing tablets must be approved by the FDA before
commercial distribution from such manufacturers occurs. We do not fully control the manufacturing process of sufentanil tablets and are completely dependent on these third party manufacturing partners for compliance with the FDAs requirements
for manufacture. In addition, although our third party manufacturers are well established commercial manufacturers, we are dependent on their continued adherence to cGMP manufacturing and acceptable changes to their process. If our manufacturers do
not meet the FDAs strict regulatory requirements, they will not be able to secure FDA approval for their manufacturing facilities. If the FDA does not approve these facilities for the commercial manufacture of sufentanil tablets, we will need
to find alternative suppliers, which would result in significant delays in obtaining FDA approval for Zalviso. These challenges may have a material adverse impact on our business, results of operations, financial condition and prospects.
Business interruptions could delay us in the process of developing our products and could disrupt our sales.
Our headquarters is located in the San Francisco Bay Area, near known earthquake fault zones and is vulnerable to significant damage from earthquakes. We
are also vulnerable to other types of natural disasters and other events that could
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disrupt our operations. We do not carry insurance for earthquakes or other natural disasters and we may not carry sufficient business interruption insurance to compensate us for losses that may
occur. Any losses or damages we incur could have a material adverse effect on our business operations.
Our future success depends on
our ability to retain key executives and to attract, retain and motivate qualified personnel.
We are highly dependent on principal
members of our executive team, the loss of whose services may adversely impact the achievement of our objectives. While we have entered into offer letters with each of our executive officers, any of them could leave our employment at any time, as
all of our employees are at will employees. Recruiting and retaining other qualified employees for our business, including scientific and technical personnel, will also be critical to our success. There is currently a shortage of skilled
executives in our industry, which is likely to continue. As a result, competition for skilled personnel is intense and the turnover rate can be high. We may not be able to attract and retain personnel on acceptable terms given the competition among
numerous pharmaceutical companies for individuals with similar skill sets. In addition, failure to succeed in clinical trials may make it more challenging to recruit and retain qualified personnel. The inability to recruit or loss of the services of
any executive or key employee might impede the progress of our research, development and commercialization objectives.
We will need to
expand our organization, and we may experience difficulties in managing this growth, which could disrupt our operations. *
As of
June 30, 2014, we had 44 full-time employees. We are planning for commercial launch of Zalviso, and we are expanding our employee base to increase our managerial, scientific and engineering, operational, sales, marketing, financial and other
resources and to hire more consultants and contractors. Current and future growth impose significant additional responsibilities on our management, including the need to identify, recruit, maintain, motivate and integrate additional employees,
consultants and contractors. Also, our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to
effectively manage the expansion of our operations, which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our
expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of additional product candidates. If our management is unable to effectively manage our growth, our
expenses may increase more than expected, our ability to generate and/or grow revenues could be reduced, and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize Zalviso and our
other product candidates and compete effectively will depend, in part, on our ability to effectively manage any future growth.
We face
potential product liability, and, if successful claims are brought against us, we may incur substantial liability.
The use of our
product candidates in clinical trials and the sale of any products for which we obtain marketing approval exposes us to the risk of product liability claims. Product liability claims might be brought against us by consumers, health care providers,
pharmaceutical companies or others selling or otherwise coming into contact with our products. If we cannot successfully defend against product liability claims, we could incur substantial liability and costs. In addition, regardless of merit or
eventual outcome, product liability claims may result in:
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impairment of our business reputation;
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withdrawal of clinical trial participants;
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costs due to related litigation;
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distraction of managements attention from our primary business;
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substantial monetary awards to patients or other claimants;
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the inability to commercialize our product candidates; and
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decreased demand for our product candidates, if approved for commercial sale.
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Our current product liability insurance coverage may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance
coverage is becoming increasingly expensive and in the future we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. If and when we obtain marketing approval for
our product candidates, we intend to expand our insurance coverage to include the sale of commercial products; however, we may be unable to obtain product liability insurance on commercially reasonable terms or in adequate amounts. On occasion,
large judgments have been awarded in class action lawsuits based on drugs that had unanticipated adverse effects. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, if judgments
exceed our insurance coverage, could adversely affect our results of operations and business.
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Our employees, independent contractors, principal investigators, consultants, commercial partners and
vendors may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements and insider trading.
We are exposed to the risk that our employees, independent contractors, investigators, consultants, commercial partners and vendors may engage in fraudulent conduct or other illegal activity. Misconduct
by these parties could include intentional, reckless and/or negligent conduct that violates (1) the laws of the FDA and similar foreign regulatory bodies, including those laws requiring the reporting of true, complete and accurate information
to such regulatory bodies; (2) healthcare fraud and abuse laws of the United States and similar foreign fraudulent misconduct laws; and (3) laws requiring the reporting of financial information or data accurately. Specifically, the
promotion, sales and marketing of healthcare items and services, as well as certain business arrangements in the healthcare industry are subject to extensive laws designed to prevent misconduct, including fraud, kickbacks, self-dealing and other
abusive practices. These laws may restrict or prohibit a wide range of pricing, discounting, marketing, structuring and commission(s), certain customer incentive programs and other business arrangements generally. Activities subject to these laws
also involve the improper use of information obtained in the course of patient recruitment for clinical trials. It is not always possible to identify and deter employee and other third-party misconduct. The precautions we take to detect and prevent
inappropriate conduct may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws. If any such actions
are instituted against us, and we are not successful in defending ourselves, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines,
disgorgement, individual imprisonment, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our
operations, any of which could adversely affect our ability to operate our business and our results of operations.
Risks Related to Our
Intellectual Property
If we cannot defend our issued patents from third party claims or if our pending patent applications fail to
issue, our business could be adversely affected. *
To protect our proprietary technology, we rely on patents as well as other
intellectual property protections including trade secrets, nondisclosure agreements, and confidentiality provisions. We are the owner of record of over 25 issued patents worldwide. These issued patents cover AcelRxs sufentanil tablet,
medication delivery devices and platform technology. These issued patents are expected to provide coverage through 2027 2031.
In
addition, we are pursuing a number of U.S. non-provisional patent applications and foreign national applications directed to our product candidates. The patent applications that we have filed and have not yet been granted may fail to result in
issued patents in the United States or in foreign countries. Even if the patents do successfully issue, third parties may challenge the patents.
Our commercial success will depend in part on successfully defending our current sufentanil formulation patents against third party challenges and expanding our existing formulation patent portfolio to
provide additional layers of patent protection, as well as extending patent protection to our proprietary delivery devices. There can be no assurance that we will be successful in defending our existing and future patents against third party
challenges, or that our pending patent applications will result in issued patents.
The patent positions of pharmaceutical companies,
including us, can be highly uncertain and involve complex and evolving legal and factual questions. No consistent policy regarding the breadth of claims allowed in pharmaceutical patents has emerged to date in the United States. Legal developments
may preclude or limit the scope of available patent protection.
There is also no assurance that any patents issued to us will not become the
subject of adversarial proceedings such as opposition, inter partes review, post-grant review, reissue, re-examination or other post-issuance proceedings, will provide us with competitive advantages, will not be challenged by any third parties, or
that the patents of others will not prevent the commercialization of products incorporating our technology. Furthermore, there can be no guarantee that others will not independently develop similar products, duplicate any of our products, or design
around our patents.
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Litigation involving patents, patent applications and other proprietary rights is expensive and time
consuming. If we are involved in such litigation, it could cause delays in bringing our product candidates to market and interfere with our business.
Our commercial success depends in part on not infringing patents and proprietary rights of third parties. Although we are not currently aware of litigation or other proceedings or third party claims of
intellectual property infringement related to our product candidates, the pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights.
As we enter our target markets, it is possible that competitors or other third parties will claim that our products and/or processes infringe their
intellectual property rights. These third parties may have obtained and may in the future obtain patents covering products or processes that are similar to, or may include compositions or methods that encompass our technology, allowing them to claim
that the use of our technologies infringes these patents.
In a patent infringement claim against us, we may assert, as a defense, that we do
not infringe the relevant patent claims, that the patent is invalid or both. The strength of our defenses will depend on the patents asserted, the interpretation of these patents, and our ability to invalidate the asserted patents. However, we could
be unsuccessful in advancing non-infringement and/or invalidity arguments in our defense. In the United States, issued patents enjoy a presumption of validity, and the party challenging the validity of a patent claim must present clear and
convincing evidence of invalidity, which is a high burden of proof. Conversely, the patent owner need only prove infringement by a preponderance of the evidence, which is a lower burden of proof.
If we were found by a court to have infringed a valid patent claim, we could be prevented from using the patented technology or be required to pay the
owner of the patent for the right to license the patented technology. If we decide to pursue a license to one or more of these patents, we may not be able to obtain a license on commercially reasonable terms, if at all, or the license we obtain may
require us to pay substantial royalties or grant cross licenses to our patent rights. For example, if the relevant patent is owned by a competitor, that competitor may choose not to license patent rights to us. If we decide to develop alternative
technology, we may not be able to do so in a timely or cost-effective manner, if at all.
In addition, because patent applications can take
years to issue and are often afforded confidentiality for some period of time there may currently be pending applications, unknown to us, that later result in issued patents that could cover one or more of our products.
It is possible that we may in the future receive, particularly as a public company, communications from competitors and other companies alleging that we
may be infringing their patents, trade secrets or other intellectual property rights, offering licenses to such intellectual property or threatening litigation. In addition to patent infringement claims, third parties may assert copyright, trademark
or other proprietary rights against us. We may need to expend considerable resources to counter such claims and may not be able to successful in our defense. Our business may suffer if a finding of infringement is established.
It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection.
The patent positions of pharmaceutical companies can be highly uncertain and involve complex legal and factual questions for which important legal
principles remain unresolved. No consistent policy regarding the breadth of claims allowed in pharmaceutical patents has emerged to date in the United States. The pharmaceutical patent situation outside the United States is even more uncertain.
Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. For example, on September 16, 2011, the Leahy-Smith America Invents Act, or the
Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to United States patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent
litigation. The United States Patent Office has developed new and untested regulations and procedures to govern the full implementation of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act,
and in particular, the first to file provisions, that became effective March 16, 2013. It is too early to tell what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its
implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial
condition.
Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in the patents that may be issued from the
applications we currently or may in the future own or license from third parties. Further, if any patents license we obtain is deemed invalid and/or unenforceable, it could impact our ability to commercialize or partner our technology.
Competitors or third parties may infringe our patents. We may be required to file patent infringement claims, which can be expensive and time-consuming.
In addition, in an infringement proceeding, a court may decide that a patent of ours is not
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valid or is unenforceable, or that the third partys technology does not in fact infringe upon our patents. An adverse determination of any litigation or defense proceedings could put one or
more of our patents at risk of being invalidated or interpreted narrowly and could put our related pending patent applications at risk of not issuing. Litigation may fail and, even if successful, may result in substantial costs and be a distraction
to our management. We may not be able to prevent misappropriation of our proprietary rights, particularly in countries outside the United States where patent rights may be more difficult to enforce. Furthermore, because of the substantial
amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential or sensitive information could be compromised by disclosure in the event of litigation. In addition, during the course of
litigation there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on
the price of our common stock.
The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:
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we were the first to make the inventions covered by each of our pending patent applications;
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we were the first to file patent applications for these inventions;
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others will not independently develop similar or alternative technologies or duplicate any of our technologies;
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any patents issued to us or our collaborators will provide a basis for commercially viable products, will provide us with any competitive advantages or
will not be challenged by third parties; or
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the patents of others will not have an adverse effect on our business.
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If we do not adequately protect our proprietary rights, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could materially harm our business,
negatively affect our position in the marketplace, limit our ability to commercialize our product candidates, and delay or render impossible our achievement of profitability.
We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.
We rely on trade secrets to protect our proprietary know-how and technological advances, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are
difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to protect our trade secrets and other proprietary information. These
agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade
secrets and proprietary information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights. Failure to obtain or maintain trade secret protection could enable competitors to use our
proprietary information to develop products that compete with our products or cause additional, material adverse effects upon our competitive business position.
Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and applications will be due to be paid to the United States Patent and Trademark Office and
various foreign governmental patent agencies in several stages over the lifetime of the patents and/or applications.
We have systems
in place, including use of third party vendors, to manage payment of periodic maintenance fees, renewal fees, annuity fees and various other patent and application fees. The United States Patent and Trademark Office, or the USPTO, and various
foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. There are situations in which noncompliance can result in abandonment
or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If this occurs, our competitors might be able to enter the market, which would have a material adverse effect on our
business.
We may not be able to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have
encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other
intellectual property protection, especially those relating to life sciences. This could make it difficult for us to stop the infringement of our patents or the misappropriation of our other intellectual property rights. For example, many foreign
countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors.
In these countries, patents may provide limited or no benefit.
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Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and
divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the
United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of intellectual property.
We have not yet registered our trademarks in all of our potential markets, and failure to secure those registrations could adversely affect our business.
We have registered our ACELRX mark in the United States, Canada, the European Union and India. We have also registered our NANOTAB mark in the United
States, Hong Kong and Singapore, and our ACCELERATE. INNOVATE. ALLEVIATE. tagline in the United States. We have additionally applied for registration of our ZALVISO mark in the United States on an intent-to-use basis and that application has been
allowed. In early 2014, the FDA accepted the ZALVISO mark as part of the NDA review process. Although we are not currently aware of any oppositions to or cancellations of our registered trademarks or pending applications, it is possible that one or
more of the applications could be subject to opposition or cancellation after the marks are registered. The registrations will be subject to use and maintenance requirements. It is also possible that we have not yet registered all of our trademarks
in all of our potential markets, and that there are names or symbols other than ACELRX that may be protectable marks for which we have not sought registration, and failure to secure those registrations could adversely affect our
business. Opposition or cancellation proceedings may be filed against our trademarks and our trademarks may not survive such proceedings.
Risks Related to Ownership of Our Common Stock
The market price of our common stock may be highly volatile. *
Since our initial
public offering, or IPO, in February 2011, the trading price of our common stock has experienced significant volatility and is likely to be volatile in the future. Our stock price could be subject to wide fluctuations in response to a variety of
factors, including the following:
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any delay in resubmitting the NDA for Zalviso, submitting an NDA for any of our other product candidates and any adverse development or perceived
adverse development with respect to the FDAs review of any NDA;
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any adverse development or perceived adverse development with respect to the FDAs regulatory review of Zalviso;
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adverse results or delays in future clinical trials;
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inability to obtain additional funding, including funding necessary for the planned potential commercialization and manufacturing of Zalviso in the
United States and advancement of clinical trials for other product candidates;
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failure to successfully develop and commercialize our product candidates;
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changes in laws or regulations applicable to our products;
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inability to obtain adequate product supply for our product candidates, or the inability to do so at acceptable prices;
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adverse regulatory decisions;
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introduction of new products, services or technologies by our competitors;
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failure to meet or exceed financial projections we provide to the public;
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failure to meet or exceed the estimates and projections of the investment community;
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the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;
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announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;
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disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for
our technologies;
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additions or departures of key scientific or management personnel;
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significant lawsuits, including patent or stockholder litigation;
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changes in the market valuations of similar companies;
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sales of our common stock by us or our stockholders in the future; and
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trading volume of our common stock.
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In addition, the stock market in general, and The NASDAQ Global Market, or NASDAQ, in particular, have
experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock,
regardless of our actual operating performance.
Until this year our common stock has thinly traded and in the future, may continue to
be thinly traded, and our stockholders may be unable to sell at or near asking prices, or at all if they need to sell their shares to raise money or otherwise desire to liquidate such shares. *
Until this year, we had a low volume of daily trades in our common stock on NASDAQ. For example, the average daily trading volume in our common stock on
NASDAQ during the first half of 2013 was approximately 275,000 shares per day. A more active market for our stock has only recently developed and may not be sustained. For example, the average daily trading volume in our common stock on NASDAQ
during the first half of 2014 was approximately 600,000 shares per day. Our stockholders may be unable to sell their common stock at or near their asking prices, which may result in substantial losses to our investors.
The market for our common stock may be characterized by significant price volatility when compared to seasoned issuers, and we expect that our share
price will be more volatile than a seasoned issuer for the indefinite future. As noted above, our common stock may be sporadically and/or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares
by our stockholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline significantly in the event that a large number of our common stock are sold on the market
without commensurate demand, as compared to a seasoned issuer that could better absorb those sales without adverse impact on its share price.
Our principal stockholders and management own a significant percentage of our stock and are able to exert significant control over matters subject
to stockholder approval.
Our executive officers and directors, together with the stockholders with whom our executive officers and
directors are affiliated or associated, beneficially own a significant percentage of our voting stock. Therefore, these stockholders have the ability to influence us through this ownership position. These stockholders are able to determine all
matters requiring stockholder approval. For example, these stockholders, acting together, are able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate
transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may believe are in your best interest as one of our stockholders.
We incur significant increased costs as a result of operating as a public company, and our management is required to devote substantial time to new compliance initiatives.
As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002, as amended, or the
Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and NASDAQ, have imposed various requirements on public companies. Our management and other personnel need to devote a substantial amount of time to these compliance
initiatives. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly. For example, these rules and regulations make it more difficult and more expensive for us
to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain our current levels of such coverage.
As a public company, we are subject to the requirements of Section 404 of the Sarbanes-Oxley Act. If we are unable to comply with Section 404 in a timely manner, it may affect the reliability of
our internal control over financial reporting. Assessing our staffing and training procedures to improve our internal control over financial reporting is an ongoing process.
We have been and will continue to be involved in a substantial effort to implement appropriate processes, document the system of internal control over key processes, assess their design, remediate any
deficiencies identified and test their operation. If we fail to comply with the requirements of Section 404, it may affect the reliability of our internal control over financial reporting and negatively impact the quality of disclosure to our
stockholders. If we or our independent registered public accounting firm identify and report a material weakness, it could adversely affect our stock price.
Sales of a substantial number of shares of our common stock in the public market by our existing stockholders could cause our stock price to fall. *
Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could depress the market
price of our common stock and could impair our ability to raise capital through the sale of
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additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of our common stock. All of our shares of common stock outstanding are
eligible for sale in the public market, subject in some cases to the volume limitations and manner of sale requirements of Rule 144 under the Securities Act. Sales of stock by our stockholders could have a material adverse effect on the trading
price of our common stock.
In addition, certain holders of our securities are entitled to certain rights with respect to the registration of
their shares of common stock under the Securities Act. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act. Recently, we registered for resale
3,070,000 shares of our common stock held by certain selling stockholders on a shelf registration statement that became effective on June 12, 2014. Any sales of securities by these stockholders could have a material adverse effect on the
trading price of our common stock.
Future sales and issuances of our common stock or rights to purchase common stock, including
pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall. *
We expect that significant additional capital will be needed in the future to continue our planned operations. To the extent we raise additional capital by issuing equity securities, our stockholders may
experience substantial dilution. We may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or
other equity securities in more than one transaction, investors may be materially diluted by subsequent sales. These sales may also result in material dilution to our existing stockholders, and new investors could gain rights superior to our
existing stockholders.
Pursuant to the 2011 Incentive Plan, our management is authorized to grant stock options and other equity-based awards
to our employees, directors and consultants. The number of shares available for future grant under our 2011 Incentive Plan will automatically increase each year by 4% of all shares of our capital stock outstanding as of December 31 of the prior
calendar year, subject to the ability of our board of directors to take action to reduce the size of the increase in any given year. Currently, we plan to register the increased number of shares available for issuance under our 2011 Incentive Plan
each year. If our board of directors elects to increase the number of shares available for future grant by the maximum amount each year, our stockholders may experience additional dilution, which could cause our stock price to fall.
We are at risk of securities class action litigation.
In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because
pharmaceutical companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of managements attention and resources, which could harm our
business.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an ownership change, generally defined as
a greater than 50% change (by value) in its equity ownership over a three year period, the corporations ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes (such as research tax credits) to offset
its post-change income may be limited. The completion of the July 2013 public equity offering, together with our public equity offering in December 2012, our initial public offering, private placements and other transactions that have occurred, have
triggered such an ownership change. In addition, since we will need to raise substantial additional funding to finance our operations, we may undergo further ownership changes in the future. As a result, if we earn net taxable income, our ability to
use our pre-change net operating loss carryforwards to offset United States federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us.
We do not intend to pay dividends on our common stock so any returns will be limited to the value of our stock.
We have never declared or paid any cash dividends on our capital stock, and we are prohibited from doing so under the terms of our Amended Loan Agreement
with Hercules. Regardless of the restrictions in our Amended Loan Agreement with Hercules or the terms of any potential future indebtedness, we anticipate that we will retain all available funds and any future earnings to support our operations and
finance the growth and development of our business and, therefore, we do not expect to pay cash dividends in the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors and
will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.
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Provisions in our amended and restated certificate of incorporation and bylaws, as well as provisions
of Delaware law, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders or remove our current management.
Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an
acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management. These provisions include:
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authorizing the issuance of blank check preferred stock, the terms of which may be established and shares of which may be issued without
stockholder approval;
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limiting the removal of directors by the stockholders;
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a staggered board of directors;
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prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;
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eliminating the ability of stockholders to call a special meeting of stockholders; and
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establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon at
stockholder meetings.
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These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our
current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, we are subject to Section 203 of the Delaware General
Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an
interested stockholder, unless such transactions are approved by our board of directors. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders. Further,
other provisions of Delaware law may also discourage, delay or prevent someone from acquiring us or merging with us.