ITEM 1A. RISK FACTORS
The risks described below may not be the only ones relating to our company. Additional risks that we currently believe are immaterial may
also impair our business operations. Our business, financial condition and future prospects and the trading price of our common stock could be harmed as a result of any of these risks. These risks and uncertainties may be interrelated or co-related,
and as a result, the occurrence of one risk might directly affect other risks described below, make them more likely to occur or magnify their impact. Investors should also refer to the other information contained or incorporated by reference in
this Quarterly Report on Form 10-Q for the period ended June 30, 2014, including the consolidated financial statements and related notes, and information contained in our 2013 Form 10-K, and in our other filings from time to time with the
SEC. The risks set forth below with an asterisk (*) next to the title are new risk factors or risk factors containing changes from the risk factors previously disclosed in our Quarterly Report on Form 10-Q for the three months ended
March 31, 2014.
Risks Relating to Our Financial Position and Operations
*There is a significant risk that we will not be able to repay or refinance the 2016 Notes when they mature. As a result, we are
considering transactions that could leave our current stockholders with little or no financial ownership of Dendreon.
As
previously disclosed, our 2016 Notes, in an aggregate principal amount of $620 million mature on January 15, 2016. Our stock price is well below the $51.24 effective conversion price for the 2016 Notes, making it unlikely that the holders of
the 2016 Notes will exercise their conversion right. As a result, we assume that, absent the execution of a transaction of the type described below, we will be required under the terms of the 2016 Notes to repay the full $620 million principal
amount at maturity. Based on our currently anticipated operating results, however, and even assuming the realization of future expense reductions that we plan to make and product revenues that we forecast, there is a significant risk that, while we
believe we have sufficient cash to meet our ordinary course obligations for at least the next twelve months, we will not be able to repay or refinance the 2016 Notes. Accordingly, we are currently considering alternatives to the repayment of the
2016 Notes in cash, including alternatives that could result in leaving our current stockholders with little or no financial ownership of Dendreon. Our Board of Directors will consider any strategic alternatives that might be presented by third
parties, though there can be no guarantee that any such alternative will provide value for the Companys stockholders.
*Our
business and operations are subject to certain risks relating to our financial condition.
Our business and operations are subject
to various risks relating to our financial condition, some of which could result from concerns our stakeholders may have about our financial situation and others that could result if we were to pursue alternatives to the repayment of the 2016 Notes
in cash. These risks include, but are not limited to, the following:
|
|
|
certain of our suppliers may attempt to cancel our contracts or restrict ordinary credit terms, require financial assurances of performance or refrain entirely from providing goods or services to us;
|
|
|
|
our employees may become distracted from performance of their duties;
|
|
|
|
physicians could cease to purchase and prescribe PROVENGE;
|
|
|
|
we may have difficulty continuing to obtain and maintain contracts necessary to continue our operations and at affordable rates with competitive terms;
|
37
|
|
|
we may have difficulty maintaining existing and building new relationships; and
|
|
|
|
we may be unable to retain and motivate key executives and employees and we may have difficulty attracting new employees.
|
*We have a history of operating losses. We expect to continue to incur losses for the foreseeable future, and we may never become
profitable.
As of June 30, 2014, our accumulated deficit was $2.3 billion and our net loss for six months ended
June 30, 2014 was $51.7 million. We have incurred net losses as a result of research and development expenses, clinical trial expenses, contract manufacturing and facility expenses, costs associated with our commercial efforts on behalf of
PROVENGE and general and administrative expenses in support of our operations and research efforts. The majority of our resources continue to be used in support of the commercialization of PROVENGE, including outside the United States. Even if we
are able to successfully realize our current operating projections, we will likely be unable to repay or refinance the 2016 Notes when they mature. And in any event, we are unable to predict when our core business will break-even or become
profitable, if at all. Even if we do produce revenues and achieve profitability, we may not be able to maintain or increase profitability, and our current stockholders may be left with little or no financial interest at such time.
The accounting method for convertible debt securities that may be settled in cash, such as the 2016 Notes, could have a material effect
on our net loss, net working capital or other financial results.
Under the FASB ASC Section 470-20,
Debt with Conversion
and other Options
(ASC 470-20), an entity must separately account for the liability and equity components of the convertible debt instruments (such as the 2016 Notes) that may be settled entirely or partially in cash upon conversion
in a manner that reflects the issuers economic interest cost. The effect of ASC 470-20 on the accounting for our 2016 Notes is that the equity component is required to be included in the additional paid-in capital section of
stockholders equity on the consolidated balance sheets and the value of the equity component is treated as original issue discount for purposes of accounting for the debt component of the notes. As a result, we are required to record non-cash
interest expense as a result of the amortization of the discounted carrying value of the 2016 Notes to their face amount over the term of the 2016 Notes. We report higher interest expense in our financial results because ASC 470-20 requires
interest to include both the current periods amortization of the debt discount and the instruments coupon interest, which could adversely affect our reported or future financial results, the trading price of our common stock and the
trading price of the 2016 Notes.
*Our stockholders may be diluted by the conversion of our outstanding convertible notes.
The holders of the 2016 Notes may choose at any time to convert their notes prior to maturity in January 2016, and upon conversion
we may issue cash, stock, or a combination thereof at our option. Should a holder of the 2016 Notes exercise their conversion option during the next twelve month period, it is our intention to satisfy the conversion with shares of our common stock.
The 2016 Notes are convertible into our common stock initially at the conversion rate of 19.5160 shares per $1,000 principal
amount, or $51.24 per share, subject to adjustment. The number of shares of common stock issuable upon conversion of the 2016 Notes, and therefore the dilution of existing common stockholders, could increase under certain circumstances described in
the indentures under which the 2016 Notes were issued. The conversion of the 2016 Notes would result in the issuance of additional shares of common stock, diluting existing common stockholders. Our stock price is well below the $51.24 effective
conversion price for the 2016 Notes, making it unlikely that the holders of the 2016 Notes will exercise their conversion right. As a result, we assume that we will be required under the terms of the 2016 Notes to repay the full $620 million
principal amount at maturity.
*Our operating results may be harmed if our restructuring plans do not achieve the anticipated
results or cause undesirable consequences.
On November 12, 2013, we announced a restructuring plan that resulted in a
reduction in headcount of approximately 150 full-time positions. In addition, on July 30, 2012, we announced a restructuring plan which resulted in a reduction in headcount of approximately 600 full-time and contractor positions, and the
closing of the New Jersey Facility. Restructuring plans may yield unintended consequences, such as attrition beyond our intended reduction in workforce and reduced employee morale, which may cause our employees who were not affected by the reduction
in workforce to seek alternate employment. Additional attrition could impede our ability to meet our operational goals, which could have a material adverse effect on our financial performance. In addition, as a result of the reductions in our
workforce, we may face an increased risk of employment litigation. Furthermore, employees whose positions will be eliminated in connection with these restructuring plans may seek future employment with our competitors. Although all our employees are
required to sign a confidentiality agreement with us at the time of hire, we cannot assure you that the confidential nature of our proprietary information will be maintained in the course of such future employment. We expect to undertake
38
additional restructuring activities, and we cannot assure you that any of our restructuring efforts will be successful, or that we will be able to realize the cost savings and other anticipated
benefits from our previous or any future restructuring plans. In addition, if we continue to reduce our workforce, it may adversely impact our ability to respond rapidly to any new growth or revenue opportunities. Any restructuring activities we
undertake may take longer than expected and may require changes to our business that we are unable to implement. If we are unsuccessful in implementing our cost saving initiatives and restructuring plans or if we do not achieve our expected results,
our results of operations and cash flows could be adversely affected.
*
Because of reductions in our workforce related
to our prior restructuring activities, we have reallocated certain employment responsibilities and have increased our dependence on third parties to perform certain corporate functions.
We restructured our operations in 2011, 2012 and 2013, which included reductions in our workforce. The reductions resulted in the loss of
numerous long-term employees, the loss of institutional knowledge and expertise and the reallocation of certain employment responsibilities, all of which could adversely affect operational efficiencies, employee performance and retention. Such
workforce reductions have also placed a significant burden on our current employees, who continue to operate with limited resources. In addition, because of these reductions, we are outsourcing certain corporate functions, which make us more
dependent on third parties for the performance of these functions in connection with our business and product candidates. To the extent that we are unable to effectively reallocate employee responsibilities, retain key employees, establish and
maintain agreements with competent third-party contractors on terms that are acceptable to us, or effectively manage the work performed by any retained third-party contractors, our ability to advance our business or product candidates may be
significantly impaired and our stock price may be adversely affected. Further cost containment initiatives that we may implement in the future could result in additional employee turnover, causing additional stress on our operational capabilities
and potentially harming our ability to operate our business.
Forecasting sales of PROVENGE may continue to be difficult. If our
revenue projections are inaccurate and our business forecasting and planning decisions are not reflected in our actual results, our business may be harmed and our stock price may be adversely affected.
Our forecasting model for PROVENGE revenue may be inaccurate because of any number of factors. These factors may include competition for
PROVENGE and slower than anticipated physician adoption of PROVENGE because of cautionary prescribing behavior due to negative perceptions of reimbursement history for the product, difficulty in identifying appropriate patients for treatment with
PROVENGE, the cost of the product, which is purchased by the physician on a buy and bill basis, and incurred over a short time period, and other aspects of physician education due to the novelty of the treatment process. The extent to which any of
these or other factors individually or in the aggregate may impact future sales of PROVENGE is uncertain and difficult to predict. Our management must make forecasting decisions regarding future revenue in the course of business planning despite
this uncertainty, and actual results of operations may deviate materially from projected results. This may lead to inefficiencies and increased difficulties in operational planning. Our general and administrative expenses are relatively fixed in the
short term. If our revenues from PROVENGE sales are lower than we anticipate, we will incur costs in the short term that will result in losses that are unavoidable. A shortfall in our revenue has a direct impact on our cash flow and on our business
generally. In addition, as reflected in our recent stock price, fluctuations in our quarterly results can adversely and significantly affect the market price of our common stock.
Risks Relating to our Product Commercialization Pursuits
If we fail to achieve and sustain commercial success for PROVENGE, our business will suffer, our future prospects may be harmed and our
stock price would likely decline.
Prior to the launch of PROVENGE in May 2010, we had never sold or marketed a pharmaceutical
product. Unless we can successfully commercialize another product candidate or acquire the right to market other approved products, we will continue to rely on PROVENGE to generate substantially all of our revenue and fund our operations from
product sales. Our ability to maintain or increase our revenues for PROVENGE will depend on, and may be limited by, a number of factors, including the following:
|
|
|
acceptance of and ongoing satisfaction with PROVENGE as the first in a new class of therapy by the medical community, patients receiving therapy and third-party payers in the United States, in the E.U., and eventually
in other foreign markets if we receive necessary marketing approvals and decide to sell PROVENGE in those markets;
|
|
|
|
our ability to develop and expand market share, both in the United States, the E.U. and potentially in the rest of the world if we receive necessary marketing approvals outside the United States and the E.U. and decide
to sell PROVENGE in those markets, in the midst of numerous competing products for late-stage prostate cancer, many of which are commercially available or in late-stage clinical development;
|
|
|
|
whether data from clinical trials for PROVENGE, including clinical trials for additional indications or clinical trials to identify biomarkers or clinical trials in connection with competing products such as sequencing
studies, are positive and whether such data, if positive, will be sufficient to achieve approval from the FDA and its foreign counterparts to market and sell PROVENGE for such additional indications;
|
39
|
|
|
whether competing therapies are prescribed in place of PROVENGE for certain patients or are perceived as superior to PROVENGE by physicians or patients;
|
|
|
|
the safety and efficacy of PROVENGE, both actual and perceived;
|
|
|
|
our ability to maintain prescribing information, also known as a label, that is substantially consistent with current prescribing information for PROVENGE;
|
|
|
|
adequate coverage or reimbursement for PROVENGE by government healthcare programs and third-party payers, including private health coverage insurers and health maintenance organizations;
|
|
|
|
the rate of growth or contraction, if any, of the overall market into which PROVENGE is sold;
|
|
|
|
our ability to sell PROVENGE in the U.S. despite significant turnover in our sales force; and
|
|
|
|
the ability of patients to afford any required co-payments for PROVENGE.
|
If for any reason we
become unable to continue selling or manufacturing PROVENGE, our business would be seriously harmed and could fail.
If PROVENGE
were to become the subject of problems related to its efficacy, safety, or otherwise, our revenues from PROVENGE could decrease.
PROVENGE, in addition to any other of our drug candidates that may be approved by the FDA, will be subject to continual review by the FDA, and
we cannot assure you that newly discovered efficacy or safety issues will not arise. With the use of any newly marketed drug by a wider patient population, serious adverse events may occur from time to time that initially do not appear to relate to
the drug itself. Any efficacy or safety issues could cause us to suspend or cease marketing of our approved products, cause us to modify how we market our approved products, subject us to substantial liabilities, and adversely affect our revenues
and financial condition. In the event of a withdrawal of PROVENGE from the market, our revenues would decline significantly and our business would be seriously harmed and could fail.
We may not be able to successfully achieve the full global market potential of PROVENGE.
PROVENGE is presently approved for the treatment of metastatic asymptomatic or minimally symptomatic castrate-resistant prostate cancer in the
United States and the E.U. Earlier diagnosis of metastatic prostate cancer will be increasingly important, and screening, diagnostic and treatment practices can vary significantly by geographic region. To achieve global success for PROVENGE as a
treatment, we will need to obtain approvals by foreign regulatory authorities. Data from our completed clinical trials of PROVENGE may not be sufficient to support approval for commercialization by regulatory agencies governing the sale of
drugs outside the United States and the E.U. This could require us to spend substantial sums to develop sufficient clinical data for licensure by foreign authorities. Submissions for approval by foreign regulatory authorities may not
result in marketing approval by these authorities for the requested indication. In addition, certain countries require pricing to be established before reimbursement for the specific indication may be obtained. We may not receive or maintain
marketing approvals at favorable pricing or reimbursement levels or at all, which could harm our ability to market PROVENGE globally. Prostate cancer is common in many regions where the healthcare support systems are limited and reimbursement for
PROVENGE may be limited or unavailable, which will likely limit or slow adoption in these regions. If we are unable to successfully achieve the full global market potential of PROVENGE due to diagnosis practices or regulatory hurdles, our future
prospects would be harmed and our stock price could decline.
PROVENGE and other products we may potentially commercialize and
market may be subject to promotional limitations.
The FDA and other regulatory authorities have the authority to impose
significant restrictions on an approved product through the product label and allowed advertising, promotional and distribution activities. The FDA also may require us to undertake post-marketing clinical trials. If the results of such
post-marketing studies are not satisfactory, the FDA may withdraw marketing authorization or may condition continued marketing on commitments from us that may be expensive and/or time consuming to fulfill. Even after we receive FDA and other
regulatory approvals, if we or others identify adverse side effects after any of our products are on the market, or if manufacturing problems occur, regulatory approval may be suspended or withdrawn and reformulation of our products, additional
clinical trials, changes in labeling of our products and additional marketing applications may be required, any of which could harm our business and cause our stock price to decline.
Adoption of PROVENGE for the treatment of patients with advanced prostate cancer may be slow or limited for a variety of reasons
including competing therapies and perceived difficulties in the treatment process or delays in obtaining reimbursement.
40
If PROVENGE is not successful in achieving broad acceptance as a treatment option for advanced prostate cancer, our business would be harmed.
The continued rate of adoption of PROVENGE for advanced prostate cancer and the ultimate market size will be dependent on several factors,
including competing therapies and the education of treating physicians on the patient treatment process with PROVENGE and immunotherapies generally. As a first-in-class therapy, PROVENGE utilizes a unique treatment approach, which can have
associated challenges in practice for treating physicians. A significant portion of the prospective patient base for treatment with PROVENGE may be under the care of urologists who may be less experienced with infusion treatments than oncologists.
Acceptance by urologists of PROVENGE as a treatment option may be measurably slower than adoption by oncologists of PROVENGE as a therapy and may require more educational effort by us. In addition, the tight manufacturing and infusion timelines
required for treatment with PROVENGE require educating physicians to adjust practice mechanics, which may result in delay in market adoption of PROVENGE as a preferred therapy.
Risks Relating to Manufacturing Activities
We sold one of our manufacturing facilities and we may close or sell more of our manufacturing facilities, which could limit our ability
to supply the market and may limit our product sales.
In 2012, we sold the New Jersey Facility to Novartis. We may decide to close
or sell more of our manufacturing facilities in the future. Manufacturing PROVENGE is very complex and time-sensitive. With fewer manufacturing facilities, it may be difficult for us to meet the commercial demand for PROVENGE, especially
in certain parts of the country. In addition, having fewer manufacturing facilities exposes us to greater risk that problems with any individual facility, or regional issues such as natural disasters or terrorist attacks, could have a greater effect
on our overall ability to supply the market. If we cannot meet demand, we could lose product sales and our revenue and reputation with physicians would suffer. In addition, our business could be materially harmed and our results of operations
would be adversely impacted.
We and our contract manufacturers are subject to significant regulation with respect to manufacturing
of our products.
All of those involved in the preparation of a therapeutic drug for clinical trials or commercial sale, including
our existing (and any future) supply contract manufacturers and clinical trial investigators, are subject to extensive regulation. Components of a finished therapeutic product approved for commercial sale or used in late-stage clinical trials must
be manufactured in accordance with the FDAs current Good Manufacturing Practices, or equivalent cGMP regulations developed by authorities in other countries. These regulations govern manufacturing processes and procedures and the
implementation and operation of quality systems to control and assure the quality of investigational products and products approved for sale. Our facilities and quality systems and the facilities and quality systems of some or all of our third-party
contractors must be inspected and audited routinely for compliance with applicable United States and other country regulations. If any such inspection or audit identifies a failure to comply with applicable regulations or if a violation of our
product specifications or applicable regulation occurs independent of such an inspection or audit, we, the FDA, or governmental authorities in other countries may require remedial measures that may be costly and/or time consuming for us or a third
party to implement and that may include the temporary or permanent suspension or change of a clinical trial or commercial sales, recalls, market withdrawals, seizures or the temporary or permanent closure of a facility. Any such remedial measures
imposed upon us or third parties with whom we contract could materially harm our business.
Manufacturing difficulties, disruptions
or delays could limit supply of our products and limit our product sales.
Manufacturing biologic human therapeutic products is
difficult, complex and highly regulated. We currently manufacture PROVENGE in the United States with the support of third party manufacturers for certain processes and plan to manufacture any other product candidates ourselves. We have
contracted with a third-party manufacturer in order to supply clinical trials and potential future commercial production in the E.U., and we are presently reliant on the ability of the third party to adequately support our clinical trials and future
commercial production in the E.U. Our ability to adequately and in a timely manner manufacture and supply our products is dependent on the uninterrupted and efficient operation of our facilities and those of our third-party contract manufacturers,
which may be impacted by:
|
|
|
availability or contamination of raw materials and components used in the manufacturing process, particularly those for which we have no other source or supplier;
|
|
|
|
the ongoing capacity of our facilities and those of our contract manufacturers;
|
|
|
|
the performance of our information technology systems;
|
|
|
|
compliance with regulatory requirements;
|
|
|
|
inclement weather and natural disasters;
|
41
|
|
|
changes in forecasts of future demand for product components;
|
|
|
|
patient access to leukapheresis, and other logistical support requirements;
|
|
|
|
potential facility contamination by microorganisms or viruses;
|
|
|
|
updating of manufacturing specifications; and
|
|
|
|
product quality success rates and yields.
|
If the efficient manufacture and supply of our
products is interrupted, we may experience delayed shipments or supply constraints. If we are at any time unable to provide an uninterrupted supply of our products to patients, we may have to notify the FDA, we may lose patients, and physicians may
elect to prescribe competing therapeutics, all of which could materially and adversely affect our product sales and results of operations.
Our manufacturing processes and those of our third-party contract manufacturers must undergo a potentially lengthy FDA or other country
regulatory approval process and are subject to continued review by the FDA and other country regulatory authorities.
If regulatory
authorities determine that we or our third-party contract manufacturers or certain of our third-party service providers have violated regulations or if they restrict, suspend or revoke our prior approvals, they could prohibit us from manufacturing
our products or conducting clinical trials or selling our marketed products until we or the affected third-party contract manufacturers or third-party service providers comply, or indefinitely. Because our third-party contract manufacturers and
certain of our third-party service providers are subject to FDA and foreign regulatory authorities, alternative qualified third-party contract manufacturers and third-party service providers may not be available on a timely basis or at all. If we or
our third-party contract manufacturers or third-party service providers cease or interrupt production or if our third-party contract manufacturers and third-party service providers fail to supply materials, products or services to us, we may
experience delayed shipments, and supply constraints for our products.
We rely on complex information technology systems for
various critical purposes, including timely delivery of product and maintaining patient confidentiality.
We have developed a
comprehensive, integrated information technology (IT) system for the intake of physician orders for PROVENGE, to track product delivery, and to store patient-related data we obtain for purposes of manufacturing PROVENGE. We rely on this
system to maintain the chain of identity for each patient-specific dose of PROVENGE, and to ensure timely delivery of product prior to expiration. PROVENGE has a limited usable life of approximately 18 hours from the completion of the manufacturing
process to patient infusion and accordingly maintaining accurate scheduling logistics is critical. In addition, this IT system stores and protects the privacy of the required patient information for the manufacture of PROVENGE. If our systems were
to fail or be disrupted for an extended period of time we could lose product sales and our revenue and reputation would suffer. In the event our systems were to be breached by an unauthorized third party, they could potentially access confidential
patient information we obtain in manufacturing PROVENGE, which could cause us to suffer reputational damage and loss of customer confidence. Any one of these events could cause our business to be materially harmed and our results of operations would
be adversely impacted.
Risks Related to Future Ability to Utilize Net Operating Loss Carryforwards
Our ability to realize potential value from our net operating loss carryforwards is highly speculative and subject to numerous material
uncertainties
.
Our net operating loss carryforwards permit us to offset net operating losses from prior
years to taxable income in future years in order to reduce our tax liability. As we have incurred losses since our inception and do not currently expect to turn a profit in the near future, we are currently unable to realize value from our net
operating loss carryforwards unless we generate future taxable income, either through the acquisition of a profitable company or otherwise. There can be no assurance that we will have sufficient taxable income, if any, in future years to use the net
operating loss carryforwards before they expire. The Internal Revenue Service could challenge the amount of our net operating loss carryforwards.
In order to preserve our net operating loss carryforwards, we must ensure that there has not been a change of control of our
company. A change of control includes a more than 50 percentage point increase in the ownership of our company by certain equity holders who are defined in Section 382 of the Internal Revenue Code as 5 percent
shareholders. Calculating whether an ownership change has occurred is subject to uncertainty, both because of the complexity of Section 382 of the Code and because of limitations on a publicly-traded companys knowledge as to the
ownership of, and transactions in, its securities. Therefore, the calculation of the amount of our net operating loss carryforwards may be changed as a result of a challenge by a governmental authority or our learning of new information about the
ownership of, and transactions in, our securities. Our ability to fully utilize our net operating losses could be limited if there have been past ownership changes or if there are future ownership changes resulting in a change of control for
Section 382. Additionally, future changes in tax legislation could negatively affect our ability to use the tax benefits associated with our net operating losses.
42
Risks from Competitive Factors
Delays to our expansion outside the United States may result in increased competitive challenges.
In September 2013, we announced the approval of PROVENGE in the E.U. In Germany and the United Kingdom, we plan to make PROVENGE commercially
available to patients within the approved label through Centers of Excellence using our Contract Manufacturing Organization, PharmaCell. Delays to the commercialization of PROVENGE in the E.U. and throughout the rest of the world could result in
increased competitive challenges in the future if competing products and therapies gain market acceptance in the interim. These competitive challenges could impede adoption of PROVENGE as a preferred therapy, which could adversely affect our future
product sales and results of operations.
Our competitors may develop and market products that are less expensive, more effective,
or safer, or that reach the market sooner, which may diminish or eliminate the commercial success of PROVENGE or any other products we may commercialize.
We operate in a highly competitive environment. PROVENGE competes with other products or treatments for diseases in its indication. If PROVENGE
is unable to compete or be combined successfully with existing approaches or if new therapies are developed for asymptomatic or minimally symptomatic, metastatic, castrate-resistant (hormone-refractory) prostate cancer, our business would be harmed.
Competition in the cancer therapeutics field is intense and is accentuated by the rapid pace of advancements in product development. In
addition, we compete with other clinical-stage companies and institutions for clinical trial participants, which could reduce our ability to recruit participants for our clinical trials. Delay in recruiting clinical trial participants could
adversely affect our ability to bring a product to market prior to our competitors. Further, research and discoveries by others may result in breakthroughs that render PROVENGE or our other product candidates obsolete.
Products such as chemotherapeutics, androgen metabolism or androgen receptor antagonists, endothelin A receptor antagonists, antisense
compounds, angiogenesis inhibitors and gene therapies for cancer are also under development by a number of companies and could potentially compete with PROVENGE and our other product candidates. In addition, many universities and private and public
research institutions have become active in cancer research, which may be in direct competition with us.
Furthermore, in 2011, ZYTIGA
®
(abiraterone acetate) was approved for use in men with prostate cancer with progression following treatment with a chemotherapeutic regime. In 2012, ZYTIGA was approved, in combination with
prednisone, to treat men with metastatic castrate-resistant prostate cancer prior to receiving chemotherapy, and Xtandi (Enzalutamide), an androgen receptor inhibitor, was approved to treat men with metastatic castrate-resistant prostate cancer who
previously received docetaxel chemotherapy. In 2013, Xofigo (radium RA 223 dichloride) injection was approved for the treatment of patients with castration-resistant prostate cancer (CRPC), symptomatic bone metastases and no known visceral
metastatic disease. Other therapies such as Bavarian Nordics PROSTVAC
®
are the subject of ongoing clinical trials in men with metastatic castrate-resistant prostate cancer. PROSTVAC
®
, currently in Phase 3 clinical development, is a therapeutic cancer vaccine being studied in men with asymptomatic or minimally symptomatic metastatic castrate-resistant prostate cancer.
Some of our competitors in the cancer therapeutics field have substantially greater research and development capabilities and manufacturing,
marketing, financial and managerial resources than we do. Acquisitions of competing companies by large pharmaceutical and biotechnology companies could enhance our competitors resources. In addition, our competitors may obtain patent
protection or regulatory approval and commercialize products more rapidly than we do, which may impact future sales of our products. We expect that competition among products approved for sale will be based, among other things, on product efficacy,
price, safety, reliability, availability, patent protection, and sales, marketing and distribution capabilities. Our profitability and financial position will suffer if our products receive regulatory approval, but cannot compete effectively in the
marketplace.
We could face competition for PROVENGE or other approved products from biosimilar products that could impact our
profitability.
We may face competition in Europe from biosimilar products, and we expect we may face competition from biosimilars
in the future in the United States as well. To the extent that governments adopt more permissive approval frameworks and competitors are able to obtain broader marketing approval for biosimilars, our products will become subject to increased
competition. Expiration or successful challenge of applicable patent rights could trigger such competition, and we could face more litigation regarding the validity and/or scope of our patents. We cannot predict to what extent the entry of
biosimilar products or other competing products could impact our future potential sale of PROVENGE in the E.U., where biosimilars to other innovator biological products are already available. Our inability to compete effectively in
foreign territories would reduce global sales potential, which could have a material adverse effect on our results of operations.
43
The Patient Protection and Affordable Care Act (PPACA) authorizes FDA approval of
biosimilar products. PPACA establishes a period of 12 years of data exclusivity for reference products and outlined statutory criteria for science-based biosimilar approval standards. Under this framework, data exclusivity protects the data in
the innovators regulatory application by prohibiting, for a period of 12 years, others from gaining FDA approval based in part on reliance or reference to the innovators data. FDA has not yet announced implementation of the
biosimilars regulatory approval pathway; however, PPACA does not require the agency to do so before it may approve biosimilars. The law does not change the duration of patents granted on biologic products. Because of this pathway for the approval of
biosimilars in the U. S., we may in the future face greater competition from biosimilar products and downward pressure on our product prices, sales and revenues, subject to our ability to enforce our patents.
*Failure to retain key personnel could impede our ability to develop and commercialize our products and to obtain new collaborations or
other sources of funding.
We depend, to a significant extent, on the efforts of our key employees, including senior management and
senior scientific, clinical, regulatory, operational and other personnel. The development of new therapeutic products requires expertise from a number of different disciplines, some of which are not widely available.
We depend upon our scientific staff to discover new product candidates and to develop and conduct preclinical studies of those new potential
products. Our clinical and regulatory staff is responsible for the design and execution of clinical trials in accordance with FDA requirements and for the advancement of our product candidates toward FDA approval and submission of data supporting
approval. The quality and reputation of our scientific, clinical and regulatory staff, especially the senior staff, and their success in performing their responsibilities, may directly influence the success of our product development programs. As we
continue to pursue successful commercialization of PROVENGE, our sales and marketing, and operations executive management staff takes on increasing significance and influence upon our organizational success. In addition, our executive officers are
involved in a broad range of critical activities, including providing strategic and operational guidance. The loss of these individuals, or our inability to retain or recruit other key management and scientific, clinical, regulatory, medical,
operational and other personnel, may delay or prevent us from achieving our business objectives. We face intense competition for personnel from other companies, universities, public and private research institutions, government entities and other
organizations. Additionally, lack of certainty regarding our financial situation could result in our key employees seeking alternate employment.
Risks
Relating to Collaboration Arrangements and Reliance on Third Parties
We must rely at present on relationships with third-party
suppliers to supply necessary components used in our products, and such relationships are not easy to replace.
We rely upon
contract manufacturers for components used in the manufacture and distribution of PROVENGE. Problems with any of our or our suppliers facilities or processes could result in failure to produce or a delay in production of adequate supplies of
the antigen or other components we use in the manufacture of PROVENGE. This could delay or reduce commercial sales and materially harm our business. Any prolonged interruption in the operations of our suppliers facilities could result in
cancellation of orders, loss of components in the process of being manufactured or a shortfall in availability of a necessary component. A number of factors could cause interruptions, including the inability of a supplier to provide raw materials,
equipment malfunctions or failures, damage to a facility due to natural disasters, changes in FDA or equivalent other country authorities regulatory requirements or standards that require modifications to manufacturing processes, action by us
to implement process changes, disputes with our suppliers or other similar factors. Because manufacturing processes are complex and are subject to a lengthy FDA or equivalent non-United States regulatory approval process, alternative qualified
supply may not be available on a timely basis or at all. Difficulties or delays in our suppliers manufacturing and supply of components could delay our clinical trials, increase our costs, damage our reputation and, for PROVENGE, cause us to
lose revenue or market share if we are unable to timely meet market demands.
We are dependent on our leukapheresis network for raw
materials required for the manufacture of PROVENGE.
The manufacture of each patient-specific dose of PROVENGE first requires that
we obtain immune cells from the relevant patient, which is done through a leukapheresis process at a cell collection center with which we have contracted. We have entered into agreements with third-party cell collection and blood centers, including
the American Red Cross, to perform this process for us. However there are a finite number of centers with the requisite skill, training, staffing and equipment to perform the leukapheresis procedure for PROVENGE patients and we cannot be
certain that the leukapheresis network presently available to us will be sufficient to service demand at full capacity. If our manufacturing capacity expands, we may need to expand the leukapheresis network available to us prospectively through
additional partnerships or other endeavors. There can be no assurance that we will be able to secure sufficient appropriate leukapheresis capacity to manufacture PROVENGE when and as desired. If we are unable to expand our access to these services
as necessary, our revenues will suffer and our business would be harmed.
44
We rely on single source vendors for some key components for PROVENGE and our active
immunotherapy product candidates, which could impair our ability to manufacture and supply our products.
We currently depend on
single source vendors for components used in PROVENGE and other active immunotherapy candidates. For example, we have a long-term contract with Fujifilm for the production of the antigen used in the manufacturing of PROVENGE. Any production
shortfall or other delay on the part of Fujifilm that impairs the supply of the antigen to us could have a material adverse effect on our business, financial condition and results of operations. If we are unable to obtain a sufficient quantity of
antigen, there could be a substantial delay in successfully developing a second source supplier. In addition, we rely on single-source unaffiliated third-party suppliers for certain other raw materials, medical devices and components necessary for
the formulation, fill and finish of our products. Certain of these raw materials, medical devices and components are the proprietary products of these unaffiliated third-party suppliers and are specifically cited in the drug application with
regulatory agencies so that they must be obtained from that specific sole source and could not be obtained from another supplier unless and until the regulatory agency approved such supplier. An inability to continue to source product from any of
these suppliers, which could be due to regulatory actions or requirements affecting the supplier, adverse financial or other strategic developments experienced by a supplier, labor disputes or shortages, unexpected demands or quality issues, could
adversely affect our ability to satisfy demand for PROVENGE or other products, which could adversely and materially affect our product sales and operating results or our ability to conduct clinical trials, either of which could significantly harm
our business.
If we fail to enter into any needed collaboration agreements for our product candidates, we may be unable to
commercialize them effectively or at all.
Product collaborations are complex and any potential discussions may not result in a
definitive agreement for many reasons. For example, whether we reach a definitive agreement for a collaboration would depend, among other things, upon our assessment of the collaborators resources and expertise, the terms and conditions of the
proposed collaboration, and the proposed collaborators evaluation of a number of factors. Those factors may include the design or results of clinical trials, the potential market for the product candidate, the costs and complexities of
manufacturing and delivering the product candidate to patients, the potential of competing products or other products approved in our indication, the existence of uncertainty with respect to our ownership of technology, which can exist if there is a
challenge to such ownership without regard to the merits of the challenge, and industry and market conditions generally. If we were to determine that a collaboration for a particular product is necessary to commercialize it and we were unable to
enter into such a collaboration on acceptable terms, we might elect to delay or scale back the commercialization of a product in order to preserve our financial resources or to allow us adequate time to develop the required physical resources and
systems and expertise ourselves.
If we enter into a collaboration agreement we consider acceptable, the collaboration may not proceed as
quickly, smoothly or successfully as we plan. The risks in a collaboration agreement generally include:
|
|
|
the collaborator may not apply the expected financial resources or required expertise in developing the physical resources and systems necessary to successfully commercialize a product;
|
|
|
|
the collaborator may not invest in the development of a sales and marketing force and the related infrastructure at levels that ensure that sales of a product reach their full potential;
|
|
|
|
disputes may arise between us and a collaborator that delay the commercialization of the product or adversely affect its sales or profitability; or
|
|
|
|
the collaborator may independently develop, or develop with third parties, products that could compete with the product.
|
With respect to a collaboration for any of our products or product candidates, we are dependent on the success of our collaborators in
performing their respective responsibilities and the continued cooperation of our collaborators. Our collaborators may not cooperate with us to perform their obligations under our agreements with them. We cannot control the amount and timing of our
collaborators resources that will be devoted to activities related to our collaboration agreements with them. Our collaborators may choose to pursue existing or alternative technologies in preference to those being developed in collaboration
with us. A collaborator may have the right to terminate the collaboration at its discretion. Any termination may require us to seek a new collaborator, which we may not be able to do on a timely basis, if at all, or require us to delay or scale back
the commercialization efforts. The occurrence of any of these events could adversely affect the commercialization of product candidates we may commercialize and materially harm our business and stock price by slowing the pace of growth of such
sales, by reducing the profitability of the product or by adversely affecting the reputation of the product in the market.
45
Risks Relating to Our Clinical Trial and Product Development Initiatives
Our clinical and preclinical candidates in the pipeline for other potential cancer immunotherapies and small molecule products may never
reach the commercial market for a number of reasons.
To sustain our business, we focus substantial resources on the search for new
pharmaceutical products. These activities include engaging in discovery research and product development, conducting preclinical and clinical studies, and seeking regulatory approval in the United States for product candidates and in other countries
for PROVENGE and other products we may market in the future. Our long-term success depends on the discovery and development of new drugs that we can commercialize. Our cancer immunotherapy and small molecule program pipeline candidates are still at
a relatively early stage in the development process. There can be no assurance that these product candidates or any other potential therapies we may pursue will become a marketed drug. In addition, we may find that certain products cannot be
manufactured on a commercial scale and, therefore, they may not be economical to produce, or may be precluded from commercialization by proprietary rights of third parties.
A significant portion of the research that we are conducting involves new and unproven technologies. Research programs to identify disease
targets and product candidates require substantial technical, financial and human resources, whether or not we ultimately identify any candidates. Our research programs may initially show promise in identifying potential product candidates, yet fail
to yield candidates for clinical development for a number of reasons, including difficulties in formulation which cannot be overcome, timing and competitive concerns.
An IND application must become effective before human clinical trials may commence. The IND application is automatically effective
30 days after receipt by the FDA unless before that time, the FDA raises concerns or questions about the products safety profile or the design of the trials as described in the application. In the latter case, any outstanding concerns
must be resolved with the FDA before clinical trials can proceed. Thus, the submission of an IND may not result in FDA authorization to commence clinical trials in any given case, or the FDA may insist on changes to the clinical study resulting in
significant delays. After authorization is received, the FDA retains the authority to place the IND, and clinical trials under that IND, on clinical hold. If we are unable to commence clinical trials or clinical trials are delayed indefinitely, we
would be unable to develop additional product candidates and our business could be materially harmed. Clinical trials, both in the United States and in other countries, can be delayed for a variety of reasons, including:
|
|
|
delays or failures in obtaining regulatory authorization to commence a trial because of safety concerns of regulators relating to our product candidates or similar product candidates of our competitors or failure to
follow regulatory guidelines;
|
|
|
|
delays or failures in obtaining clinical materials and manufacturing sufficient quantities of the product candidate for use in trials;
|
|
|
|
delays or failures in reaching agreement on acceptable terms with prospective study sites;
|
|
|
|
delays or failures in obtaining approval of our clinical trial protocol from an institutional review board (IRB) or ethics committee (EC) to conduct a clinical trial at a prospective study site;
|
|
|
|
delays in recruiting patients to participate in a clinical trial;
|
|
|
|
failure of our clinical trials and clinical investigators to be in compliance with the FDAs Good Clinical Practices or equivalent other country regulations and requirements;
|
|
|
|
safety issues, including negative results from ongoing preclinical studies;
|
|
|
|
inability to monitor patients adequately during or after treatment;
|
|
|
|
adverse events occurring during the clinical trial;
|
|
|
|
failure by third-party clinical trial managers to comply with regulations concerning protection of patient health data;
|
|
|
|
difficulty monitoring multiple study sites;
|
|
|
|
failure of our third-party clinical trial managers to satisfy their contractual duties, comply with regulations or meet expected deadlines; and
|
|
|
|
determination by regulators that the clinical design of the trials is not adequate.
|
The
nature and efforts required to complete a prospective research and development project are typically indeterminable at very early stages when research is primarily conceptual and may have multiple applications. Once a focus towards developing a
specific product candidate has been developed, we obtain more visibility into the efforts that may be required to reach conclusion of the development phase. However, there are inherent risks and uncertainties in developing novel biologics in a
rapidly changing industry environment. To obtain approval of a product candidate from the FDA or other country regulatory authorities, we must, among other
46
requirements, submit data supporting safety and efficacy as well as detailed information on the manufacture and composition of the product candidate. In most cases, this entails extensive
laboratory tests and preclinical and clinical trials. The collection of this data, as well as the preparation of applications for review by the FDA and other regulatory agencies outside the United States, is costly in time and effort, and may
require significant capital investment.
We may encounter significant difficulties or costs in our efforts to obtain FDA approvals or
approvals to market products in foreign markets. For example, the FDA or the equivalent in jurisdictions outside the United States may determine that our data is not sufficiently compelling to warrant marketing approval, or may require we engage in
additional clinical trials or provide further analysis which may be costly and time consuming. Regardless of the nature of our efforts to complete development of our products and receive marketing approval, we may encounter delays that render our
product candidates uncompetitive or otherwise preclude us from marketing products.
We may be required to obtain additional funding to
complete development of product candidates or in order to commercialize approved products. However such funding may not be available to us on terms we deem acceptable or at all. Our ability to access additional capital is dependent on the success of
our business and the perception by the market of our future business prospects. In the event we were unable to obtain necessary funding, we might halt or temporarily delay ongoing development projects.
Preclinical testing and clinical trials for product candidates must satisfy stringent regulatory requirements or we may be unable to
utilize the results.
The preclinical testing and clinical trials of any product candidates that we develop must comply with
regulations by numerous federal, state and local government authorities in the United States, principally the FDA, and by similar governmental authorities in other countries. Clinical trials are subject to continuing oversight by governmental
regulatory authorities and institutional review boards and must meet the requirements of these authorities in the United States and other countries, including those for informed consent and good clinical practices. We may not be able to comply with
these requirements, which could disqualify completed or ongoing clinical trials. We may experience numerous unforeseen events during, or as a result of, the testing process that could delay or prevent commercialization of our product candidates,
including the following:
|
|
|
safety and efficacy results from human clinical trials may show the product candidate to be less effective or safe than desired or earlier results may not be replicated in later clinical trials;
|
|
|
|
the results of preclinical studies may be inconclusive or they may not be indicative of results that will be obtained in human clinical trials;
|
|
|
|
after reviewing relevant information, including preclinical testing or human clinical trial results, we may abandon or substantially restructure programs that we might previously have believed to be promising;
|
|
|
|
we, the FDA, an IRB, an EC, or similar regulatory authorities in other countries may suspend or terminate clinical trials if the participating patients are being exposed to unacceptable health risks or for other
reasons; and
|
|
|
|
the effects of our product candidates may not be the desired effects or may include undesirable side effects or other characteristics that interrupt, delay or cause us or the FDA, or equivalent governmental authorities
in other countries, to halt clinical trials or cause the FDA or non-United States regulatory authorities to deny approval of the product candidate for any or all target indications.
|
Each phase of clinical testing is highly regulated, and during each phase there is risk that we will encounter serious obstacles or will not
achieve our goals, and accordingly we may abandon a product in which we have invested substantial amounts of time and money. In addition, we must provide the FDA and foreign regulatory authorities with preclinical and clinical data that demonstrate
that our product candidates are safe and effective for each target indication before they can be approved for commercial distribution. We cannot state with certainty when or whether any of our products now under development will be approved or
launched, or whether any products, once approved and launched, will be commercially successful.
The FDA, other non-United States
regulatory authorities, or an Advisory Committee may determine our clinical trials data regarding safety or efficacy are insufficient for regulatory approval.
Although we obtain guidance from regulatory authorities on certain aspects of our clinical development activities, these discussions are not
binding obligations on regulatory authorities. Regulatory authorities may revise or retract previous guidance or may disqualify a clinical trial in whole or in part from consideration in support of approval of a potential product for commercial sale
or otherwise deny approval of that product. Even if we obtain successful clinical safety and efficacy data, we may be required to conduct additional, expensive trials to obtain regulatory approval. The FDA, or equivalent other country authorities,
may elect to obtain advice from outside experts regarding scientific issues and/or marketing applications under FDA or other country authority review through the FDAs Advisory Committee process or other country procedures. Views of the
Advisory Committee or other experts may differ from those of the FDA, or equivalent other country authority, and may impact our ability to commercialize a product candidate.
47
If we encounter difficulties enrolling patients in our clinical trials, our trials could be
delayed or otherwise adversely affected.
Clinical trials for our product candidates may require that we identify and enroll a
large number of patients with the disease under investigation. We may not be able to enroll a sufficient number of patients, or those with required or desired characteristics to achieve diversity in a study, to complete our clinical trials in a
timely manner.
Patient enrollment is affected by factors including:
|
|
|
design of the trial protocol;
|
|
|
|
the size of the patient population;
|
|
|
|
eligibility criteria for the study in question;
|
|
|
|
perceived risks and benefits of the product candidate under study;
|
|
|
|
availability of competing therapies and clinical trials;
|
|
|
|
efforts to facilitate timely enrollment in clinical trials;
|
|
|
|
patient referral practices of physicians;
|
|
|
|
the ability to monitor patients adequately during and after treatment; and
|
|
|
|
geographic proximity and availability of clinical trial sites for prospective patients.
|
Additionally, even if we are able to identify an appropriate patient population for a clinical trial, there can be no assurance that the
patients will continue in the clinical trial through completion.
If we have difficulty enrolling or maintaining a sufficient number of
patients with sufficient diversity to conduct our clinical trials as planned, we may need to delay or terminate ongoing or planned clinical trials, either of which would have a negative effect on our business.
Risks Related to Regulation of the Pharmaceutical Industry
PROVENGE and our other products in development cannot be sold if we do not maintain or gain required regulatory approvals.
Our business is subject to extensive regulation by numerous state and federal governmental authorities in the United States, including the FDA,
and by foreign regulatory authorities, with regulations differing from country to country. In the United States, the FDA regulates, among other things, the preclinical testing, clinical trials, manufacturing, safety, efficacy, potency, labeling,
storage, record keeping, quality systems, advertising, promotion, sale and distribution of therapeutic products. Other applicable non-United States regulatory authorities have equivalent powers. Failure to comply with applicable requirements could
result in, among other things, one or more of the following actions: withdrawal of product approval, notices of violation, untitled letters, warning letters, fines and other monetary penalties, unanticipated expenditures, delays in approval or
refusal to approve a product candidate; product recall or seizure; interruption of manufacturing or clinical trials; operating restrictions; injunctions; and criminal prosecution. We are required in the United States and in foreign countries to
obtain approval from regulatory authorities before we can manufacture, market and sell our products.
Obtaining regulatory approval for
marketing of a product candidate in one country does not assure we will be able to obtain regulatory approval in other countries. However, a failure or delay in obtaining regulatory approval in one country may have a negative effect on the
regulatory process in other countries. Once approved, the FDA and other United States and non-United States regulatory authorities have substantial authority to limit the uses or indications for which a product may be marketed, restrict
distribution of the product, require additional testing, change product labeling or mandate withdrawal of our products. The marketing of our approved products will be subject to extensive regulatory requirements administered by the FDA and other
regulatory bodies, including: the manufacturing, testing, distribution, labeling, packaging, storage, reporting and record-keeping related to the product, advertising, promotion, and adverse event reporting requirements. In addition, incidents of
adverse drug reactions, unintended side effects or misuse relating to our products could result in required post-marketing studies, additional regulatory controls or restrictions, or even lead to withdrawal of a product from the market.
In general, the FDA and equivalent other country authorities require labeling, advertising and promotional materials to be truthful and not
misleading, and marketed only for the approved indications and in accordance with the provisions of the approved label. If the FDA or other regulatory authorities were to challenge our promotional materials or activities, they may bring enforcement
action.
48
Our failure to obtain approval, significant delays in the approval process, or our failure to
maintain approval in any jurisdiction will prevent us from selling a product in that jurisdiction. Any product and its manufacturer will continue to be subject to strict regulations after approval, including but not limited to, manufacturing,
quality control, labeling, packaging, adverse event reporting, advertising, promotion and record-keeping requirements. Any problems with an approved product, including the later exhibition of adverse effects or any violation of regulations could
result in restrictions on the product, including its withdrawal from the market, which could materially harm our business. The process of obtaining approvals in foreign countries is subject to delay and failure for many of the same reasons.
Regulatory authorities could also add new regulations or change existing regulations at any time, which could affect our ability to obtain or
maintain approval of our products. PROVENGE and our investigational cellular immunotherapies are novel. As a result, regulatory agencies lack experience with them, which may lengthen the regulatory review process, increase our development costs
and delay or prevent commercialization of PROVENGE outside the United States and with respect to our active immunotherapy products under development. We are unable to predict when and whether any changes to regulatory policy affecting our
business could occur, and such changes could have a material adverse impact on our business. If regulatory authorities determine that we have not complied with regulations in the research and development of a product candidate, a new indication for
an existing product or information to support a current indication, they may not approve the product candidate or new indication or maintain approval of the current indication in its current form or at all, and we would not be able to market and
sell it. If we were unable to market and sell our products or product candidates, our business and results of operations would be materially and adversely affected.
Failure to comply with foreign regulatory requirements governing human clinical trials and failure to obtain marketing approval for
product candidates could prevent us from selling our products in foreign markets, which may adversely affect our operating results and financial condition.
The requirements governing the conduct of clinical trials, manufacturing, testing, product approvals, pricing and reimbursement outside the
United States vary greatly from country to country. In addition, the time required to obtain approvals outside the United States may differ significantly from that required to obtain FDA approval. We may not obtain foreign regulatory approvals on
the timeframe we may desire, if at all. Approval by the FDA does not assure approval by regulatory authorities in other countries, and foreign regulatory authorities could require additional testing. Failure to comply with these regulatory
requirements or obtain required approvals could impair our ability to develop foreign markets for our products and may have a material adverse effect on our business and future prospects.
Our product sales depend on adequate coverage and reimbursement from third-party payers.
The sale of PROVENGE is dependent on the availability and extent of coverage and reimbursement from third-party payers, including government
healthcare programs and private insurance plans. We rely in large part on the reimbursement coverage by federal and state sponsored government programs such as Medicare and Medicaid in the United States and equivalent programs in other countries. In
the event we seek approvals to market PROVENGE in foreign territories, we will need to work with the government-sponsored healthcare systems in Europe and other foreign countries that are the primary payers of healthcare costs in those regions.
Governments and private payers may regulate prices, reimbursement levels and/or access to PROVENGE and any other products we may market to control costs or to affect levels of use of our products. We cannot predict the availability or level of
coverage and reimbursement for PROVENGE or our product candidates. A reduction in coverage and/or reimbursement for our products could have a material adverse effect on our product sales and results of operations.
The availability and amount of reimbursement for PROVENGE and our product candidates and the manner in which government and private
payers may reimburse for our potential products is uncertain.
In many international markets, the prices of pharmaceutical products
are subject to direct price controls pursuant to applicable law or regulation and to drug reimbursement programs with varying price control mechanisms. Many of the patients in the United States who seek treatment with PROVENGE or any other of
our products that are approved for marketing will be eligible for Medicare benefits. Other patients may be covered by private health plans. The Medicare program is administered by the CMS, and coverage and reimbursement for products and services
under Medicare are determined pursuant to statute, regulations promulgated by CMS, and CMSs subregulatory coverage and reimbursement determinations. CMSs regulations and interpretive determinations are subject to change, as are the
procedures and criteria by which CMS makes coverage and reimbursement determinations and the reimbursement amounts established by statute, particularly because of budgetary pressures facing the Medicare program. For example, Medicare reimbursement
for drugs and biologicals administered in physician offices, including PROVENGE, is set at ASP plus six percent by statute. ASP is a price calculated by the manufacturer and reported to CMS on a quarterly basis. In addition, the statute establishes
the payment rate for new drugs and biologicals administered in hospital outpatient departments that are granted pass-
49
through status at the rate applicable in physicians offices (i.e., ASP plus six percent) for two to three years after FDA approval. PROVENGE was granted pass-through status effective
October 1, 2010, allowing reimbursement in hospital outpatient departments at ASP plus six percent, and this status expired on December 31, 2012. CMS establishes the payment rates for drugs and biologicals that do not have pass-through
status by regulation. For 2013, these drugs, including PROVENGE, are reimbursed at ASP plus six percent if they have an average cost per day exceeding $80; drugs with an average cost per day of less than $80 are not separately reimbursed. In future
years, CMS could change both the payment rate and the average cost threshold, and these changes could adversely affect payment for PROVENGE. In addition, Congress has considered amending the statute to reduce Medicares payment rates for drugs
and biologicals, and if such legislation is enacted, it could adversely affect payment for PROVENGE.
Beginning April 1, 2013,
Medicare payments for all items and services, including drugs and biologicals, were reduced by up to 2% under the sequestration (i.e., automatic spending reductions) required by the Budget Control Act of 2011, Pub. L. No. 112-25
(BCA), as amended by the American Taxpayer Relief Act of 2012, Pub. L. 112-240 (ATRA). The BCA requires sequestration for most federal programs, excluding Medicaid, Social Security, and certain other programs, because
Congress failed to enact legislation by January 15, 2012, to reduce federal deficits by $1.2 trillion over ten years. The BCA caps the cuts to Medicare payments or items and services at 2%, and requires the cuts to be implemented on the first
day of the first month following the issuance of a sequestration order. The ATRA delayed implementation of sequestration from January 2, 2013, to March 1, 2013, and as a result, the Medicare cuts took effect April 1, 2013. These cuts
may adversely impact payment for PROVENGE and related procedures.
PROVENGE also is made available to patients that are eligible for
Medicaid benefits. A condition of federal funds being made available to cover our products under Medicaid and Medicare Part B is our participation in the Medicaid drug rebate program, established by the Omnibus Budget Reconciliation Act of 1990,
Pub. L. 101-508, and as amended by subsequent legislation, including PPACA. Under the Medicaid rebate program, we pay a rebate to each state Medicaid program for each unit of our drug paid for by those programs. The rebate amount for a drug varies
by quarter, and is based on pricing data reported by us on a monthly and quarterly basis to CMS. These data include the monthly and quarterly average manufacturer price (AMP) for the drug, and in the case of innovator products such as
PROVENGE, the quarterly best price (BP), which is our lowest price in a quarter to any commercial or non-governmental customer. The formula for determining the rebate amount, using those data, is set by law, and for innovator products
like PROVENGE is the greater of 23.1% of AMP or the difference between AMP and BP. The rebate amount for innovator products also must be adjusted upward for price increases that outpace inflation.
We cannot predict the availability or level of coverage and the amount of reimbursement for PROVENGE or our product candidates, or the manner
in which government and private payers may reimburse for our potential products. A reduction in coverage and/or reimbursement for our products could have a material adverse effect on our product sales and results of operations.
Healthcare law and policy changes, including those based on recently enacted legislation, may impact our business in ways that we cannot
currently predict and these changes could have a material adverse effect on our business and financial condition.
In March 2010,
the President signed PPACA. This law substantially changes the way healthcare is financed by both governmental and private insurers in the U.S., and significantly impacts the pharmaceutical industry. PPACA contains a number of provisions that are
expected to impact our business and operations, in some cases in ways we cannot currently predict. Changes that may affect our business include those governing enrollment in federal healthcare programs, reimbursement changes, rules regarding
prescription drug benefits under the health insurance exchanges, and fraud and abuse and enforcement. These changes will impact existing government healthcare programs and will result in the development of new programs.
PPACA significantly changed the Medicaid rebate program. Rebates previously were due only on utilization under Medicaid fee-for-service plans,
but PPACA expanded our rebate liability to include the utilization of Medicaid managed care organizations, effective upon enactment, March 23, 2010. PPACA also increased the minimum rebate due for innovator drugs such as PROVENGE, from 15.1% of
AMP to 23.1% of AMP, effective the first quarter of 2010, and capped the total rebate amount for innovator drugs at 100% of AMP. PPACA and subsequent legislation also changed the definition of AMP, effective the fourth quarter of 2010. CMS has
issued a proposed rule to implement PPACAs changes to the Medicaid rebate program, but does not anticipate finalizing this rule until later in 2014. This rule may have the effect of increasing our rebates or other costs and charges associated
with participating in the Medicaid rebate program.
PPACA is expected to impact the United States pharmaceutical industry
substantially, including with regard to how health care is financed by both governmental and private insurers. Some of the other key PPACA provisions include:
|
|
|
The establishment of an annual, non-deductible fee on any entity that manufactures or imports certain branded prescription drugs and biologics, beginning 2011. Each individual pharmaceutical manufacturer will pay a
prorated share of the branded prescription drug fee (set at a total of $2.8 billion for 2012 and 2013 and increasing thereafter) based on the dollar value of its branded prescription drug sales to certain federal programs identified in the law;
|
50
|
|
|
An expansion of the eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals beginning April 2010 and by adding new mandatory eligibility
categories for certain individuals with income at or below 133% of the Federal Poverty Level beginning 2014, thereby potentially increasing manufacturers Medicaid rebate liability. In 2012, the Supreme Court of the United States heard
challenges to the constitutionality of the individual mandate and the viability of certain provisions of PPACA. The Supreme Courts decision upheld most of PPACA and determined that requiring individuals to maintain minimum
essential health insurance coverage or pay a penalty to the Internal Revenue Service was within Congresss constitutional taxing authority. However, the Supreme Court struck down a provision in PPACA that penalized states that choose not
to expand their Medicaid programs. As a result of the Supreme Courts ruling, it is unclear whether states will expand their Medicaid programs by raising the income limit to 133% of the federal poverty level and whether there will be more
uninsured patients in 2014 than anticipated when Congress passed PPACA; and
|
|
|
|
The establishment of a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research.
|
Although the constitutionality of key provisions of PPACA was upheld by the Supreme Court, legislative changes to the PPACA remain possible.
The issuance of additional regulations and the passage of additional or amended legislation may increase our costs and the complexity of compliance. Moreover, a number of state and federal legislative and regulatory proposals aimed at reforming the
healthcare system in the United States continue to be proposed, the effect of which, if enacted, could adversely impact our product sales and results of operations.
If we fail to comply with our obligation to accurately track and report ASP, AMP and BP data to the relevant state and federal
authorities, we may face fines or penalties and could be subject to additional reimbursement requirements, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
As a result of our participation in the Medicaid and Medicare programs, we are required to report ASP, AMP and BP data to state and federal
authorities. The calculations for our reported pricing data, including AMP, BP, as well as ASP, are complex and the governing legal requirements may be subject to interpretation by us, governmental or regulatory agencies, and the courts. If we
become aware that our reported AMP and BP figures for prior quarters are incorrect or should be changed to reflect late-arriving pricing data, we are obligated to submit the corrected data for a period not to exceed 12 quarters from the quarter in
which the data originally were due. Such restatements and recalculations serve to increase our costs for complying with the laws and regulations governing the Medicaid rebate program. Any corrections to our pricing data could result in an overage or
underage in our rebate liability for past quarters, depending on the nature of the correction.
Our failure to submit AMP, BP, ASP, and
other required data on a timely basis could result in a civil monetary penalty of $10,000 per day for each day the submission is late beyond the due date. In addition, if we are found to have knowingly submitted false information to the government,
we could be liable for civil monetary penalties not to exceed $100,000 per item of false information, in addition to other penalties the government may impose. As to ASP specifically, if a manufacturer is found to have made a misrepresentation in
the reporting of ASP, the statute provides for civil monetary penalties of up to $10,000 for each misrepresentation for each day in which the misrepresentation was applied. In all cases, this conduct also could result in the termination of our
Medicaid rebate agreement. In the event that CMS terminates our rebate agreement, no federal payments would be available under Medicaid or Medicare Part B for PROVENGE or any other of our products that are approved for marketing.
The availability of federal funds under Medicaid and Medicare Part B to pay for PROVENGE and any other products that are approved for
marketing also is conditioned on our participation in the PHS 340B drug pricing program. The 340B drug pricing program requires participating manufacturers to agree to charge statutorily-defined covered entities no more than the 340B ceiling
price for the manufacturers covered outpatient drugs. These covered entities include hospitals that serve a disproportionate share of poor Medicare beneficiaries, as well as a variety of community health clinics and other recipients of
health services grant funding. PPACA expanded the 340B program to include additional entity types: certain free standing cancer hospitals, critical access hospitals, rural referral centers and sole community hospitals, each as defined by the Act.
The 340B ceiling price for a drug is calculated using a statutory formula that is based on the AMP and Medicaid rebate amount for the drug. To the extent PPACA, as discussed above, changes the statutory and regulatory definitions of AMP and the
Medicaid rebate amount, these changes will also affect our 340B ceiling price for PROVENGE or any other of our products that are approved for marketing. Any revisions to previously reported Medicaid pricing data also may require revisions to the
340B ceiling prices that were based on those data and could require the issuance of refunds.
We also make PROVENGE available for purchase
by authorized users of the FSS, of the General Services Administration pursuant to an FSS contract with the VA that was awarded to the Company in mid-2012. Under the Veterans Health Care Act of 1992 (VHCA), we are required to offer
deeply discounted FSS contract pricing to four federal agencies commonly referred to as the Big Four the VA, the DoD, the Coast Guard and the PHS (including the Indian Health Service) for federal funding to be made
51
available for reimbursement of any of our products under the Medicaid program, Medicare Part B and for our products to be eligible to be purchased by those four federal agencies and certain
federal grantees. FSS pricing to those four federal agencies must be equal to or less than the federal ceiling price (FCP). The FCP is based on a weighted average wholesaler price known as the non-federal average manufacturer price
(Non-FAMP). We are required to report Non-FAMP to the VA on a quarterly and annual basis. If we misstate Non-FAMP or FCP, we must restate these figures. In addition, if we are found to have knowingly submitted false information to the
government, the VHCA provides for civil monetary penalties of $100,000 per item of false information in addition to other penalties the government may impose.
The FSS contract is a federal procurement contract that includes standard government terms and conditions and extensive disclosure and
certification requirements. The FSS contract has a five-year base term and five (5) one-year option periods. All items on FSS contracts are subject to a standard FSS contract clause that requires FSS contract price reductions under certain
circumstances where pricing is reduced to an agreed tracking customer. Further, in addition to the Big Four agencies, all other federal agencies and some non-federal entities are authorized to access FSS contracts. If we
overcharge the government in connection with our FSS contract, whether due to a misstated FCP or otherwise, we are required to refund the difference to the government. Failure to make necessary disclosures and/or to identify contract overcharges can
result in allegations against us under the Federal False Claims Act and other laws and regulations. Unanticipated refunds to the government, and responding to a government investigation or enforcement action, would be expensive and time-consuming,
and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Pricing and
rebate calculations vary among products, and programs and are complex. Governmental agencies may also make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously
estimated or paid. We cannot assure you that our submissions will not be found by CMS or VA to be incomplete or incorrect.
The
pharmaceutical industry is subject to significant regulation and oversight to prevent an inappropriate inducement and health care fraud pursuant to anti-kickback laws, false claims statutes, and anti-corruption laws, which may result in significant
additional expense and limit our ability to commercialize our products. In addition, any failure to comply with these regulations could result in substantial fines or penalties.
In the United States, we are also subject to health care fraud and abuse regulation and enforcement by both the federal government and the
states in which we conduct our business. The laws that may affect our ability to operate include:
|
|
|
the Federal health care programs Anti-Kickback Law, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in
exchange for or to induce either the referral of an individual for, or the purchase, lease, order or recommendation of, any good or service for which payment may be made under federal health care programs such as the Medicare and Medicaid programs;
|
|
|
|
federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other federal health care
programs that are false or fraudulent. This false claims liability may attach in the event that a company is found to have knowingly submitted false AMP, BP, ASP or other pricing data to the government or to have unlawfully promoted its products;
|
|
|
|
federal sunshine laws that require transparency regarding financial arrangements with health care providers, such as the reporting and disclosure requirements imposed by PPACA on drug manufacturers regarding
any payment or transfer of value made or distributed to physicians and teaching hospitals; and
|
|
|
|
state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payer, including commercial insurers.
|
The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully
interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Moreover, recent health care reform legislation has strengthened many of these laws. For example, PPACA, among other things,
amends the intent requirement of the federal anti-kickback and criminal health care fraud statutes to clarify that a person or entity does not need to have actual knowledge of this statute or specific intent to violate it. In addition, PPACA
provides that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes.
Our products are subject to rigorous regulation by the FDA. These requirements include, among other things, regulations regarding
manufacturing practices, quality control, product labeling, packaging, safety surveillance, adverse event reporting, storage, and advertising and post-marketing reporting. Our facilities and procedures are subject to ongoing regulation, including
periodic inspection by the FDA and other regulatory authorities. We must spend time and effort to ensure compliance with these complex regulations. Possible regulatory actions could include warning letters, fines, damages, injunctions, civil
penalties, recalls, seizures of our products, and criminal prosecution. These actions could result in substantial modifications to our business practices and operations that could disrupt our business.
52
In addition, a number of states have laws that require pharmaceutical companies to track and
report payments, gifts and other benefits provided to physicians and other health care professionals and entities. Similarly, the federal Physician Payments Sunshine Act within PPACA requires pharmaceutical companies to report to the federal
government certain payments to physicians and teaching hospitals. The Physician Payments Sunshine Act provisions required manufacturers that participate in federal health care programs to begin collecting such information on August 1,
2013. Manufacturers were required to begin reporting such data to CMS by March 13, 2014. Other state laws require pharmaceutical companies to adopt and or disclose specific compliance policies to regulate the companys interactions with
healthcare professionals. Moreover, some states, such as Minnesota and Vermont, also impose an outright ban on certain gifts to physicians.
Violations of some of these laws may result in substantial fines. These laws affect our promotional activities by limiting the kinds of
interactions we may have with hospitals, physicians or other potential purchasers or users of our products. Both the disclosure laws and gift bans impose additional administrative and compliance burdens on us. In addition to the federal
and state disclosure and gift ban laws, certain countries outside of the United States have similarly enacted disclosure laws that the company in its activities may be subjected to from time to time. Although we seek to structure our interactions in
compliance with all applicable requirements, these laws are broadly written, and it is often difficult to determine precisely how a law will be applied in specific circumstances. If an employee were to offer an inappropriate gift to a customer, we
could be subject to a claim under an applicable state law. Similarly if we fail to comply with a reporting requirement, we could be subject to penalties under applicable federal or state laws or laws outside the United States.
The United States and other countries have adopted anti-corruption laws such as the U.S. Foreign Corrupt Practices Act (FCPA) and the U.K.
Bribery Act, which generally prohibit directly or indirectly giving, offering or promising inducements to public officials to elicit an improper commercial advantage. Under the FCPA, this prohibition has been interpreted to apply to doctors and
other medical professionals who work in state-run hospitals and state-run healthcare systems outside the United States. Some of these laws, including the U.K. Bribery Act, also prohibit directly or indirectly giving, offering or promising (and, in
some cases, accepting or soliciting) inducements to (or from) private parties to elicit (or grant) an improper commercial advantage.
As
we begin to commercialize our products outside the United States, there is an increased risk that we (or others acting on our behalf) will engage in transactions or activities that could be deemed to violate applicable anti-corruption laws. Although
we believe that we have appropriate compliance policies and procedures in place to mitigate such risk
,
our personnel and others acting on our behalf could nevertheless engage in conduct that violates such laws, for which we could be held
responsible. Under such circumstances, we could be subject to civil and/or criminal penalties, and the resulting negative publicity could adversely affect our brand, our reputation, and our commercial activities.
We expect there will continue to be U.S. and non-U.S. national and, in some cases, regional and local laws and/or regulations, proposed and
implemented, that could impact our operations and business. The extent to which future legislation or regulations, if any, relating to health care fraud abuse laws and/or enforcement, may be enacted or what effect such legislation or regulation
would have on our business remains uncertain. Because of the breadth of these laws and, in some cases, the lack of extensive legal guidance in the form of regulations or court decisions, it is possible that some of our business activities could be
subject to challenge under one or more of these laws. If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and
criminal penalties, damages, fines, exclusion of a companys products from reimbursement under governmental health care programs, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate
our business and our financial results. Any challenge that we or our business partners have failed to comply with applicable laws and regulations could have a material adverse effect on our business, financial condition, results of operations and
growth prospects. If we or the other parties with whom we work fail to comply with applicable regulatory requirements, we or they could be subject to a range of regulatory actions that could affect our ability to commercialize our products and could
harm or prevent sales of the affected products, or could substantially increase the costs and expenses of commercializing and marketing our products. Any threatened or actual government enforcement action could also generate adverse publicity and
require that we devote substantial resources that could otherwise be used in other aspects of our business.
We may be subject to or
otherwise affected by laws relating to privacy and security of personal information, including personal health information and our failure to comply could result in fines and penalties and significant reputational damage.
There are numerous United States federal and state laws governing the privacy and security of personal health information that we obtain,
maintain or have access to in connection with manufacture of our product. Some of the laws that may apply include state
53
security breach notification laws, state health information privacy laws and federal and state consumer protections laws which impose requirements for the collection, use, disclosure and
transmission of personal information. Numerous other countries have, or are developing, laws governing the collection, use and transmission of personal information as well. Each of these laws may be subject to varying interpretations by courts and
government agencies, creating complex compliance issues for us. If we fail to comply with applicable laws and regulations we could be subject to penalties or sanctions.
Although we are not a covered entity subject to the Health Insurance Portability and Accountability Act of 1996 (HIPAA), most
healthcare providers who prescribe our product and from whom we obtain personal health information are subject to HIPAA. Accordingly, we could be subject to criminal penalties if we knowingly obtain individually identifiable health information from
a covered entity in a manner that is not authorized or permitted by HIPAA or for aiding and abetting the violation of HIPAA. We are unable to predict whether our actions could be subject to prosecution in the event of an impermissible disclosure of
health information to us.
The receipt of personal health information in connection with our clinical trial initiatives is subject to
state and federal human subject protection laws. These laws could create liability for us if one of our research collaborators were to use or disclose research subject information without consent and in violation of applicable laws.
If we do not ensure the effectiveness of our information security controls over patient personal information, cyber-attacks against our
computing infrastructure may result in that information being accessed by unauthorized external individuals, which could result in substantial reputational damage, increase company costs, and may subject the company to financial penalties.
We receive personal information from our patients and our business partners in connection with business operations and the product
manufacturing process. We have implemented information security measures to protect patients personal information against the risk of inappropriate and unauthorized external use and disclosure. However, despite these measures, and due to the
ever changing information cyber-threat landscape, we may be subject to data breaches through cyber-attacks perpetrated by individuals that attempt to compromise our security controls.
An attack that results in a breach of patient information may compromise our patients trust, resulting in devastating reputational
damage, which could have major operational and financial impact on our business. Moreover, because we depend on information systems for our manufacturing process, a successful cyber-attack could limit the availability of our computing infrastructure
thereby causing a disruption in our operations and negatively affecting our financial condition. Any such cyber-breach may subject the company to state and federal penalties. Finally, an information breach through cyber-attacks could require that we
engage additional resources, thereby increasing our costs.
We use hazardous materials in our business and must comply with
environmental laws and regulations, which can be expensive.
Our operations produce hazardous waste products, including chemicals
and radioactive and biological materials. We are subject to a variety of federal, state and local laws and regulations relating to the use, handling, storage and disposal of these materials. Although we believe that our safety procedures for
handling and disposing of these materials complies with the standards prescribed by state and federal laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. We generally contract with third
parties for the disposal of such hazardous waste products and store our low level radioactive waste at our facilities in compliance with applicable environmental laws until the materials are no longer considered radioactive. We are also subject to
regulation by the Occupational Safety and Health Administration (OSHA), and the Environmental Protection Agency (the EPA), and to regulation under the Toxic Substances Control Act, the Resource Conservation and Recovery Act
and other regulatory statutes, and may in the future be subject to other federal, state or local regulations. OSHA and/or the EPA may promulgate regulations that may affect our research and development programs. We may be required to incur further
costs to comply with current or future environmental and safety laws and regulations. In addition, in the event of accidental contamination or injury from these materials, we could be held liable for any damages that result, including remediation,
and any such liability could exceed our resources.
Risks in Protecting Our Intellectual Property
If we are unable to protect our proprietary rights or to defend against infringement claims, we may not be able to compete effectively or
operate profitably.
We invent and develop technologies that are the basis for or incorporated in our potential products. We
protect our technology through United States and foreign patent filings, copyrights, trademarks and trade secrets. We have issued patents, and applications for United States and foreign patents in various stages of prosecution. We expect that we
will continue to file and prosecute patent applications and that our success depends in part on our ability to establish and defend our proprietary rights in the technologies that are the subject of issued patents and patent applications.
54
The fact that we have filed a patent application or that a patent has issued, however, does not
ensure that we will have meaningful protection from competition with regard to the underlying technology or product. Patents, if issued, may be challenged, invalidated, declared unenforceable or circumvented or may not cover all applications we may
desire. Our pending patent applications as well as those we may file in the future may not result in issued patents. Patents may not provide us with adequate proprietary protection or advantages against competitors with, or who could develop,
similar or competing technologies or who could design around our patents. Patent law relating to the scope of claims in the pharmaceutical field in which we operate is continually evolving and can be the subject of some uncertainty. The laws
providing patent protection may change in a way that would limit protection.
We also rely on trade secrets and know-how that we seek to
protect, in part, through confidentiality agreements. Our policy is to require our officers, employees, consultants, contractors, manufacturers, outside scientific collaborators and sponsored researchers and other advisors to execute confidentiality
agreements. These agreements provide that all confidential information developed or made known to the individual during the course of the individuals relationship with us be kept confidential and not disclosed to third parties except in
specific limited circumstances. We also require signed confidentiality agreements from companies that receive our confidential data. For employees, consultants and contractors, we require confidentiality agreements providing that all inventions
conceived while rendering services to us shall be assigned to us as our exclusive property. It is possible, however, that these parties may breach those agreements, and we may not have adequate remedies for any breach. It is also possible that our
trade secrets or know-how will otherwise become known to or be independently developed by competitors.
We are also subject to the risk of
claims, whether meritorious or not, that our products or product candidates infringe or misappropriate third-party intellectual property rights. Defending against such claims can be quite expensive even if the claims lack merit. If we are found to
have infringed or misappropriated a third partys intellectual property, we could be required to seek a license or discontinue our products or cease using certain technologies or delay commercialization of the affected products or product
candidates, and we could be required to pay substantial damages, which could materially harm our business.
We may be subject to
litigation with respect to the ownership and use of intellectual property that will be costly to defend or pursue and uncertain in its outcome.
Our business may bring us into conflict with our licensees, licensors or others with whom we have contractual or other business relationships,
or with our competitors or others whose interests differ from ours. If we are unable to resolve those conflicts on terms that are satisfactory to all parties, we may become involved in litigation brought by or against us. That litigation is likely
to be expensive and may require a significant amount of managements time and attention, at the expense of other aspects of our business.
Litigation relating to the ownership and use of intellectual property is expensive, and our position as a relatively small company in an
industry dominated by very large companies may cause us to be at a disadvantage in defending our intellectual property rights and in defending against claims that our product or product candidates infringe or misappropriate third-party intellectual
property rights. Even if we are able to defend our position, the cost of doing so may adversely affect our profitability. We may in the future be subject to patent litigation and may not be able to protect our intellectual property at a reasonable
cost if such litigation is initiated. The outcome of litigation is always uncertain, and in some cases could include judgments against us that require us to pay damages, enjoin us from certain activities or otherwise affect our legal or contractual
rights, which could have a significant adverse effect on our business.
We are exposed to potential product liability claims, and
insurance against these claims may not be adequate and may not be available to us at a reasonable rate in the future.
Our business exposes us to
potential liability risks inherent in the research, development, manufacturing and marketing of pharmaceutical products and product candidates. If any of our product candidates in clinical trials or our marketed products harm people or allegedly
harm people, we may be subject to costly and damaging product liability claims. Most, if not all, of the patients who participate in our clinical trials are already seriously ill when they enter a trial. We have clinical trial insurance coverage,
and commercial product liability insurance coverage. However, this insurance coverage may not be adequate to cover all claims against us. There is also a risk that adequate insurance coverage will not be available in the future on commercially
reasonable terms, if at all. The successful assertion of an uninsured product liability or other claim against us could cause us to incur significant expenses to pay such a claim, could adversely affect our product development or product sales and
could cause a decline in our product revenues. Even a successfully defended product liability claim could cause us to incur significant expenses to defend such a claim, could adversely affect our product development and could cause a decline in our
product revenues. In addition, product liability claims could result in an FDA or equivalent non-United States regulatory authority investigation of the safety or efficacy of our products, our manufacturing processes and facilities, or our marketing
programs. An FDA or equivalent non-United States regulatory authority investigation could also potentially lead to a recall of our products or more serious enforcement actions, limitations on the indications for which they may be used, or suspension
or withdrawal of approval.
55
Risks Relating to an Investment in Our Common Stock
*We are currently subject to certain pending litigation and may be subject to similar claims in the future.
As previously reported the Company and three former officers are named defendants in a securities action pending in the United States District
Court for the Western District of Washington (the District Court) and brought by a group of individual investors who elected to opt out of a securities class action lawsuit that was settled in August 2013. The pending action, filed
May 16, 2013, is captioned
Christoph Bolling, et al. v. Dendreon Corporation, et al
., Case No. 2:13-cv-0872 JLR. Plaintiffs allege generally that the Company made various false or misleading statements between April 29, 2010
and August 3, 2011 concerning the Company, its finances, business operations and prospects with a focus on the market launch of PROVENGE and related forecasts concerning physician adoption, and revenue from sales of PROVENGE. Based on
information provided informally by plaintiffs counsel, the plaintiff group, which totals approximately 30 persons, purports to have purchased approximately 250,000 shares of Dendreon common stock during the relevant period. The
Bolling
plaintiffs filed an amended complaint on July 16, 2013, alleging both violations of certain provisions of the federal Securities Exchange Act of 1934 and provisions of Washington state law and seeking unspecified damages. In response to a
motion by defendants, the federal claims were dismissed with leave to amend in January 2014. On February 17, 2014, plaintiffs filed a Second Amended Complaint which defendants moved to dismiss on March 24, 2014. After briefing, the
District Court, by order dated June 5, 2014, again dismissed the federal claims, but denied the motion as to the plaintiffs Washington state law claims for fraudulent and negligent misrepresentation. The case is now in the discovery
phase. We cannot predict the outcome of the litigation; however, the Company intends to continue defending against claims vigorously.
The
Company also is the subject of stockholder derivative complaints first filed in August 2011 generally arising out of the facts and circumstances that are alleged to underlie the previously settled securities action. Derivative suits filed in the
District Court were consolidated into a proceeding captioned
In re Dendreon Corp. Derivative Litigation
, Master Docket No. C 11-1345 JLR; others were filed in the Superior Court of Washington for King County and were consolidated into a
proceeding captioned
In re Dendreon Corporation Shareholder Derivative Litigation
, Lead Case No. 11-2-29626-1 SEA. In addition, on June 22, 2012, another derivative action was filed in the Court of Chancery of the State of Delaware,
captioned
Herbert Silverberg, derivatively on behalf of Dendreon Corporation v. Mitchell H. Gold, et al
., Case No. 7646-VCP. The various derivative complaints name as defendants various current and former officers and directors of the
Company. While the complaints assert various legal theories of liability, the lawsuits generally allege that the defendants breached fiduciary duties owed to the Company in connection with the launch of PROVENGE and by purportedly subjecting the
Company to potential liability for securities fraud. The complaints also include claims against certain defendants for supposed misappropriation of Company information and insider trading; the
Silverberg
complaint, asserts only this latter
claim. After a formal mediation and further post-mediation negotiations, the parties to the various derivative actions reached a tentative settlement of the actions, the terms of which are set out in a Memorandum of Understanding dated as of
July 18, 2014. The settlement is subject to final documentation and court approval. We cannot predict whether the process of full settlement documentation and court approval will be successful. In any event, the purported derivative lawsuits do
not seek relief against the Company although the Company has certain indemnification obligations, including obligations to advance legal expense to the named defendants for defense of these lawsuits. Additionally, the Securities and Exchange
Commission (SEC) is conducting a formal investigation, which we believe relates to some of the same issues raised in the securities and derivative actions. We are cooperating fully with the SEC investigation. The ultimate financial
impact of these various proceedings, if any, is not yet determinable and therefore, no provision for loss, if any, has been recorded in the financial statements. With respect to all of the above-described proceedings, the Company has insurance that
we believe affords coverage for much of the anticipated costs, subject to the policies terms and conditions.
On March 7, 2014,
a stockholder derivative complaint was filed in United States District Court for the District of Delaware. The lawsuit, captioned
Quintal v. Bayh, et al
., No. 1:14-cv-00311-LPS, names as defendants both present and former
members of the Companys Board. Plaintiffs purported derivative complaint alleges that members of the Companys Board of Directors violated the terms of the Companys 2009 Equity Incentive Plan by granting to non-employee
directors shares of Company stock that vested immediately upon grant as part of the non-employee directors annual compensation package. Defendants filed a motion to dismiss the complaint on April 14, 2014. The Court heard oral
argument on Defendants motion on July 29, 2014, and the motion is now under submission. We cannot predict the outcome of the motion to dismiss or the timing of the action. While the Company has certain indemnification
obligations, including obligations to advance legal expense to the named defendants for defense of this lawsuit, the lawsuit does not seek monetary relief against the Company.
The Company is not a defendant in the stockholder derivative actions as the defendants are the members of the Companys Board of
Directors and certain executive officers. Nevertheless, the Company is at risk of incurring significant costs in connection with these derivative actions, including for example costs associated with discovery and defense of the individual
defendants. We
56
cannot predict the outcome of any of these suits or proceedings. Monitoring and defending against legal actions, whether or not meritorious, and considering stockholder demands is time-consuming
for our management and detracts from our ability to fully focus our internal resources on our business activities and we cannot predict how long it may take to resolve these matters. In addition, legal fees and costs incurred in connection with such
activities can be significant. We cannot predict the outcome of the matters or the associated costs to us, nor the amounts that the Company may need to pay to settle them or satisfy an adverse judgment. The Company maintains directors and
officers liability insurance that it believes is applicable to these various lawsuits; however, this insurance coverage may not be adequate to cover all claims against us. We have not established any reserves for any potential liability
relating to the suits or other claims related to the same matters. It is possible that we could, in the future, be subject to judgments or enter into settlements of claims for monetary damages. A decision adverse to our interests on these actions or
resulting from these matters could result in the payment of substantial damages and could have a material adverse effect on our cash flow, results of operations and financial position.
Our business may be affected by other legal proceedings.
We have been in the past, and may become in the future, involved in legal proceedings in addition to those described above. You should
carefully review and consider the various disclosures we make in our reports filed with the SEC regarding legal matters that may affect our business. Civil and criminal litigation is inherently unpredictable and outcomes can result in excessive
verdicts, fines, penalties and/or injunctive relief that affect how we operate our business. Monitoring and defending against legal actions, whether or not meritorious, and considering stockholder demands, is time-consuming for our management and
detracts from our ability to fully focus our internal resources on our business activities. In addition, legal fees and costs incurred in connection with such activities may be significant. We cannot predict with certainty the outcome of any legal
proceedings in which we become involved and it is difficult to estimate the possible costs to us stemming from these matters. Settlements and decisions adverse to our interests in legal actions could result in the payment of substantial amounts and
could have a material adverse effect on our cash flow, results of operations and financial position. Refer to Part II Item 1 for further discussion of our legal proceedings.
Market volatility may affect our stock price, and the value of an investment in our common stock may be subject to sudden decreases.
The trading price for our common stock has been, and we expect it to continue to be, volatile. The price at which our common stock
trades depends on a number of factors, including the following, many of which are beyond our control:
|
|
|
the relative success of our commercialization efforts for PROVENGE;
|
|
|
|
developments concerning our competitors;
|
|
|
|
preclinical and clinical trial results and other product development activities;
|
|
|
|
our historical and anticipated operating results, including fluctuations in our financial and operating results or failure to meet revenue guidance;
|
|
|
|
changes in government regulations affecting product approvals, reimbursement or other aspects of our or our competitors businesses;
|
|
|
|
announcements of technological innovations or new commercial products by us or our competitors;
|
|
|
|
developments concerning our key personnel;
|
|
|
|
our ability to protect our intellectual property, including in the face of changing laws;
|
|
|
|
announcements regarding our significant collaborations or strategic alliances;
|
|
|
|
publicity regarding actual or potential performance of products under development by us or our competitors;
|
|
|
|
market perception of the prospects for biotechnology companies as an industry sector; and
|
|
|
|
general market and economic conditions.
|
During periods of extreme stock market price
volatility, share prices of many biotechnology companies have often fluctuated in a manner not necessarily related to their individual operating performance. Furthermore, historically our common stock has experienced greater price volatility than
the stock market as a whole.
Anti-takeover provisions in our charter documents and under Delaware law and our stockholders
rights plan could make an acquisition of us, which may be beneficial to our stockholders, more difficult.
57
Provisions of our amended and restated certificate of incorporation, as amended
(certification of incorporation) and amended and restated bylaws (bylaws) will make it more difficult for a third party to acquire us on terms not approved by our board of directors and may have the effect of deterring
hostile takeover attempts. Our certificate of incorporation, as amended, authorizes our board of directors to issue up to 10,000,000 shares of preferred stock, of which 2,500,000 shares have been designated as Series A Junior
Participating Preferred Stock, and to fix the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of our common
stock will be subject to, and may be junior to the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock could reduce the voting power of the holders of our common stock and the likelihood
that common stockholders will receive payments upon liquidation.
In addition, our certificate of incorporation divides our board of
directors into three classes having staggered terms. This may delay any attempt to replace our board of directors. We have also implemented a stockholders rights plan, also called a poison pill, which would substantially reduce or eliminate
the expected economic benefit to an acquirer from acquiring us in a manner or on terms not approved by our board of directors. These and other impediments to a third-party acquisition or change of control could limit the price investors are willing
to pay in the future for shares of our common stock. Our executive officers have employment agreements that include change of control provisions providing severance benefits in the event that their employment terminates involuntarily without cause
or for good reason within twelve months after a change of control of us. These agreements could affect the consummation of and the terms of a third-party acquisition.
We are also subject to provisions of Delaware law that could have the effect of delaying, deferring or preventing a change of control of our
company. One of these provisions prevents us from engaging in a business combination with any interested stockholder for a period of three years from the date the person becomes an interested stockholder, unless specified conditions are satisfied.
*We do not intend to pay cash dividends on our common stock in the foreseeable future.
We have never declared or paid cash dividends on our capital stock. We are not currently profitable. To the extent we become profitable, we
intend to retain any future earnings to fund the development and growth of our business and do not currently anticipate paying any cash dividends in the foreseeable future.
*The fundamental change repurchase feature of our convertible notes may delay or prevent a takeover attempt of our company that would
otherwise be beneficial to investors.
The indenture governing our 2016 Notes will require us to repurchase the notes for cash upon
the occurrence of a fundamental change and, in certain circumstances, to increase the conversion rate for a holder that converts its notes in connection with a fundamental change. A takeover of our company may be a fundamental change that would
trigger the requirement that we repurchase the notes and increase the conversion rate, which could make it more costly for a potential acquirer to engage in a combinatory transaction with us. Such additional costs may have the effect of delaying or
preventing a takeover of our company that would otherwise be beneficial to investors.
*Changes in interest rates can affect the
fair value of our investment portfolio and the debt we have issued and its interest earnings.
Our interest rate risk exposure
results from our investment portfolio and our non-recourse notes. Our primary objectives in managing our investment portfolio are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. The securities we hold in
our investment portfolio are subject to interest rate risk. At any time, sharp changes in interest rates can affect the fair value of the investment portfolio and its interest earnings. Currently, we do not hedge these interest rate exposures. We
have established policies and procedures to manage exposure to fluctuations in interest rates. We place our investments with high quality issuers, limit the amount of credit exposure to any one issuer, and do not use derivative financial instruments
in our investment portfolio.
The fair value of the 2016 Notes is affected by changes in the interest rates and by changes in the price of
our common stock.
If securities or industry analysts publish research or reports or publish unfavorable research about our
business, the price of our common stock and trading volume could decline.
The trading market for our common stock will depend in
part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades our common stock, the price of our common stock would likely decline. If one or more of
these analysts ceases to cover us or fails to publish regular reports on us, interest in the purchase of our common stock could decrease, which could cause the price of our common stock or trading volume to decline.
58
Risks Relating to Foreign Operations
Risks associated with operating in foreign countries could materially adversely affect our business.
In September 2013, PROVENGE was approved in Europe. In Germany and the United Kingdom, Dendreon will make PROVENGE commercially available to
patients within the approved label through Centers of Excellence using its Contract Manufacturing Organization, PharmaCell. In addition, we may expand our presence in Europe to other countries. As a result, our activities in Europe may include
importing, marketing, selling and distributing our products in European countries. Our clinical and commercial supply chain activities could occur outside the United States. Consequently, we are, and will continue to be, subject to risks related to
operating in foreign countries. Risks associated with conducting operations in foreign countries include:
|
|
|
differing regulatory requirements for drug approvals and regulation of approved drugs in foreign countries;
|
|
|
|
differing laws and regulation regarding protection of private information required for our business operations;
|
|
|
|
unexpected changes in tariffs, trade barriers and regulatory requirements;
|
|
|
|
economic weakness, including inflation, or political instability in particular foreign economies and markets;
|
|
|
|
compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
|
|
|
|
foreign taxes, including withholding of payroll taxes;
|
|
|
|
foreign currency fluctuations, which could result in increased operating expenses or reduced revenues, and other obligations incident to doing business or operating in another country;
|
|
|
|
workforce uncertainty in countries where labor unrest is more common than in the United States;
|
|
|
|
production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
|
|
|
|
business interruptions resulting from geo-political actions, including war and terrorism.
|
These and other risks described elsewhere in these risk factors associated with our international operations could materially adversely affect
our business.