Our business is subject to numerous risks. You should carefully consider the risks
described below together with the other information set forth in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 30, 2016, which could materially
affect our business, financial condition and future results. The risks described below are not the only risks facing our company. Risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially
adversely affect our business, prospects, financial condition and operating results.
Risks Related to our Business
We have incurred significant operating losses since inception, and we expect to incur significant losses for the foreseeable future. We may never become
profitable or, if achieved, be able to sustain profitability.
We have incurred significant operating losses since we were founded
in 2004 and expect to incur significant losses for the next several years as we continue our clinical trial and development programs for ADX-102 and our other product candidates. Net loss for the three months ended September 30, 2016 and 2015
was approximately $4.8 million and $3.4 million, respectively. Net loss for the nine months ended September 30, 2016 and 2015 was approximately $14.0 million and $7.7 million, respectively. As of
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September 30, 2016, we had total stockholders equity of $25.7 million. Losses have resulted principally from costs incurred in our clinical trials, research and development
programs and from our general and administrative expenses. In the future, we intend to continue to conduct research and development, clinical testing, regulatory compliance activities and, if ADX-102 or any of our other product candidates is
approved, sales and marketing activities that, together with anticipated general and administrative expenses, will likely result in our incurring further significant losses for the next several years.
We currently generate no revenue from sales, and we may never be able to commercialize ADX-102 or our other product candidates. We do not
currently have the required approvals to market any of our product candidates and we may never receive them. We may not be profitable even if we or any of our future development partners succeed in commercializing any of our product candidates.
Because of the numerous risks and uncertainties associated with developing and commercializing our product candidates, we are unable to predict the extent of any future losses or when we will become profitable, if at all.
Our business is dependent in large part on the success of a single product candidate, ADX-102. We cannot be certain that we will be able to obtain
regulatory approval for, or successfully commercialize, ADX-102.
Our product candidates are in the early stage of development and
will require additional preclinical studies, substantial clinical development and testing, and regulatory approval prior to commercialization. We have not yet completed development of any product. We have only one product candidate that has been the
focus of significant development: ADX-102, a novel small molecule chemical entity that is believed to trap and allow for the degradation of aldehydes, toxic chemical species suspected to cause and exacerbate numerous diseases in humans and animals.
We are largely dependent on successful continued development and ultimate regulatory approval of this product candidate for our future business success. We have invested, and will continue to invest, a significant portion of our time and financial
resources in the development of ADX-102. We will need to raise sufficient funds for, and successfully enroll and complete, our current and planned clinical trials of ADX-102. The future regulatory and commercial success of this product candidate is
subject to a number of risks, including the following:
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we may not have sufficient financial and other resources to complete the necessary clinical trials for ADX-102;
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we may not be able to provide evidence of safety and efficacy for ADX-102;
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we may not be able to timely or adequately finalize the design or formulation of any product candidate or demonstrate that a formulation of our product candidate will be stable for commercially reasonable time periods;
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the safety and efficacy results of later phases or larger clinical trials may not confirm the results of our earlier trials;
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there may be variability in patients, adjustments to clinical trial procedures and inclusion of additional clinical trial sites;
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we may be required to perform additional clinical trials to support approval;
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the results of our clinical trials may not meet the end points, or level of statistical or clinical significance required by the FDA, or comparable foreign regulatory bodies for marketing approval;
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patients in our clinical trials may suffer other adverse effects or die for reasons that may or may not be related to ADX-102;
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if approved for certain diseases, ADX-102 will compete with well-established products already approved for marketing by the FDA, including corticosteroids and other agents that have demonstrated varying levels of
efficacy in some of the diseases for which we may attempt to develop ADX-102; and
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we may not be able to obtain, maintain or enforce our patents and other intellectual property rights.
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Of the large number of drugs in development in the pharmaceutical industry, only a small percentage result in the submission of a New Drug
Application (NDA) to the FDA and even fewer are approved for commercialization. Furthermore, even if we do receive regulatory approval to market ADX-102, any such approval may be subject to limitations on the indicated uses for which we may market
the product. Accordingly, even if we are able to obtain the requisite financing to continue to fund our development programs, we cannot assure you that ADX-102 will be successfully developed or commercialized. If we or any of our future development
partners are unable to develop, or obtain regulatory approval for or, if approved, successfully commercialize, ADX-102, we may not be able to generate sufficient revenue to continue our business.
Because we have limited experience developing clinical-stage compounds, there is a limited amount of information about us upon which you can evaluate
our product candidates and business prospects.
We commenced our first clinical trial in 2010, and we have limited experience
developing clinical-stage compounds upon which you can evaluate our business and prospects. In addition, as an early-stage clinical development company, we have limited
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experience in conducting clinical trials, and we have never conducted clinical trials of a size required for regulatory approvals. Further, we have not yet demonstrated an ability to successfully
overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biopharmaceutical area. For example, to execute our business plan we will need to successfully:
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execute our product candidate development activities, including successfully designing and completing our clinical trial programs and product design and formulation of future product candidates;
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obtain required regulatory approvals for our product candidates;
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manage our spending as costs and expenses increase due to the performance and completion of clinical trials, attempting to obtain regulatory approvals, manufacturing and commercialization;
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secure substantial additional funding;
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develop and maintain successful strategic relationships;
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build and maintain a strong intellectual property portfolio;
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build and maintain appropriate clinical, sales, distribution, and marketing capabilities on our own or through third parties; and
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gain broad market acceptance for our product candidates.
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If we are unsuccessful in
accomplishing these objectives, we may not be able to develop product candidates, raise capital, expand our business, or continue our operations.
The results of preclinical studies and early clinical trials are not always predictive of future results. Any product candidate we or any of our future
development partners advance into clinical trials, including ADX-102, may not have favorable results in later clinical trials, if any, or receive regulatory approval.
Drug development has inherent risk. We or any of our future development partners will be required to demonstrate through adequate and
well-controlled clinical trials that our product candidates are safe and effective, with a favorable benefit-risk profile, for use in their target indications before we can seek regulatory approvals for their commercial sale. Drug development is a
long, expensive and uncertain process, and delay or failure can occur at any stage of development, including after commencement of any of our clinical trials. In addition, as product candidates proceed through development, the trial designs may
often be different from phase to phase, the vehicles may be modified from trial to trial and the product formulations or manufacturing process may differ due to the need to test product candidate samples that can be manufactured on a commercial
scale. For instance, we plan to modify the vehicle utilized in our expected Phase IIb allergic conjunctivitis trial from the vehicle used in our prior Phase IIa trial. Success in early clinical trials does not mean that later clinical trials will be
successful because product candidates in later-stage clinical trials may fail to demonstrate sufficient safety or efficacy despite having progressed through initial clinical testing. Furthermore, our clinical trials will need to demonstrate
sufficient safety and efficacy for approval by regulatory authorities in larger patient populations. Companies frequently suffer significant setbacks in advanced clinical trials, even after earlier clinical trials have shown promising results. In
addition, only a small percentage of drugs under development result in the submission of an NDA to the FDA and even fewer are approved for commercialization.
In addition, the presumed mechanisms of aldehyde-mediated inflammation are distinct from the presumed aldehyde-mediated pathology in inborn
errors of metabolism, and the efficacy and safety of ADX-102 in one indication does not predict the efficacy and safety of ADX-102 in other indications.
Because we are developing novel product candidates for the treatment of diseases in a manner which there is little clinical drug development experience
and, in some cases, are using new endpoints or methodologies, the regulatory pathways for approval are not well defined, and, as a result, there is greater risk that our clinical trials will not result in our desired outcomes.
Our clinical focus is on the development of new products for inflammation, inborn errors of metabolism, and other diseases that are thought to
be related to naturally occurring toxic and pro-inflammatory chemical species known as aldehydes. Our Phase III vehicle-controlled clinical program in noninfectious anterior uveitis and our Phase III clinical program in Sjögren-Larsson Syndrome
(SLS) represent the first such clinical trials performed, and thus the comparative effects of vehicle and drug are unpredictable.
We
could also face challenges in designing clinical trials and obtaining regulatory approval of aldehyde sequestering agents due to the small number of historical clinical trial experience for this novel class of therapeutics. Because no aldehyde
sequestering agents have received regulatory approval anywhere in the world, it is difficult to determine whether regulatory agencies will be receptive to the approval of our product candidates and to predict the time and cost associated with
obtaining regulatory approval. The clinical trial requirements of the FDA and other regulatory agencies and the criteria these regulators use to determine the safety and efficacy of a product candidate vary substantially according to the type,
complexity, novelty and intended use and market of the potential products. The regulatory approval process for novel product candidates such as ours can be more expensive and take longer than for other, better known or more extensively studied
classes of product candidates. Any inability to design clinical trials with protocols and endpoints acceptable to applicable regulatory authorities, and to obtain regulatory approvals for our product candidates, would have an adverse impact on our
business, prospects, financial condition and results of operations.
Because ADX-102 and our other product candidates are
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to
our knowledge, new chemical entities, it is difficult to predict the time and cost of development and our ability to successfully complete clinical development of these product candidates and obtain the necessary regulatory approvals for
commercialization.
Our product candidates are, to our knowledge, new chemical entities, and unexpected problems related to such
new technology may arise that can cause us to delay, suspend or terminate our development efforts. Although we have seen signs of efficacy and observed ADX-102 to be well tolerated in our clinical trials to date, because ADX-102 is a novel chemical
entity with limited use in humans, short and long-term safety, as well as prospects for efficacy, are poorly understood and difficult to predict due to our and regulatory agencies lack of experience with them. Regulatory approval of new
product candidates such as ADX-102 can be more expensive and take longer than approval for other more well-known or extensively studied pharmaceutical or biopharmaceutical product candidates.
Our dermatologic topical formulation of ADX-102 is unlikely to affect other clinical manifestations of Sjögren-Larsson Syndrome, which may decrease
the likelihood of commercial acceptance.
While
the primary day-to-day complaint of SLS patients and their caregivers are symptoms associated with severe skin disease, SLS patients also manifest varying degrees of delay in mental development, spasticity, seizures and retinal disease. In August
2016, we announced that the results of our randomized, parallel-group, double-masked, vehicle-controlled clinical trial of a dermatologic formulation of ADX-102 for the treatment of the skin manifestations of SLS demonstrated clinically relevant
activity of ADX-102 in diminishing the severity of ichthyosis, a serious dermatologic disease characteristic of SLS. There were no serious adverse events reported in any of these trials. However, due to expected low systemic exposure of ADX-102 when
administered topically to the skin, it is unlikely that ADX-102 will significantly affect the non-dermatologic conditions of SLS. Lack of effect in neurologic and ocular manifestations of SLS may negatively impact the potential market for ADX-102 in
SLS and may also negatively impact reimbursement, pricing and commercial acceptance of ADX-102, if it is approved.
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ADX-102 and our other product candidates are subject to extensive regulation, compliance with which is
costly and time consuming, and such regulation may cause unanticipated delays, or prevent the receipt of the required approvals to commercialize our product candidates.
The clinical development, manufacturing, labeling, storage, record-keeping, advertising, promotion, import, export, marketing, and
distribution of our product candidates are subject to extensive regulation by the FDA in the United States and by comparable authorities in foreign markets. In the United States, we are not permitted to market our product candidates until we receive
regulatory approval from the FDA. The process of obtaining regulatory approval is expensive, often takes many years, and can vary substantially based upon the type, complexity, and novelty of the products involved, as well as the target indications,
and patient population. Approval policies or regulations may change and the FDA has substantial discretion in the drug approval process, including the ability to delay, limit, or deny approval of a product candidate for many reasons. Despite the
time and expense invested in clinical development of product candidates, regulatory approval is never guaranteed.
ADX-102 and the
activities associated with its development and potential commercialization, including its testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to extensive
regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in other jurisdictions.
Our
ongoing research and development activities and planned clinical development for our product candidates may be delayed, modified or ceased for a variety of reasons, including:
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determining that a product candidate is ineffective or causes harmful side effects during preclinical studies or clinical trials;
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difficulty establishing predictive preclinical models for demonstration of safety and efficacy of a product candidate in one or more potential therapeutic areas for clinical development;
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difficulties in manufacturing a product candidate, including the inability to manufacture a product candidate in a sufficient quantity, suitable form, or in a cost-effective manner, or under processes acceptable to the
FDA for marketing approval;
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the proprietary rights of third parties, which may preclude us from developing or commercializing a product candidate;
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determining that a product candidate may be uneconomical to develop or commercialize, or may fail to achieve market acceptance or adequate reimbursement;
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our inability to secure strategic partners which may be necessary for advancement of a product candidate into clinical development or commercialization; or
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our prioritization of other product candidates for advancement.
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The FDA or comparable foreign
regulatory authorities can delay, limit, or deny approval of a product candidate for many reasons, including:
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such authorities may disagree with the design or implementation of our or any of our future development partners clinical trials, including the end points of our clinical trials;
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we or any of our future development partners may be unable to demonstrate to the satisfaction of the FDA or other regulatory authorities that a product candidate is safe and effective for any indication;
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such authorities may not accept clinical data from trials which are conducted at clinical facilities or in countries where the standard of care is potentially different from the United States;
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the results of clinical trials may not demonstrate the safety or efficacy required by such authorities for approval;
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we or any of our future development partners may be unable to demonstrate that a product candidates clinical and other benefits outweigh its safety risks;
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such authorities may disagree with our interpretation of data from preclinical studies or clinical trials or the design of such trials;
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such authorities may find deficiencies in the manufacturing processes or facilities of third-party manufacturers with which we or any of our future development partners contract for clinical and commercial supplies; or
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the approval policies or regulations of such authorities may significantly change in a manner rendering our or any of our future development partners clinical data insufficient for approval.
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With respect to foreign markets, approval procedures vary among countries and, in addition to the
aforementioned risks, can involve additional product testing, administrative review periods and agreements with pricing authorities. In addition, events raising questions about the safety of certain marketed pharmaceuticals may result in increased
cautiousness by the FDA and comparable foreign regulatory authorities in reviewing new drugs based on safety, efficacy or other regulatory considerations and may result in significant delays in obtaining regulatory approvals. Any delay in obtaining,
or inability to obtain, applicable regulatory approvals would prevent us or any of our future development partners from commercializing our product candidates.
Any termination or suspension of, or delays in the commencement or completion of, our clinical trials could result in increased costs to us, delay or
limit our ability to generate revenue and adversely affect our commercial prospects.
Delays in the commencement or completion of
our planned clinical trials for ADX-102 or other product candidates could significantly affect our product development costs. We do not know whether future trials will begin on time or be completed on schedule, if at all. The commencement and
completion of clinical trials can be delayed for a number of reasons, including delays related to:
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the FDA failing to grant permission to proceed or placing the clinical trial on hold;
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subjects failing to enroll or remain in our clinical trials at the rate we expect;
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subjects choosing an alternative treatment for the indication for which we are developing ADX-102 or other product candidates, or participating in competing clinical trials;
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lack of adequate funding to continue the clinical trial;
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subjects experiencing severe or unexpected drug-related adverse effects;
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a facility manufacturing ADX-102, any of our other product candidates or any of their components being ordered by the FDA or other government or regulatory authorities, to temporarily or permanently shut down due to
violations of current Good Manufacturing Practices, or cGMP, or other applicable requirements, or infections or cross-contaminations of product candidates in the manufacturing process;
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any changes to our manufacturing process that may be necessary or desired;
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inability to timely manufacture sufficient quantities of the applicable product candidate for the clinical trial or expiration of materials intended for use in the clinical trial;
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third-party clinical investigators losing the licenses or permits necessary to perform our clinical trials, not performing our clinical trials on our anticipated schedule or consistent with the clinical trial protocol,
Good Clinical Practice or regulatory requirements, or other third parties not performing data collection or analysis in a timely or accurate manner;
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inspections of clinical trial sites by the FDA or the finding of regulatory violations by the FDA or an institutional review board, or IRB, that require us to undertake corrective action, result in suspension or
termination of one or more sites or the imposition of a clinical hold on the entire trial, or that prohibit us from using some or all of the data in support of our marketing applications;
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third-party contractors becoming debarred or suspended or otherwise penalized by the FDA or other government or regulatory authorities for violations of regulatory requirements, in which case we may need to find a
substitute contractor, and we may not be able to use some or all of the data produced by such contractors in support of our marketing applications; or
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one or more IRBs refusing to approve, suspending or terminating the trial at an investigational site, precluding enrollment of additional subjects, or withdrawing its approval of the trial.
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Product development costs will increase if we have delays in testing or approval of ADX-102 or if we need to perform more or larger clinical
trials than planned. Additionally, changes in regulatory requirements and policies may occur and we may need to amend clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to IRBs for
reexamination, which may impact the costs, timing or successful completion of a clinical trial. If we experience delays in completion of or if we, the FDA or other regulatory authorities, the IRB, other reviewing entities, or any of our clinical
trial sites suspend or terminate any of our clinical trials, the commercial prospects for a product candidate may be harmed and our ability to generate product revenues will be delayed. In addition, many of the factors that cause, or lead to,
termination or suspension of, or a delay in the commencement or completion of, clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate. Further, if one or more clinical trials are delayed, our competitors
may be able to bring products to market before we do, and the commercial viability of ADX-102 or other product candidates could be significantly reduced.
We may find it difficult to enroll patients in our clinical trials or identify patients during commercialization (if our products are approved by
regulatory agencies) for product candidates addressing orphan or rare diseases.
As part of our business strategy, we plan to
evaluate the development and commercialization of product candidates for the treatment of orphan and other rare diseases. Given that we are in the early stages of clinical trials for ADX-102, we may not be able to initiate or continue clinical
trials if we are unable to locate a sufficient number of eligible patients willing and able to participate in the clinical trials required by the FDA or other non-United States regulatory agencies. In addition, if others develop product candidates
for the treatment of similar diseases, we would potentially compete with them for the enrollment in these rare patient populations, which may adversely impact the rate of patient enrollment in and the timely completion of our current and planned
clinical trials.
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Additionally, insufficient patient enrollment, may be a function of many other factors, including the size and nature of the patient population, the nature of the protocol, the proximity of
patients to clinical sites, the timing and magnitude of disease symptom presentation, the availability of effective treatments for the relevant disease, and the eligibility criteria for the clinical trial. Our inability to identify and enroll a
sufficient number of eligible patients for any of our current or future clinical trials would result in significant delays or may require us to abandon one or more clinical trials altogether. Delays in patient enrollment in the future as a result of
these and other factors may result in increased costs or may affect the timing or outcome of our clinical trials, which could prevent us from completing these trials and adversely affect our ability to advance the development of our product
candidates. Further, if our products are approved by regulatory agencies, we may not be able to identify sufficient number of patients to generate significant revenues.
Any product candidate we or any of our future development partners advance into clinical trials may cause unacceptable adverse events or have other
properties that may delay or prevent its regulatory approval or commercialization or limit its commercial potential.
Unacceptable
adverse events caused by any of our product candidates that we advance into clinical trials could cause us or regulatory authorities to interrupt, delay, or halt clinical trials and could result in the denial of regulatory approval by the FDA or
other regulatory authorities for any or all targeted indications and markets. This in turn could prevent us from completing development or commercializing the affected product candidate and generating revenue from its sale.
We have not yet completed testing of any of our product candidates in humans for the treatment of the indications for which we intend to seek
approval, and we currently do not know the extent of adverse events, if any, that will be observed in patients who receive any of our product candidates. ADX-102, for example, has been observed to be toxic at high concentrations in
in vitro
human dermal tissue. In addition, there was transient and generally mild stinging noted in the ADX-102 treatment arm of our Phase IIa clinical trial in allergic conjunctivitis, with two patients out of the 50 patients in the treatment arm dropping
out of the trial during treatment. There was an increased frequency of ocular stinging and burning in the ADX-102 treated arms of our Phase II clinical trial in noninfectious anterior uveitis, with one subject in the ADX-102 treatment arm and one
subject in combination ADX-102 and Pred Forte
®
arm dropping out of the trial during treatment for an adverse event of stinging. However, there were no serious adverse events in such trial. In
preparation for clinical testing of systemically administered ADX-102, we believe that we have identified a preliminary No Adverse Effect Level in pre-clinical toxicology studies where ADX-102 is administrated intravenously. If any of our product
candidates cause unacceptable adverse events in clinical trials, which may be larger or longer than those previously conducted, we may not be able to obtain regulatory approval or commercialize such product candidate.
Final marketing approval for ADX-102 or our other product candidates by the FDA or other regulatory authorities for commercial use may be delayed,
limited, or denied, any of which would adversely affect our ability to generate operating revenues.
After the completion of our
clinical trials and, assuming the results of the trials are successful, the submission of an NDA, we cannot predict whether or when we will obtain regulatory approval to commercialize ADX-102 or our other product candidates and we cannot, therefore,
predict the timing of any future revenue. We cannot commercialize ADX-102 or our other product candidates until the appropriate regulatory authorities have reviewed and approved the applicable applications. We cannot assure you that the regulatory
agencies will complete their review processes in a timely manner or that we will obtain regulatory approval for ADX-102 or our other product candidates. In addition, we may experience delays or rejections based upon additional government regulation
from future legislation or administrative action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review. If marketing approval for ADX-102 or our other product candidates is delayed, limited or
denied, our ability to market the product candidate, and our ability to generate product sales, would be adversely affected.
Even if we obtain
marketing approval for ADX-102 or any other product candidate, it could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated
problems with our product candidate, when and if any of them are approved.
Even if United States regulatory approval is obtained,
the FDA may still impose significant restrictions on a products indicated uses or marketing or impose ongoing requirements for potentially costly and time consuming post-approval studies, post-market surveillance or clinical trials. Following
approval, if any, of ADX-102 or any other product candidates, such candidate will also be subject to ongoing FDA requirements governing the labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, recordkeeping and
reporting of safety and other post-market information. In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP
requirements, including those relating to quality control, quality assurance and corresponding maintenance of records and documents. If we or a regulatory agency discovers previously unknown problems with a product, such as adverse events of
unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility or us, including requesting recall or withdrawal of the
product from the market or suspension of manufacturing.
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If we or the manufacturing facilities for ADX-102 or any other product candidate that may receive
regulatory approval, if any, fail to comply with applicable regulatory requirements, a regulatory agency may:
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issue warning letters or untitled letters;
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seek an injunction or impose civil or criminal penalties or monetary fines;
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suspend or withdraw regulatory approval;
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suspend any ongoing clinical trials;
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refuse to approve pending applications or supplements or applications filed by us;
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suspend or impose restrictions on operations, including costly new manufacturing requirements; or
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seize or detain products, refuse to permit the import or export of product, or request us to initiate a product recall.
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The occurrence of any event or penalty described above may inhibit our ability to commercialize our product candidates and generate revenue.
The FDA has the authority to require a risk evaluation and mitigation strategy plan as part of a NDA or after approval, which may impose
further requirements or restrictions on the distribution or use of an approved drug, such as limiting prescribing to certain physicians or medical centers that have undergone specialized training, limiting treatment to patients who meet certain
safe-use criteria and requiring treated patients to enroll in a registry.
In addition, if ADX-102 or any of our other product candidates
is approved, our product labeling, advertising and promotion would be subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that may be made about prescription products. In particular,
a product may not be promoted for uses that are not approved by the FDA as reflected in the products approved labeling. If we receive marketing approval for a product candidate, physicians may nevertheless prescribe it to their patients in a
manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may become subject to significant liability. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion
of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant sanctions. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and
has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed.
Even if we receive regulatory approval for ADX-102 or any other product candidate, we still may not be able to successfully commercialize it and the
revenue that we generate from its sales, if any, could be limited.
Even if our product candidates receive regulatory approval,
they may not gain market acceptance among physicians, patients, healthcare payors, and the medical community. Coverage and reimbursement of our product candidates by third-party payors, including government payors, is also generally necessary for
commercial success. The degree of market acceptance of our product candidates will depend on a number of factors, including:
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demonstration of clinical efficacy and safety compared to other more-established products;
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the limitation of our targeted patient population and other limitations or warnings contained in any FDA-approved labeling;
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acceptance of a new formulation by health care providers and their patients;
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the prevalence and severity of any adverse effects;
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new procedures or methods of treatment that may be more effective in treating or may reduce the incidences of SLS or other conditions for which our products are intended to treat;
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pricing and cost-effectiveness;
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the effectiveness of our or any future collaborators sales and marketing strategies;
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our ability to obtain and maintain sufficient third-party coverage or reimbursement from government health care programs, including Medicare and Medicaid, private health insurers and other third-party payors;
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unfavorable publicity relating to the product candidate; and
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the willingness of patients to pay out-of-pocket in the absence of third-party coverage.
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If any product candidate is approved but does not achieve an adequate level of acceptance by
physicians, hospitals, healthcare payors or patients, we may not generate sufficient revenue from that product candidate and may not become or remain profitable. Our efforts to educate the medical community and third-party payors on the benefits of
ADX-102 or any of our other product candidates may require significant resources and may never be successful. In addition, our ability to successfully commercialize our product candidate will depend on our ability to manufacture our products,
differentiate our products from competing products and defend the intellectual property of our products.
Reimbursement may be limited or
unavailable in certain market segments for our product candidates, which could make it difficult for us to sell our product candidates profitably.
Market acceptance and sales of our product candidates will depend significantly on the availability of adequate insurance coverage and
reimbursement from third-party payors for any of our product candidates and may be affected by existing and future health care reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance
organizations, decide which drugs they will pay for and establish reimbursement levels. As a result of negative trends in the general economy in the U.S. or other jurisdictions in which we may do business, these organizations may be unable to
satisfy their reimbursement obligations or may delay payment. Reimbursement by a third-party payor may depend upon a number of factors including the third-party payors determination that use of a product candidate is:
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a covered benefit under its health plan;
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safe, effective, and medically necessary;
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appropriate for the specific patient;
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neither experimental nor investigational.
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Obtaining coverage and reimbursement approval for a
product candidate from a government or other third-party payor is a time-consuming and costly process that could require us to provide supporting scientific, clinical and cost effectiveness data for the use of the applicable product candidate to the
payor. We may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement. We cannot be sure that coverage or adequate reimbursement will be available for any of our product candidates. Further, we cannot be
sure that reimbursement amounts will not reduce the demand for, or the price of, our product candidates. If reimbursement is not available or is available only in limited levels, we may not be able to commercialize certain of our product candidates
profitably, or at all, even if approved.
As a result of legislative proposals and the trend toward managed health care in the United
States, third-party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement of new drugs. They may also refuse to provide coverage of approved product candidates for medical
indications other than those for which the FDA has granted market approvals. As a result, significant uncertainty exists as to whether and how much third-party payors will reimburse patients for their use of newly approved drugs, which in turn will
put pressure on the pricing of drugs. We expect to experience pricing pressures in connection with the sale of our product candidates due to the trend toward managed health care, the increasing influence of health maintenance organizations, and
additional legislative proposals as well as country, regional or local healthcare budget limitations.
If we fail to develop and commercialize other
product candidates, we may be unable to grow our business.
As part of our growth strategy, we plan to evaluate the development
and commercialization of other therapies related to immune-mediated, inflammatory, orphan and other diseases. We will evaluate internal opportunities from our compound libraries, and also may choose to in-license or acquire other product candidates
as well as commercial products to treat patients suffering from immune-mediated or orphan or other disorders with high unmet medical needs and limited treatment options. These other product candidates will require additional, time-consuming
development efforts prior to commercial sale, including preclinical studies, clinical trials and approval by the FDA and/or applicable foreign regulatory authorities. All product candidates are prone to the risks of failure that are inherent in
pharmaceutical product development, including the possibility that the product candidate will not be shown to be sufficiently safe and/or effective for approval by regulatory authorities. In addition, we cannot assure you that any such products that
are approved will be manufactured or produced economically, successfully commercialized or widely accepted in the marketplace or be more effective than other commercially available alternatives.
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Orphan drug designation from the FDA may be difficult or not possible to obtain, and if we are unable to
obtain orphan drug designation for ADX-102 or our other product candidates, regulatory and commercial prospects may be negatively impacted.
The FDA designates orphan status to drugs that are intended to treat rare diseases with fewer than 200,000 patients in the United States or
that affect more than 200,000 persons but are not expected to recover the costs of developing and marketing a treatment drug. Orphan status drugs do not require prescription drug user fees with a marketing application, may qualify the drug
development sponsor for certain tax credits, and can be marketed without generic competition for seven years. We believe that ADX-102 will qualify as an orphan drug for SLS and noninfectious anterior uveitis, and possibly other diseases that we may
test. However, we cannot guarantee that we will be able to receive orphan drug status from the FDA for ADX-102. If we are unable to secure orphan drug status for ADX-102 or our other product candidates, our regulatory and commercial prospects may be
negatively impacted.
We rely and will continue to rely on outsourcing arrangements for many of our activities, including clinical development and
supply of ADX-102 and our other product candidates.
As of September 30, 2016, we had only ten full-time employees and, as a
result, we rely, and expect to continue to rely, on outsourcing arrangements for a significant portion of our activities, including clinical research, data collection and analysis, manufacturing, financial reporting and accounting and human
resources, as well as for certain functions as a public company. We may have limited control over these third parties and we cannot guarantee that they will perform their obligations in an effective and timely manner.
In addition, during challenging and uncertain economic times and in tight credit markets, there may be a disruption or delay in the
performance of our third party contractors, suppliers or partners. If such third parties are unable to satisfy their commitments to us, our business and results of operations would be adversely affected.
We rely on third parties to conduct our clinical trials. If these third parties do not meet our deadlines or otherwise conduct the trials as required,
our clinical development programs could be delayed or unsuccessful and we may not be able to obtain regulatory approval for or commercialize our product candidates when expected or at all.
We do not have the ability to conduct all aspects of our preclinical testing or clinical trials ourselves. We are dependent on third parties
to conduct the clinical trials for ADX-102 and clinical trials for our other future product candidates and, therefore, the timing of the initiation and completion of these trials is controlled by such third parties and may occur on substantially
different timing from our estimates. Specifically, we use CROs to conduct our clinical trials and we also rely on medical institutions, clinical investigators and consultants to conduct our trials in accordance with our clinical protocols and
regulatory requirements. Our CROs, investigators, and other third parties play a significant role in the conduct of these trials and subsequent collection and analysis of data.
There is no guarantee that any CROs, investigators, or other third parties on which we rely for administration and conduct of our clinical
trials will devote adequate time and resources to such trials or perform as contractually required. If any of these third parties fails to meet expected deadlines, fails to adhere to our clinical protocols, or otherwise performs in a substandard
manner, our clinical trials may be extended, delayed, or terminated. If any of our clinical trial sites terminates for any reason, we may experience the loss of follow-up information on subjects enrolled in our ongoing clinical trials unless we are
able to transfer those subjects to another qualified clinical trial site. In addition, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and may receive cash or equity
compensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts of interest, the integrity of the data generated at the applicable clinical trial site may be jeopardized.
We rely completely on third parties to supply drug substance and manufacture drug product for our clinical trials and preclinical studies. We
intend to rely on other third parties to produce commercial supplies of product candidates, and our dependence on third parties could adversely impact our business.
We are completely dependent on third-party suppliers of the drug substance and drug product for our product candidates. If these third-party
suppliers do not supply sufficient quantities of materials to us on a timely basis and in accordance with applicable specifications and other regulatory requirements, there could be a significant interruption of our supplies, which would adversely
affect clinical development of the product candidate. Furthermore, if any of our contract manufacturers cannot successfully manufacture material that conforms to our specifications and within regulatory requirements, we will not be able to secure
and/or maintain regulatory approval, if any, for our product candidates.
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We will also rely on our contract manufacturers to purchase from third-party suppliers the
materials necessary to produce our product candidates for our anticipated clinical trials. We do not have any control over the process or timing of the acquisition of raw materials by our contract manufacturers. Moreover, we currently do not have
agreements in place for the commercial production of these raw materials. Any significant delay in the supply of a product candidate or the raw material components thereof for an ongoing clinical trial could considerably delay completion of that
clinical trial, product candidate testing, and potential regulatory approval of that product candidate.
We do not expect to have the
resources or capacity to commercially manufacture any of our proposed product candidates if approved, and will likely continue to be dependent on third-party manufacturers. Our dependence on third parties to manufacture and supply us with clinical
trial materials and any approved product candidates may adversely affect our ability to develop and commercialize our product candidates on a timely basis.
We are subject to a multitude of manufacturing risks, any of which could substantially increase our costs and limit supply of our products.
The process of manufacturing our products is complex, highly regulated and subject to several risks, including:
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The manufacturing of compounds is extremely susceptible to product loss due to contamination, equipment failure, improper installation or operation of equipment, or vendor or operator error. Even minor deviations from
normal manufacturing processes could result in reduced production yields, product defects and other supply disruptions. If microbial, viral or other contaminations are discovered in our products or in the manufacturing facilities in which our
products are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination.
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The manufacturing facilities in which our products are made could be adversely affected by equipment failures, labor shortages, natural disasters, power failures and numerous other factors.
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We and our contract manufacturers must comply with the FDAs cGMP regulations and guidelines. We and our contract manufacturers may encounter difficulties in achieving quality control and quality assurance and may
experience shortages in qualified personnel. We and our contract manufacturers are subject to inspections by the FDA and comparable agencies in other jurisdictions to confirm compliance with applicable regulatory requirements. Any failure to follow
cGMP or other regulatory requirements or any delay, interruption or other issues that arise in the manufacture, fill-finish, packaging, or storage of our products as a result of a failure of our facilities or the facilities or operations of third
parties to comply with regulatory requirements or pass any regulatory authority inspection could significantly impair our ability to develop and commercialize our products, including leading to significant delays in the availability of products for
our clinical studies or the termination or hold on a clinical study, or the delay or prevention of a filing or approval of marketing applications for our product candidates. Significant noncompliance could also result in the imposition of sanctions,
including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approvals for our product candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating
restrictions and criminal prosecutions, any of which could damage our reputation. If we are not able to maintain regulatory compliance, we may not be permitted to market our products and/or may be subject to product recalls, seizures, injunctions,
or criminal prosecution.
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Any adverse developments affecting manufacturing operations for our products may result in
shipment delays, inventory shortages, lot failures, product withdrawals or recalls, or other interruptions in the supply of our products. We may also have to take inventory write-offs and incur other charges and expenses for products that fail to
meet specifications, undertake costly remediation efforts or seek more costly manufacturing alternatives.
We may not be successful in establishing
and maintaining development or other strategic partnerships, which could adversely affect our ability to develop and commercialize product candidates.
We may choose to enter into development or other strategic partnerships in the future, including collaborations with major biotechnology or
pharmaceutical companies. We face significant competition in seeking appropriate partners and the negotiation process is time consuming and complex. Moreover, we may not be successful in our efforts to establish a development partnership or other
alternative arrangements for any of our other existing or future product candidates and programs because our research and development pipeline may be insufficient, our product candidates and programs may be deemed to be at too early a stage of
development for collaborative effort and/or third parties may not view our product candidates and programs as having the requisite potential to demonstrate safety and efficacy. Even if we are successful in our efforts to establish development
partnerships, the terms that we agree upon may not be favorable to us and we may not be able to maintain such development partnerships if, for example, development or approval of a product candidate is delayed or sales of an approved product
candidate are disappointing. Any delay in entering into development partnership agreements related to our product candidates could delay the development and commercialization of our product candidates and reduce their competitiveness if they reach
the market.
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Moreover, if we fail to maintain development or other strategic partnerships related to our
product candidates that we may choose to enter into:
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the development of certain of our current or future product candidates may be terminated or delayed;
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our cash expenditures related to development of certain of our current or future product candidates would increase significantly and we may need to seek additional financing;
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we may be required to hire additional employees or otherwise develop expertise, such as sales and marketing expertise, for which we have not budgeted; and
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we will bear all of the risk related to the development of any such product candidates.
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We may form
strategic alliances in the future, and we may not realize the benefits of such alliances.
We may form strategic alliances, create
joint ventures or collaborations or enter into licensing arrangements with third parties that we believe will complement or augment our existing business, including for the continued development or commercialization of ADX-102 or our other product
candidates. These relationships or those like them may require us to incur non-recurring and other charges, increase our near- and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business.
In addition, we face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other
alternative arrangements for ADX-102 or our other product candidates because third parties may view the risk of success in our planned clinical trial as too significant or the commercial opportunity for our product candidate as too limited. We
cannot be certain that, following a strategic transaction or license, we will achieve the revenues or specific net income that justifies such transaction.
If our competitors develop treatments for the target indications of our product candidates that are approved more quickly than ours, marketed more
successfully or demonstrated to be safer or more effective than our product candidates, our commercial opportunity will be reduced or eliminated.
We operate in highly competitive segments of the biotechnology and biopharmaceutical markets. We face competition from many different sources,
including commercial pharmaceutical and biotechnology enterprises, academic institutions, government agencies, and private and public research institutions. Our product candidates, if successfully developed and approved, will compete with
established therapies as well as with new treatments that may be introduced by our competitors. With the exception of SLS, there are a variety of drug candidates in development for the indications that we intend to test. Many of our competitors have
significantly greater financial, product candidate development, manufacturing, and marketing resources than we do. Large pharmaceutical and biotechnology companies have extensive experience in clinical testing and obtaining regulatory approval for
drugs. In addition, universities and private and public research institutes may be active in aldehyde research, and some could be in direct competition with us. We also may compete with these organizations to recruit management, scientists, and
clinical development personnel. We will also face competition from these third parties in establishing clinical trial sites, registering subjects for clinical trials, and in identifying and in-licensing new product candidates. Smaller or early-stage
companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.
New developments, including the development of other pharmaceutical technologies and methods of treating disease, occur in the pharmaceutical
and life sciences industries at a rapid pace. Developments by competitors may render our product candidates obsolete or noncompetitive. There are methods that can potentially be employed to trap aldehydes that we have not conceived of or attempted
to patent, and other parties may discover and patent aldehyde trapping approaches and compositions that are similar to or different from ours. Competition in drug development is intense. We anticipate that we will face intense and increasing
competition as new treatments enter the market and advanced technologies become available.
Our future success depends on our ability to
demonstrate and maintain a competitive advantage with respect to the design, development and commercialization of ADX-102 or our other product candidates. Noninfectious anterior uveitis and other inflammatory diseases may be treated with general
immune suppressing therapies, including corticosteroids, some of which are generic. Our potential competitors in these diseases may be developing novel immune modulating therapies that may be safer or more effective than ADX-102 or our other product
candidates.
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We have no sales, marketing or distribution capabilities and we will have to invest significant resources
to develop these capabilities.
We have no internal sales, marketing or distribution capabilities. If ADX-102 or any of our other
product candidates ultimately receives regulatory approval, we may not be able to effectively market and distribute the product candidate. We will have to invest significant amounts of financial and management resources to develop internal sales,
distribution and marketing capabilities, some of which will be committed prior to any confirmation that ADX-102 or any of our other product candidates will be approved. We may not be able to hire consultants or external service providers to assist
us in sales, marketing and distribution functions on acceptable financial terms or at all. Even if we determine to perform sales, marketing and distribution functions ourselves, we could face a number of additional related risks, including:
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we may not be able to attract and build an effective marketing department or sales force;
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the cost of establishing a marketing department or sales force may exceed our available financial resources and the revenues generated by ADX-102 or any other product candidates that we may develop, in-license or
acquire; and
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our direct sales and marketing efforts may not be successful.
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We are highly dependent on the services
of our employees and certain key consultants.
As a company with a limited number of personnel, we are highly dependent on the
development, regulatory, commercial, and financial expertise of our senior management team composed of three individuals and certain other employees: Todd C. Brady, M.D., Ph.D., our President and Chief Executive Officer; Stephen J. Tulipano, our
Chief Financial Officer; and David J. Clark, M.D., our Chief Medical Officer. In addition, we rely on the services of a number of key consultants, including IP, pharmacokinetic, chemistry, toxicology, dermatologic drug development and ocular drug
development consultants. The loss of such individuals or the services of future members of our management team could delay or prevent the further development and potential commercialization of our product candidates and, if we are not successful in
finding suitable replacements, could harm our business.
If we fail to attract and retain senior management and key commercial personnel, we may be
unable to successfully develop or commercialize our product candidates.
We will need to expand and effectively manage our
managerial, operational, financial, and other resources in order to successfully pursue our clinical development and commercialization efforts. Our success also depends on our continued ability to attract, retain, and motivate highly qualified
management and scientific personnel and we may not be able to do so in the future due to intense competition among biotechnology and pharmaceutical companies, universities, and research organizations for qualified personnel. If we are unable to
attract and retain the necessary personnel, we may experience significant impediments to our ability to implement our business strategy.
We expect to expand our management team. Our future performance will depend, in part, on our ability to successfully integrate newly hired
executive officers into our management team and our ability to develop an effective working relationship among senior management. Our failure to integrate these individuals and create effective working relationships among them and other members of
management could result in inefficiencies in the development and commercialization of our product candidates, harming future regulatory approvals, sales of our product candidates and our results of operations.
We may encounter difficulties in managing our growth and expanding our operations successfully.
Because, as of September 30, 2016, we only had ten full-time employees, we will need to grow our organization to continue development and
pursue the potential commercialization of ADX-102 and our other product candidates, as well as function as a public company. As we seek to advance ADX-102 and other product candidates, we will need to expand our financial, development, regulatory,
manufacturing, marketing and sales capabilities or contract with third parties to provide these capabilities for us. As our operations expand, we expect that we will need to manage additional relationships with various strategic partners, suppliers
and other third parties. Future growth will impose significant added responsibilities on members of management and require us to retain additional internal capabilities. Our future financial performance and our ability to commercialize our product
candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to manage our development efforts and clinical trials effectively and hire, train and integrate
additional management, clinical and regulatory, financial, administrative and sales and marketing personnel. We may not be able to accomplish these tasks, and our failure to so accomplish could prevent us from successfully growing our company.
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Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing
approval of and commercialize our product candidates and may affect the prices we may obtain.
In the United States and some
foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding healthcare systems that could prevent or delay marketing approval for our product candidates, restrict or regulate post-approval
activities and affect our ability to profitably sell our product candidates.
Legislative and regulatory proposals have been made to
expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We are not sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be
changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the United States Congress of the FDAs approval process may significantly delay or prevent
marketing approval, as well as subject us to more stringent product labeling and post-marketing testing and other requirements.
In the
United States, the Medical Modernization Act of 2003, or MMA, changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement
methodology based on average sales prices for drugs. In addition, this legislation authorized Medicare Part D prescription drug plans to use formulas where they can limit the number of drugs that will be covered in any therapeutic class. As a result
of this legislation and the expansion of federal coverage of drug products, we expect that there will be additional pressure to contain and reduce costs. These cost reduction initiatives and other provisions of this legislation could decrease the
coverage and price that we receive for any approved products and could seriously harm our business. While the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations
in setting their own reimbursement rates, and any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payors.
In early 2010, President Obama signed into law the Health Care Reform Law, a sweeping law intended to broaden access to health insurance,
reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry and imposed
additional health policy reforms. Effective October 1, 2010, the Health Care Reform Law revised the definition of average manufacturer price for reporting purposes, which could increase the amount of Medicaid drug rebates to states.
Further, beginning in 2011, the Health Care Reform Law imposes a significant annual fee on companies that manufacture or import branded prescription drug products. Substantial new provisions affecting compliance have also been enacted, which may
require us to modify our business practices with healthcare practitioners. Although it is too early to determine the effect of the Health Care Reform Law on our business, the new law appears likely to continue the pressure on pharmaceutical pricing,
especially under Medicare, and may also increase our regulatory burdens and operating costs.
The continuing efforts of the government,
insurance companies, managed care organizations, and other payors of healthcare services to contain or reduce costs of health care may adversely affect:
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the demand for any product candidates for which we may obtain regulatory approval;
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our ability to set a price that we believe is fair for our product candidates;
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our ability to generate revenue and achieve or maintain profitability;
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the level of taxes that we are required to pay; and
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the availability of capital.
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If we market products in a manner that violates healthcare fraud and abuse
laws, or if we violate government price reporting laws, we may be subject to civil or criminal penalties.
In addition to FDA
restrictions on the marketing of pharmaceutical products, several other types of state and federal healthcare fraud and abuse laws have been applied in recent years to restrict certain marketing practices in the pharmaceutical industry. These laws
include false claims statutes and anti-kickback statutes. Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of these laws.
Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the
federal government or knowingly making, or causing to be made, a false statement to get a false claim paid. The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or
receiving remuneration to induce, or in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs.
This statute has
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been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formula managers on the other. Although there are several statutory
exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing or recommending may
be subject to scrutiny if they do not qualify for an exemption or safe harbor. Our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability.
Over the past few years, several pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety of alleged
promotional and marketing activities, such as: allegedly providing free trips, free goods, sham consulting fees and grants and other monetary benefits to prescribers; reporting to pricing services inflated average wholesale prices that were then
used by federal programs to set reimbursement rates; engaging in off-label promotion that caused claims to be submitted to Medicaid for non-covered, off-label uses; and submitting inflated best price information to the Medicaid Rebate Program to
reduce liability for Medicaid rebates. Most states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several
states, apply regardless of the payor. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturers products from reimbursement under government programs, criminal fines and imprisonment.
Governments may impose price controls, which may adversely affect our future profitability.
We intend to seek approval to market our product candidates in both the United States and in foreign jurisdictions. If we obtain approval in
one or more foreign jurisdictions, we will be subject to rules and regulations in those jurisdictions relating to our product candidates. In some foreign countries, particularly in the European Union, the pricing of prescription pharmaceuticals is
subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product candidate. If reimbursement of our future products is
unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.
If
product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of ADX-102 or our other product candidates.
We face an inherent risk of product liability as a result of the clinical testing of ADX-102 and our other product candidates and will face an
even greater risk if we commercialize our product candidates. For example, we may be sued if ADX-102 or our other product candidates allegedly cause injury or are found to be otherwise unsuitable during product testing, manufacturing, marketing or
sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product candidate, negligence, strict liability and a breach of warranties. Claims could
also be asserted under state consumer protection acts.
If we cannot successfully defend ourselves against product liability claims, we
may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability
claims may result in:
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decreased demand for ADX-102 or our other product candidates;
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injury to our reputation;
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withdrawal of clinical trial participants;
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costs to defend the related litigation;
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a diversion of managements time and our resources;
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substantial monetary awards to trial participants or patients;
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product recalls, withdrawals or labeling, marketing or promotional restrictions;
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the inability to commercialize ADX-102 or our other product candidates; and
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a decline in our stock price.
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We maintain product liability insurance with $3.0 million in
coverage. Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of ADX-102 or our other product
candidates. Although we will maintain such insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits
of our insurance coverage. Our insurance policies will also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We may have to pay any amounts awarded by a court or negotiated in a settlement
that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.
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We and our development partners, third-party manufacturers and suppliers use biological materials and may
use hazardous materials, and any claims relating to improper handling, storage, or disposal of these materials could be time consuming or costly.
We and our development partners, third-party manufacturers and suppliers may use hazardous materials, including chemicals and biological
agents and compounds that could be dangerous to human health and safety or the environment. Our operations and the operations of our development partner, third-party manufacturers and suppliers also produce hazardous waste products. Federal, state,
and local laws and regulations govern the use, generation, manufacture, storage, handling, and disposal of these materials and wastes. Compliance with applicable environmental laws and regulations may be expensive and current or future environmental
laws and regulations may impair our product development efforts. In addition, we cannot entirely eliminate the risk of accidental injury or contamination from these materials or wastes. We do not carry specific biological or hazardous waste
insurance coverage and our property, casualty, and general liability insurance policies specifically exclude coverage for damages and fines arising from biological or hazardous waste exposure or contamination. Accordingly, in the event of
contamination or injury we could be held liable for damages or be penalized with fines in an amount exceeding our resources, and our clinical trials or regulatory approvals could be suspended.
We and any of our future development partners will be required to report to regulatory authorities if any of our approved products cause or contribute
to adverse medical events, and any failure to do so would result in sanctions that would materially harm our business.
If we and
any of our future development partners are successful in commercializing our products, the FDA and foreign regulatory authorities will require that we and any of our future development partners report certain information about adverse medical events
if those products may have caused or contributed to those adverse events. The timing of our obligation to report would be triggered by the date we become aware of the adverse event as well as the nature of the event. We and any of our future
development partners may fail to report adverse events we become aware of within the prescribed timeframe or to perform inadequate investigations of their causes. We and any of our future development partners may also fail to appreciate that we have
become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of our products. If we and any of our future development partners
fail to comply with our reporting obligations, the FDA or a foreign regulatory authority could take action including criminal prosecution, the imposition of civil monetary penalties, seizure of our products, or delay in approval or clearance of
future products.
Our insurance policies are expensive and protect us only from some business risks, which leaves us exposed to significant
uninsured liabilities.
We do not carry insurance for all categories of risk that our business may encounter. Some of the policies
we currently maintain include general liability, product and clinical trial liability, workers compensation, and directors and officers insurance. We do not know, however, if we will be able to maintain existing insurance with
adequate levels of coverage. Any significant, uninsured liability may require us to pay substantial amounts, which would adversely affect our working capital and results of operations.
If we engage in an acquisition, reorganization or business combination, we will incur a variety of risks that could adversely affect our business
operations or our stockholders.
From time to time we have considered, and we will continue to consider in the future, strategic
business initiatives intended to further the development of our business. These initiatives may include acquiring businesses, technologies or products or entering into a business combination with another company. If we do pursue such a strategy, we
could, among other things:
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issue equity securities that would dilute our current stockholders percentage ownership;
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incur substantial debt that may place strains on our operations;
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spend substantial operational, financial and management resources in integrating new businesses, technologies and products; and
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assume substantial actual or contingent liabilities.
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Our internal computer systems, or those of our
development partners, third-party clinical research organizations or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our product development programs.
Despite the implementation of security measures, our internal computer systems and those of our current and any future CROs and other
contractors, consultants and collaborators are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we have not experienced any such material system
failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could
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result in a material disruption of our development programs and our business operations. For example, the loss of clinical trial data from completed or future clinical trials could result in
delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Likewise, we rely on third parties to manufacture our product candidates and conduct clinical trials, and similar events relating to
their computer systems could also have a material adverse effect on our business. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential
or proprietary information, we could incur liability and the further development and commercialization of our product candidate could be delayed.
Business disruptions could seriously harm our future revenues and financial condition and increase our costs and expenses.
Our operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons,
fires, extreme weather conditions, medical epidemics and other natural or manmade disasters or business interruptions, for which we are predominantly self-insured. The occurrence of any of these business disruptions could seriously harm our
operations and financial condition and increase our costs and expenses. We rely on third-party manufacturers to produce ADX-102 and our other product candidates. Our ability to obtain clinical supplies of ADX-102 or our other product candidates
could be disrupted, if the operations of these suppliers are affected by a man-made or natural disaster or other business interruption.
Our
employees may engage in misconduct or other improper activities including noncompliance with regulatory standards and requirements and insider trading.
We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with
FDA regulations, provide accurate information to regulatory authorities, comply with manufacturing standards we have established, comply with federal and state health care fraud and abuse laws and regulations, report financial information or data
accurately, or disclose unauthorized activities to us. In particular, sales, marketing, and business arrangements in the health care industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing, and other
abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs, and other business arrangements. Employee misconduct could also
involve improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation.
In addition, during the course of our operations our directors, executives, and employees may have access to material, nonpublic information
regarding our business, our results of operations, or potential transactions we are considering. We may not be able to prevent a director, executive, or employee from trading in our common stock on the basis of, or while having access to, material,
nonpublic information. If a director, executive, or employee was to be investigated or an action were to be brought against a director, executive, or employee for insider trading, it could have a negative impact on our reputation and our stock
price. Such a claim, with or without merit, could also result in substantial expenditures of time and money, and divert attention of our management team from other tasks important to the success of our business.
Risks Relating to Our Intellectual Property
Our
success depends on our ability to protect our intellectual property and our proprietary technologies.
Our commercial success
depends in part on our ability to obtain and maintain patent protection and trade secret protection for our product candidates, proprietary technologies, and their uses as well as our ability to operate without infringing upon the proprietary rights
of others. There can be no assurance that our patent applications or those of our licensors will result in additional patents being issued or that issued patents will afford sufficient protection against competitors with similar technology, nor can
there be any assurance that the patents issued will not be infringed, designed around, or invalidated by third parties. Even issued patents may later be found unenforceable or may be modified or revoked in proceedings instituted by third parties
before various patent offices or in courts. The degree of future protection for our proprietary rights is uncertain. Only limited protection may be available and may not adequately protect our rights or permit us to gain or keep any competitive
advantage. This failure to properly protect the intellectual property rights relating to these product candidates could have a material adverse effect on our financial condition and results of operations.
Composition-of-matter patents on the biological or chemical active pharmaceutical ingredient are generally considered to be the strongest form
of intellectual property protection for pharmaceutical products, as such patents provide protection without regard to any method of use. While we have issued composition-of-matter patents in the United States and other countries for ADX-102, we
cannot be certain that the claims in our patent applications covering composition-of-matter of our other product candidates will be considered patentable by the United States Patent and Trademark Office (USPTO) and courts in the United States or by
the patent offices and courts in foreign countries, nor can we be certain that the claims in our issued composition-of-matter patents will not be found invalid or unenforceable if challenged. Method-of-use patents protect the use of a product for
the specified method. This type of patent does not prevent a competitor from making and marketing a product that is identical to our product for an indication that is outside the scope of the patented method. Moreover, even if competitors do not
actively promote their product for our targeted
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indications, physicians may prescribe these products off-label. Although off-label prescriptions may infringe or contribute to the infringement of method-of-use patents, the practice
is common and such infringement is difficult to prevent or prosecute. In addition, there are possibly methods that can be employed to trap aldehydes that we have not conceived of or attempted to patent, and other parties may discover and patent
aldehyde trapping approaches and compositions that are similar to or different from ours.
The patent application process is subject to
numerous risks and uncertainties, and there can be no assurance that we or any of our future development partners will be successful in protecting our product candidates by obtaining and defending patents. These risks and uncertainties include the
following:
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the USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which
noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than
would otherwise have been the case;
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patent applications may not result in any patents being issued;
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patents that may be issued or in-licensed may be challenged, invalidated, modified, revoked, circumvented, found to be unenforceable, or otherwise may not provide any competitive advantage;
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our competitors, many of whom have substantially greater resources than we do and many of whom have made significant investments in competing technologies, may seek or may have already obtained patents that will limit,
interfere with, or eliminate our ability to make, use, and sell our potential product candidates;
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there may be significant pressure on the United States government and international governmental bodies to limit the scope of patent protection both inside and outside the United States for disease treatments that prove
successful, as a matter of public policy regarding worldwide health concerns; and
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countries other than the United States may have patent laws less favorable to patentees than those upheld by United States courts, allowing foreign competitors a better opportunity to create, develop, and market
competing product candidates.
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In addition, we rely on the protection of our trade secrets and proprietary know-how.
Although we have taken steps to protect our trade secrets and unpatented know-how, including entering into confidentiality agreements with third parties, and confidential information and inventions agreements with employees, consultants, and
advisors, third parties may still obtain this information or may come upon this or similar information independently. If any of these events occurs or if we otherwise lose protection for our trade secrets or proprietary know-how, the value of this
information may be greatly reduced.
Claims by third parties that we infringe their proprietary rights may result in liability for damages or
prevent or delay our developmental and commercialization efforts.
The biotechnology industry has been characterized by frequent
litigation regarding patent and other intellectual property rights. Because patent applications are maintained in secrecy until the application is published, we may be unaware of third party patents that may be infringed by commercialization of
ADX-102 or our other product candidates. In addition, identification of third party patent rights that may be relevant to our technology is difficult because patent searching is imperfect due to differences in terminology among patents, incomplete
databases and the difficulty in assessing the meaning of patent claims. Any claims of patent infringement asserted by third parties would be time consuming and could likely:
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result in costly litigation;
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divert the time and attention of our technical personnel and management;
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cause development delays;
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prevent us from commercializing ADX-102 or our other product candidates until the asserted patent expires or is held finally invalid or not infringed in a court of law;
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require us to develop non-infringing technology; or
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require us to enter into royalty or licensing agreements.
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Although no third party has
asserted a claim of patent infringement against us, others may hold proprietary rights that could prevent ADX-102 or our other product candidates from being marketed. Any patent-related legal action against us claiming damages and seeking to enjoin
commercial activities relating to our product candidate or processes could subject us to potential liability for damages and require us to obtain a license to continue to manufacture or market ADX-102 or our other product candidates. We cannot
predict whether we would prevail in any such actions or that any license required under any of these patents
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would be made available on commercially acceptable terms, if at all. In addition, we cannot be sure that we could redesign our product candidate or processes to avoid infringement, if necessary.
Accordingly, an adverse determination in a judicial or administrative proceeding, or the failure to obtain necessary licenses, could prevent us from developing and commercializing ADX-102 or our other product candidates, which could harm our
business, financial condition and operating results.
Any such claims against us could also be deemed to constitute an event of default
under our loan and security agreement with Pacific Western Bank. In the case of a continuing event of default under the loan, Pacific Western Bank, could, among other remedies, elect to declare all amounts outstanding to be immediately due and
payable and terminate all commitments to extend further credit. Although as of September 30, 2016, we had sufficient cash and cash equivalents to repay all obligations owed to Pacific Western Bank if the debt was accelerated, in the event we do
not or are not able to repay the obligations at the time a default occurred, Pacific Western Bank may elect to commence and prosecute bankruptcy and/or other insolvency proceedings, or proceed against the collateral granted to Pacific Western Bank
under the loan, which includes our intellectual property.
Our issued patents could be found invalid or unenforceable if challenged in court.
If we or any of our future development partners were to initiate legal proceedings against a third party to enforce a patent
covering one of our product candidates, or one of our future product candidates, the defendant could counterclaim that our patent is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity
and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion
could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement during prosecution. Third parties may also raise similar claims before the USPTO, even outside
the context of litigation. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we and
the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on such product candidate. Such a
loss of patent protection would have a material adverse impact on our business.
We may fail to comply with any of our obligations under existing
agreements pursuant to which we license rights or technology, which could result in the loss of rights or technology that are material to our business.
We are a party to a technology license and we may enter into additional licenses in the future. Such licenses may impose various commercial,
contingent payment, royalty, insurance, indemnification, and or other obligations on us. If we fail to comply with these obligations, the licensor may have the right to terminate the license, in which event we could lose valuable rights under our
license agreements and our ability to develop product candidates could be impaired. Additionally, should such a license agreement be terminated for any reason, there may be a limited number of licensors who would be suitable replacements and it may
take a significant amount of time to transition to a replacement licensor.
We may be subject to claims that we have wrongfully hired an employee
from a competitor or that we or our employees have wrongfully used or disclosed alleged confidential information or trade secrets of their former employers.
As is common in the biotechnology and pharmaceutical industry, we engage the services of consultants to assist us in the development of our
product candidates. Many of these consultants were previously employed at, or may have previously provided or may be currently providing consulting services to, other biotechnology or pharmaceutical companies including our competitors or potential
competitors. We may become subject to claims that our company or a consultant inadvertently or otherwise used or disclosed trade secrets or other information proprietary to their former employers or their former or current clients. Litigation may be
necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to our management team.
If we do not obtain protection under the Hatch-Waxman Amendments by extending the patent terms and obtaining data exclusivity for our product candidate,
our business may be materially harmed.
Depending upon the timing, duration and specifics of FDA marketing approval of ADX-102 or
other product candidates, one or more of our United States patents may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The
Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, we may not be granted an extension because of, for example,
failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be
less than we request. If we are unable to obtain patent term extension or restoration or the term of any such extension is less than we request, our competitors may obtain approval of competing products following our patent expiration, and our
revenue could be reduced, possibly materially.
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If our trademarks and trade names are not adequately protected, then we may not be able to build name
recognition in our markets of interest and our business may be adversely affected.
If our trademarks and trade names are not
adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected. Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented or
declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition among potential partners or customers in our markets of interest.
At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement
claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. Over the long term, if we are unable to establish name recognition based on our trademarks
and trade names, then we may not be able to compete effectively and our business may be adversely affected. Our efforts to enforce or protect our proprietary rights related to trademarks, trade secrets, domain names, copyrights or other intellectual
property may be ineffective and could result in substantial costs and diversion of resources and could adversely impact our financial condition or results of operations.
Changes in United States patent law could diminish the value of patents in general, thereby impairing our ability to protect our product candidates.
As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly
patents. Obtaining and enforcing patents in the biopharmaceutical industry involve technological and legal complexity. Therefore, obtaining and enforcing biopharmaceutical patents is costly, time consuming, and inherently uncertain. In addition,
Congress may pass patent reform legislation. The Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain
situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the
United States Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents we might
obtain in the future.
We may not be able to protect our intellectual property rights throughout the world.
While we have issued composition-of-matter patents covering ADX-102 in the United States and other countries, filing, prosecuting and
defending patents on ADX-102 and our other product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those
in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, we may not be able to prevent third parties from
practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where
we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products
may compete with our product candidates and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The
legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for
us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our
efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We
may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain
a significant commercial advantage from the intellectual property that we develop or license.
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Risks Related to Our Financial Position and Need for Capital
If we fail to obtain the capital necessary to fund our operations, we will be unable to successfully develop and commercialize ADX-102 and our other
product candidates.
We will require substantial future capital in order to complete the remaining clinical development for
ADX-102 and our other product candidates and to potentially commercialize these product candidates. We expect our spending levels to increase in connection with our clinical trials of ADX-102 and our other product candidates, as well as other
corporate activities. The amount and timing of any expenditure needed to implement our development and commercialization programs will depend on numerous factors, including:
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the type, number, scope, progress, expansion costs, results of and timing of our planned clinical trials of ADX-102 or any our other product candidates which we are pursuing or may choose to pursue in the future;
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the need for, and the progress, costs and results of, any additional clinical trials of ADX-102 and our other product candidates we may initiate based on the results of our planned clinical trials or discussions with
the FDA, including any additional trials the FDA or other regulatory agencies may require evaluating the safety of ADX-102 and our other product candidates;
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the costs of obtaining, maintaining and enforcing our patents and other intellectual property rights;
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the costs and timing of obtaining or maintaining manufacturing for ADX-102 and our other product candidates, including commercial manufacturing if any product candidate is approved;
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the costs and timing of establishing sales and marketing capabilities and enhanced internal controls over financial reporting;
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the terms and timing of establishing collaborations, license agreements and other partnerships on terms favorable to us;
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costs associated with any other product candidates that we may develop, in-license or acquire;
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the effect of competing technological and market developments;
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our ability to establish and maintain partnering arrangements for development; and
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the costs associated with being a public company.
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Some of these factors are outside of our
control. We do not expect our existing capital resources to be sufficient to enable us to fund the completion of our clinical trials and remaining development program through commercial introduction. We expect that we will need to raise additional
funds in the near future.
We have not sold any products, and we do not expect to sell or derive revenue from any product sales for the
foreseeable future. We may seek additional funding through collaboration agreements and public or private financings, including debt financings. The global economic downturn and market instability has made the business climate more volatile and more
costly. In addition, the United Kingdoms recent decision to exit the European Union (Brexit) could contribute to instability and volatility in the global financial and foreign exchange markets. These economic conditions, and
uncertainty as to the general direction of the macroeconomic environment, are beyond our control and may make any necessary debt or equity financing more difficult, more costly, and more dilutive. Additional funding may not be available to us on
acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders or be excessively dilutive. In addition, the issuance of additional shares by us, or the possibility of such
issuance, may cause the market price of our shares to decline.
If we are unable to obtain funding on a timely basis, we will be unable to
complete the planned clinical trials for ADX-102 and our other product candidates and we may be required to significantly curtail some or all of our activities. We also could be required to seek funds through arrangements with collaborative partners
or otherwise that may require us to relinquish rights to our product candidates or some of our technologies or otherwise agree to terms unfavorable to us.
The terms of our secured debt facility require us to meet certain operating and financial covenants and place restrictions on our operating and
financial flexibility. If we raise additional capital through debt financing, the terms of any new debt could further restrict our ability to operate our business.
We have a $5.0 million Credit Facility with Pacific Western that is secured by a lien covering all of our assets as of September 30,
2016. As of September 30, 2016 and December 31, 2015, the outstanding principal balance under the Credit Facility was approximately $1.4 million. Under the terms of the Credit Facility, (i) $2,000,000 was made available on
November 10, 2014; and (ii) $3,000,000 (the Tranche B Loan) became available to us following the satisfaction of certain conditions, including receipt of
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positive phase 2 data (as determined by our Board of Directors) in either SLS or noninfectious anterior uveitis. The loan agreement contains customary affirmative and negative covenants and
events of default. Affirmative covenants include, among others, covenants requiring us to maintain our legal existence and governmental approvals, deliver certain financial reports and maintain insurance coverage. Negative covenants include, among
others, restrictions on transferring any part of our business or property, changing our business, including changing the composition of our executive team or board of directors, incurring additional indebtedness, engaging in mergers or acquisitions,
paying dividends or making other distributions, making investments and creating other liens on our assets and other financial covenants, in each case subject to customary exceptions. If we default under the terms of the loan agreement, including
failure to satisfy our operating covenants, the lender may accelerate all of our repayment obligations and take control of our pledged assets, potentially requiring us to renegotiate our agreement on terms less favorable to us or to immediately
cease operations. Further, if we are liquidated, the lenders right to repayment would be senior to the rights of the holders of our common stock. The lender could declare a default upon the occurrence of any event that they interpret as a
material adverse effect as defined under the loan agreement. Any declaration by the lender of an event of default could significantly harm our business and prospects and could cause the price of our common stock to decline. If we raise any
additional debt financing, the terms of such additional debt could further restrict our operating and financial flexibility.
Our ability to use net
operating loss carryforwards and tax credit carryforwards to offset future taxable income may be limited as a result of transactions involving our common stock.
In general, under Section 382 of the Internal Revenue Code of 1986, as amended (Code), a corporation that undergoes an ownership
change is subject to limitations on its ability to utilize its pre-change net operating losses (NOLs) and certain other tax assets (tax attributes) to offset future taxable income. In general, an ownership change occurs if the aggregate stock
ownership of certain stockholders increases by more than 50 percentage points over such stockholders lowest percentage ownership during the testing period (generally three years). Transactions involving our common stock, even those outside our
control, such as purchases or sales by investors, within the testing period could result in an ownership change. A limitation on our ability to utilize some or all of our NOLs or credits could have a material adverse effect on our results of
operations and cash flows. Prior to 2016, Aldeyra has undergone two ownership changes. However, our management believes that we had sufficient Built-In-Gain to offset the Section 382 of the Code limitation generated by such
ownership changes. Any future ownership changes, including those resulting from our recent or future financing activities, may cause our existing tax attributes to have additional limitations.
Risks Related to Our Common Stock
An active
trading market for our common stock may not develop or be sustained and investors may not be able to resell their shares at or above the price at which they purchased them.
We have a limited history as a public company. An active trading market for our shares may never develop or be sustained. In the absence of an
active trading market for our common stock, investors may not be able to sell their common stock at or above the price they paid or at the time that they would like to sell. In addition, an inactive market may impair our ability to raise capital by
selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration, which, in turn, could harm our business.
The trading price of the shares of our common stock has been and is likely to continue to be highly volatile, and purchasers of our common stock could
incur substantial losses.
Our stock price has been and will likely continue to be volatile for the foreseeable future. The stock
market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be
able to sell their common stock at or above the price they paid. The market price for our common stock may be influenced by many factors, including:
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our ability to enroll patients in our planned clinical trials;
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results of the clinical trials, and the results of trials of our competitors or those of other companies in our market sector;
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regulatory developments in the United States and foreign countries;
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variations in our financial results or those of companies that are perceived to be similar to us;
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changes in the structure of healthcare payment systems, especially in light of current reforms to the United States healthcare system;
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announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
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market conditions in the pharmaceutical and biotechnology sectors and issuance of securities analysts reports or recommendations;
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sales of our stock by insiders and 5% stockholders;
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trading volume of our common stock;
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general economic, industry and market conditions other events or factors, many of which are beyond our control;
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additions or departures of key personnel; and
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intellectual property, product liability or other litigation against us.
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In addition, in the
past, stockholders have initiated class action lawsuits against biotechnology and pharmaceutical companies following periods of volatility in the market prices of these companies stock. Such litigation, if instituted against us, could cause us
to incur substantial costs and divert managements attention and resources, which could have a material adverse effect on our business, financial condition and results of operations.
Our quarterly operating results may fluctuate significantly.
We expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results will be affected by numerous
factors, including:
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variations in the level of expenses related to our clinical trial and development programs;
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addition or termination of clinical trials;
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any intellectual property infringement lawsuit in which we may become involved;
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regulatory developments affecting ADX-102 and our other product candidates;
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our execution of any collaborative, licensing or similar arrangements, and the timing of payments we may make or receive under these arrangements;
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nature and terms of stock-based compensation grants; and
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derivative instruments recorded at fair value.
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If our quarterly operating results fall below
the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially.
Our failure to meet the continued listing requirements of The NASDAQ Capital Market could result in a delisting of our common stock.
If we fail to satisfy the continued listing requirements of The NASDAQ Capital Market, such as the corporate governance requirements or the
minimum closing bid price requirement, NASDAQ may take steps to de-list our common stock. Such a delisting would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when
you wish to do so. In the event of a delisting, we would expect to take actions to restore our compliance with NASDAQs listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to
become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the NASDAQ minimum bid price requirement or prevent future non-compliance with NASDAQs listing
requirements.
If our shares become subject to the penny stock rules, it would become more difficult to trade our shares.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally
equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume information with
respect to transactions in such securities is provided by the exchange or system. If we do not retain a listing on The NASDAQ Capital Market and if the price of our common stock is less than $5.00, our common stock will be deemed a penny stock. The
penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require
that before effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the
purchasers written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure
requirements may have the effect of reducing the trading activity in the secondary market for our common stock, and therefore stockholders may have difficulty selling their shares.
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We may allocate our cash and cash equivalents in ways that you and other stockholders may not approve.
Our management has broad discretion in the application of our cash and cash equivalents. Because of the number and variability of
factors that will determine our use of our cash and cash equivalents, their ultimate use may vary substantially from their currently intended use. Our management might not apply our cash and cash equivalents in ways that ultimately increase the
value of your investment. We expect to use of our cash and cash equivalents to fund our planned clinical trials of ADX-102, development of other molecules that may relate to our aldehyde trapping platform, and the remainder for working capital and
other general corporate purposes. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest our cash and cash equivalents in short-term, investment-grade, interest-bearing securities.
These investments may not yield a favorable return to our stockholders. If we do not invest or apply our cash and cash equivalents in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock
price to decline.
Because a small number of our existing stockholders own a majority of our voting stock, your ability to influence corporate
matters will be limited.
As of September 30, 2016, our executive officers, directors and greater than 5% stockholders, in
the aggregate, own approximately 73.0% of our outstanding common stock. As a result, such persons, acting together, will have the ability to control our management and business affairs and substantially all matters submitted to our stockholders for
approval, including the election and removal of directors and approval of any significant transaction. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control, impeding a merger, consolidation,
takeover or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our business, even if such a transaction would benefit other stockholders.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders,
more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our
amended and restated certificate of incorporation and amended and restated bylaws may delay or prevent an acquisition of us or a change in our management. These provisions include:
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authorizing the issuance of blank check preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;
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limiting the removal of directors by the stockholders;
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creating a staggered board of directors;
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prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;
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eliminating the ability of stockholders to call a special meeting of stockholders;
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permitting our board of directors to accelerate the vesting of outstanding option grants upon certain transactions that result in a change of control; and
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establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings.
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In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General
Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Although we believe these provisions collectively provide for an opportunity to obtain greater value for
stockholders by requiring potential acquirors to negotiate with our board of directors, they would apply even if an offer rejected by our board were considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent
any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.
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We do not intend to pay dividends on our common stock and, consequently, your ability to achieve a return
on your investment will depend on appreciation in the price of our common stock.
We have never declared or paid any cash dividend
on our common stock and do not currently intend to do so for the foreseeable future. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying
any cash dividends for the foreseeable future. In addition, our loan and security agreement with Pacific Western currently prohibits us from paying dividends on our equity securities, and any future debt financing arrangement may contain terms
prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. Any return to stockholders will therefore be limited to the appreciation of their stock. Therefore, the success of an investment in shares of our
common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.
A substantial number of shares of our common stock could be sold into the public market in the near future, which could depress our stock price.
Sales of substantial amounts of our common stock in the public market could reduce the prevailing market prices for our common
stock. Substantially all of our outstanding common stock are eligible for sale as are common stock issuable under vested and exercisable stock options. If our existing stockholders sell a large number of shares of our common stock, or the public
market perceives that existing stockholders might sell shares of common stock, the market price of our common stock could decline significantly. These sales might also make it more difficult for us to sell equity securities at a time and price that
we deem appropriate.
We are an emerging growth company, and we cannot be certain if the reduced reporting requirements applicable to emerging
growth companies will make our common stock less attractive to investors.
We are an emerging growth company, as defined in the
Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are
not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation in our periodic reports and proxy statements and exemptions from the requirements of holding nonbinding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could
be an emerging growth company until December 31, 2019, although circumstances could cause us to lose that status earlier, including if we become a large accelerated filer, if we have total annual gross revenue of $1.0 billion or more during any
fiscal year before that time, in which cases we would no longer be an emerging growth company as of the following December 31 or, if we issue more than $1.0 billion in non-convertible debt during any three year period before that time, we would
cease to be an emerging growth company immediately. Even after we no longer qualify as an emerging growth company, we may still qualify as a smaller reporting company which would allow us to take advantage of many of the same exemptions
from disclosure requirements including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports
and proxy statements. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market
for our common stock and our stock price may be more volatile.
We are incurring significant increased costs and demands upon management as a result
of operating as a public company.
As a public company, we are incurring significant legal, accounting and other expenses that we
did not incur as a private company. We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which require, among other things, that we file with the Securities and Exchange Commission, or
the SEC, annual, quarterly and current reports with respect to our business and financial condition. In addition, the Sarbanes-Oxley Act, as well as rules subsequently adopted by the SEC, and The NASDAQ Capital Market to implement provisions of the
Sarbanes-Oxley Act, impose significant requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Further, in 2010, the Dodd-Frank
Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and
regulations in these areas such as say on pay and proxy access. Recent legislation permits smaller emerging growth companies to implement many of these requirements over a longer period and up to five years from our Initial
Public Offering. We intend to continue to take advantage of this new legislation but cannot guarantee that we will not be required to implement these requirements sooner than budgeted or planned and thereby incur unexpected expenses. Stockholder
activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact the
manner in which we operate our business in ways we cannot currently anticipate.
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We expect the rules and regulations applicable to public companies to continue to substantially
increase our legal and financial compliance costs and to make some activities more time-consuming and costly. If these requirements divert the attention of our management and personnel from other business concerns, they could have a material adverse
effect on our business, financial condition and results of operations. The increased costs will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our
products or services. For example, these rules and regulations make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain the same or similar
coverage. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to
serve on our board of directors, our board committees or as executive officers.
If we fail to maintain proper and effective internal control over
financial reporting in the future, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, investors views of us and, as a result, the value of our common stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act, our management is required to report upon the effectiveness of our internal control
over financial reporting. When and if we are a large accelerated filer or an accelerated filer and are no longer an emerging growth company, each as defined in the Exchange Act, our independent registered public
accounting firm will be required to attest to the effectiveness of our internal control over financial reporting. However, for so long as we remain an emerging growth company, we intend to take advantage of certain exemptions from various reporting
requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404. Once we are no longer an emerging
growth company or, if prior to such date, we opt to no longer take advantage of the applicable exemption, we will be required to include an opinion from our independent registered public accounting firm on the effectiveness of our internal controls
over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing, and possible remediation. To comply with
the requirements of being a reporting company under the Exchange Act, we need to upgrade our systems including information technology; implement additional financial and management controls, reporting systems, and procedures; and hire additional
accounting and finance staff.
Historically, we have not had sufficient accounting and supervisory personnel with the appropriate level of
technical accounting experience and training necessary or adequate formally documented accounting policies and procedures to support, effective internal controls. As we grow, we will hire additional personnel and engage in external temporary
resources and may implement, document and modify policies and procedures to maintain effective internal controls. However, we may identify deficiencies and weaknesses or fail to remediate previously identified deficiencies in our internal controls.
If material weaknesses or deficiencies in our internal controls exist and go undetected or unremediated, our financial statements could contain material misstatements that, when discovered in the future, could cause us to fail to meet our future
reporting obligations and cause the price of our common stock to decline.
If securities or industry analysts do not publish research or reports or
publish unfavorable research or reports about our business, our stock price 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, our business, our market or our competitors. We currently have limited research coverage by securities and industry analysts.
If other securities or industry analysts do not commence coverage of our company, the trading price for our stock could be negatively impacted. If one or more of the analysts who covers us downgrades our stock, our stock price would likely decline.
If one or more of these analysts ceases to cover us or fails to regularly publish reports on us, interest in our stock could decrease, which could cause our stock price or trading volume to decline.
We could be subject to securities class action litigation.
In the past, securities class action litigation has often been brought against a company following a decline in the market price of its
securities. This risk is especially relevant for us because pharmaceutical companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of
managements attention and resources, which could harm our business.
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