Item 1. Business.
Overview
We
are a biopharmaceutical company that historically has been focused on the development and commercialization of Locilex
®
(pexiganan cream 0.8%), a novel, first-in-class, broad spectrum, topical antibiotic. Locilex
®
is a chemically
synthesized, 22-amino acid peptide isolated from the skin of the African Clawed Frog. Its novel mechanism of action kills microbial
targets by disrupting the bacterial cell membrane; a process known as cell membrane permeability.
However, in light of
recent clinical trial disappointments in our development programs for Locilex
®
, and our decision to discontinue
its development for the treatment of mild infections of diabetic foot ulcers, we have shifted our strategic emphasis to external
business opportunities not related to developing Locilex
®
. As such, although we continue to describe our intellectual
property assets and programs herein and continue to maintain our intellectual property rights in the U.S. and internationally,
we are no longer pursuing drug development activities for Locilex
®
pending the outcome of the proposed merger with
PLx Pharma Inc. (“PLx Pharma”) and further review of the clinical data from our recently completed Phase 3 program.
Recent Developments
On December 22, 2016, we announced our
entry into a definitive Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with PLx Pharma, pursuant
to which, among other things, subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, a wholly-owned
subsidiary of ours will be merged with and into PLx Pharma, with PLx Pharma continuing as the surviving corporation and a wholly-owned
subsidiary of ours (the “Proposed Merger”). Immediately following the effective time of the Proposed Merger, existing
PLx Pharma stockholders are expected to own approximately 76.75% of the capital stock of the combined company, and existing Dipexium
stockholders are expected to own approximately 23.25% of the capital stock of the combined company, in each case, subject to certain
adjustments set forth in the Merger Agreement related to our cash on a determination date which approaches the closing of the Proposed
Merger.
We expect to consummate the Proposed Merger
in the second quarter of 2017.
We
continue to believe that Locilex
®
has advantages compared to systemic antibiotics and that it may have potential
to be approved in a different clinical indication although our medical and scientific team has yet to identify any such indication
since the clinical trial data was released on October 25, 2016. We believe that the key attributes of Locilex
®
are: (i) it has not generated resistant bacteria systemically; (ii) it has not generated cross resistance with other
antibiotics; (iii) it has demonstrated activity against a broad spectrum of pathogens, including difficult to treat gram
negative, and anaerobic bacteria; (iv) it has not been systemically absorbed; (v) it has not caused any significant
safety or tolerability issues in over 1,500 patients treated, including the recently completed OneStep-1 and OneStep-2 Phase 3
clinical trials; and (vi) it has demonstrated significant success treating multi-drug resistant bacteria in several laboratory
tests and clinical trials performed to date. These attributes lead us to believe that Locilex
®
could be repositioned
to target a different clinical indication despite its failure to achieve any of the primary or secondary endpoints in the OneStep
Phase 3 clinical trials in mild infections of diabetic foot ulcers. If pursued, a restart of clinical trials in a yet-to-be-identified
clinical indication would involve significant risk, resources and time to design and complete a clinical development program that
may very well begin with Phase 1 clinical trials.
Our Business Strategy
We
seek to develop and commercialize Locilex
®
(pexiganan cream 0.8%) either directly or through one or more
potential partnerships. In the light of the disappointing outcomes of our OneStep-1 and OneStep-2 Phase 3 clincial trials of Locilex
®
for the treatment of patients with mild infections of diabetic foot ulcers, we have identified and assessed a broad range
of strategic options, culminating in our decision to enter into the Merger Agreement with PLx Pharma.
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Restart
clinical and regulatory development of Locilex
®
in one or more new clinical indications/Proposed Merger with
PLx Pharma.
Based upon the advice of our research and development consultants, in order to maintain a viable drug development
strategy for Locilex
®
, we need to identify one or more new clinical indications potentially well served by Locilex
®
and restart drug development activities in at least one new indication. Based on the clinicial evidence from the recently
completed OneStep Phase 3 clinical trials, our research and development team has been unable to identify an appropriate clinical
indication that we may target with Locilex
®
for further drug development activities. If identified, a new clinical
and regulatory pathway for Locilex
®
may very well involve restarting with Phase 1 clinical trials and involve significant
resources and risk to get back to Phase 3 clinical trials and beyond. Accordingly, we decided to enter into an agreement
with respect to the Proposed Merger with PLx Pharma. Assuming the Proposed Merger is consummated as planned in the
second quarter of 2017, the combined company will focus its development on PLx Pharma’s product pipeline.
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Seek
value for Locilex
®
either directly through a restart in a new clinical indication or through one
or more partnerships.
Whether or not our Proposed Merger with PLx Pharma is completed as planned, we will continue
to preserve the Locilex
®
asset including by maintaining our patent portfolio and preparing and submitting all required
regulatory submissions while we evaluate whether or not to develop Locilex
®
ourselves or through one or more potential
future partnerships with third parties.
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Because of the high risk nature of restarting
clinical development in a yet-to-be-identified clinical indication within which no clinical trials have been performed to date
using Locilex
®
and the high cost of this endeavor, our board of directors and management team have concluded that
the Proposed Merger with PLx Pharma is a more attractive alternative to preserve and recapture stockholder value.
Corporate Conversion
We were organized originally as a limited liability
company under the laws of the State of Delaware in January 2010. On March 12, 2014, we converted Dipexium Pharmaceuticals, LLC
from a Delaware limited liability company to a Delaware corporation. As a result of the corporate conversion:
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the Class A Membership Interests of Dipexium Pharmaceuticals, LLC
became shares of common stock of Dipexium Pharmaceuticals, Inc. pursuant to a conversion
ratio of seven shares of common stock of Dipexium Pharmaceuticals, Inc. for each
Class A membership interest of Dipexium Pharmaceuticals, LLC previously held.
Accordingly, 767,911 Class A Membership Interests of Dipexium Pharmaceuticals, LLC
issued and outstanding immediately prior to the corporate conversion were converted automatically
into 5,375,377 shares of Dipexium Pharmaceuticals, Inc.;
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all of the outstanding warrants to purchase Class A
Membership Interests of Dipexium Pharmaceuticals, LLC became warrants to purchase
shares of common stock of Dipexium Pharmaceuticals, Inc. in a ratio of seven shares
of common stock of Dipexium Pharmaceuticals, Inc. for each Class A membership
interest of Dipexium Pharmaceuticals, LLC underlying such warrants, with the effect
that warrants to purchase 4,900 Class A Membership Interests of Dipexium Pharmaceuticals, LLC
outstanding immediately prior to the corporate conversion automatically converted into
warrants to purchase 34,300 shares of Dipexium Pharmaceuticals, Inc. upon consummation
of the corporate conversion; and
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the exercise price of all of the outstanding warrants was
adjusted in the same ratio as the seven-for-one conversion ratio noted above such that
all of our outstanding warrants to purchase Class A Membership Interests of Dipexium
Pharmaceuticals, LLC which were exercisable at $60 per Class A membership interest
were automatically adjusted such that the new exercise price for the outstanding warrants
upon consummating the corporate conversion was $8.57 per share, subject to certain adjustments
noted in each of the warrants.
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In connection with the corporate conversion,
Dipexium Pharmaceuticals, Inc. continued to hold all property of Dipexium Pharmaceuticals, LLC and assumed all of the
debts and obligations of Dipexium Pharmaceuticals, LLC. Dipexium Pharmaceuticals, Inc. is governed by a certificate
of incorporation filed with the Delaware Secretary of State and bylaws. On the effective date of the corporate conversion, the
members of the board of directors of Dipexium Pharmaceuticals, LLC became the members of the board of directors of Dipexium
Pharmaceuticals, Inc. and the officers of Dipexium Pharmaceuticals, LLC became the officers of Dipexium Pharmaceuticals, Inc.
The purpose of the corporate conversion was to reorganize our corporate structure so that our company would continue as a corporation
rather than a limited liability company, and so that our existing investors would own our common stock rather than equity interests
in a limited liability company. In order to consummate the corporate conversion, a certificate of conversion was filed with the
Secretary of State of the State of Delaware on March 12, 2014.
Manufacturing and Supply
Historically, we used three contract
manufacturers (or CMOs) to produce Locilex
®
. Our manufacturing supply chain for Locilex
®
started
with PolyPeptide Laboratories, Inc. which manufactures pexiganan, the active pharmaceutical ingredient (API) in Locilex
®
.
At our direction, PolyPeptide Laboratories delivered the API to DPT Laboratories, Inc., which formulated the API into a cream
formulation on our behalf. DPT Laboratories then delivered the formulated product to Almac Group Limited, which labeled, packaged,
and delivered the finished goods for clinical trials as we requested.
In the late 1990s,
the prior sponsor engaged in an FDA review process for a prior formulation of Locilex®. In its 1999 non-approvable letter,
the FDA identified two cGMP manufacturing issues. The first issue concerned the stability of the formulated product. Examination
of the formulated product over time showed evidence of water separation from the cream matrix. The second issue related to the
purity level of the API in the product. The prior source of the API yielded a purity level as low as 95%.
After acquiring the
rights to Locilex®, we developed a detailed product development plan to arrive at an optimized formulation to address these
issues to the satisfaction of the FDA. We believe that the changes we made to the formulation have resolved the previously observed
product separation and impurity levels.
We also scaled up the size of our API lots
and have completed successfully our scale-up of the first formulated batch of Locilex® cream at the 140 kg batch size. The
scale-up was achieved successfully in the view of our manufacturing advisors. We used this commercial-scale batch in the OneStep
Phase 3 trials.
If we are able to identify a clinical and regulatory
pathway forward in light of the recent failure of the OneStep Phase 3 clincial trials, we or a partner who acquires the rights
to Locilex® will have adequate stability data on three cGMP registration batches of product supply. Our stability testing
is conducted in compliance with the
ICH Guideline Q1A(R2): International Conference on Harmonisation of Technical Requirements
for Registration of Pharmaceuticals for Human Use, ICH Harmonised Tripartate Guideline, Stability Testing of New Drug Substances
and Products, Current Step 4 version, Dated 6 February
2003
. The purpose of the stability testing is to provide
evidence on how the quality of a drug substance or drug product varies with time under the influence of a variety of environmental
factors such as temperature, humidity, and light, and to establish a re-test period for the drug substance or a shelf life for
the drug product and recommended storage conditions. Our contract research organizations (or CROs) have confirmed that we have
sufficient stability data on the three cGMP batches of commercial supply to support any new drug development pathway for Locilex®
that may develop or be developed in the future. Our manufacturing experts believe that the stability data supports a shelf life
of at least 24 months for Locilex
®
.
We also believe our
peptide is highly purified. The impurity levels of the API used in our commercial scale batch of Locilex® has been confirmed
to be 99.4% pure for the API used in our cGMP batches.
In
October 2013, we submitted our manufacturing data, including data from the first 30 kg cGMP batch as well as 18-month stability
data on our 30 kg non-cGMP batch, to the FDA, and in December 2013 the FDA indicated in written communications with us that Locilex®’s
stability and purity levels were acceptable for use in our Phase 3 studies. As a result of the aforementioned activities,
we believe we have resolved the stability and purity concerns previously articulated by the FDA. We continued by preparing two
additional cGMP batches of Locilex
®
and monitored
stability over the past several years. In addition, we performed a scale up to a 140 kg batch size, filed relevant stability data
with the FDA and used a portion of this scaled-up batch in our Phase 3 clinical trial program.
Intellectual Property
We hold rights to a U.S. patent covering our
proprietary formulation of Locilex
®
and the method of using it for the treatment of skin and wound infections (U.S.
Patent Number 8,530,409). This patent was granted in September 2013 and expires in the U.S. in June 2032. The patent incorporates
discoveries made by Dow Pharmaceutical Sciences, Inc. (later acquired by Valeant Pharmaceuticals International, Inc.).
The application which gave rise to U.S. Patent No. 8,520,409 was assigned to us in June 2013. In addition, we have filed
a Patent Cooperation Treaty (or PCT) application claiming priority to U.S. Patent No. 8,520,409 that will allow us to seek
corresponding protection outside of the U.S., including in Europe, Japan, China, Australia, and Korea, as well as in other PCT
jurisdictions. We announced in February 2016 that patents were granted by patent offices in Australia and New Zealand and in March
2016 a patent was granted in Japan. In June 2016, July 2016, September 2016 and October 2016, we were notified that a patent was
granted by the patent offices in Hong Kong, Europe, Korea and Israel, respectively. All of these newly issued patents provide
patent protection into 2033. We anticipate completing the national stage patent prosecutions in other international regions throughout
2017.
In addition to this patent, we hold an exclusive
sublicense to the composition-of-matter patent covering the pexiganan technology (U.S. Patent No. 5,912,231) which would
have expired in June 2016 had we not filed an interim patent extension, not including any patent term extension that we expect
to seek under the Drug Price Competition and Patent Term Restoration Act of 1984 (or the Hatch-Waxman Act). We acquired this sublicense
when we acquired the rights to Locilex
®
in April 2010. Our rights to practice the pexiganan technology are originally
derived through a license agreement between Scripps Research Institute (or Scripps), the inventor of the pexiganan technology,
and Multiple Peptide Systems, Inc. (or MPS). MPS then sublicensed the pexiganan technology to the prior sponsor of the pexiganan
program. In October 1996, both of the license and sublicense agreements were amended by Scripps, MPS and the prior sponsor of
Locilex
®
to confirm that the license and sublicense were fully-paid, royalty free and of indefinite duration, with
no further economic obligations for the practice of the pexiganan technology. We filed an interim patent extension on the ’231
patent in June 2016 which was granted by the U.S. Patent and Trademark Office in June 2016.
Although U.S. Patent 5,912,231 supplements our
existing intellectual property portfolio, we are chiefly reliant on our U.S. Patent 8,530,409, which covers the novel formulation
and method of use for Locilex
®
and provides for substantially longer patent coverage than U.S. Patent 5,912,231.
Further, U.S. Patent 8,530,409’s attributes as a topical formulation, its potentially broader scope of coverage and opportunity
for foreign patent protection offer greater benefits to us than U.S. Patent 5,912,231. As such, we have not yet engaged in any
discussions with Scripps regarding a possible patent term extension for U.S. Patent No. 5,912,231. If and when we decide to
apply for an extension, we will we will need to work with Scripps throughout the application process to facilitate its approval.
Competition
The pharmaceutical and biotechnology industry
is characterized by intense competition, rapid product development and technological change. Competition is intense among manufacturers
of prescription pharmaceuticals and other product areas where we may develop and market products in the future. Most of our competitors
are large, well established pharmaceutical or healthcare companies with considerably greater financial, marketing, sales and technical
resources than are available to us. Additionally, many of our competitors have research and development capabilities that may
allow such competitors to develop new or improved products that may compete with Locilex
®
in a clinical setting
that has yet to be identified. Our product could be rendered obsolete or made uneconomical by the development of new products
to treat various acute bacterial skin infections even if Locilex® is proven to work in any such indications.
Our business, financial condition and results
of operations could be materially adversely affected by any one or more of such developments. We cannot assure you that we will
be able to compete successfully against current or future competitors or that competition will not have a material adverse effect
on our business, financial condition and results of operations.
Even if Locilex
®
receives regulatory
approval in a clinical indication other than mild infections of diabetic foot ulcers, of which there can be no assurance, our
competitors’ drugs may be more effective, more effectively marketed and sold, or less costly than Locilex
®
,
and may render our product obsolete or non-competitive before we can recover the expenses of developing and commercializing Locilex
®
.
In addition, some of our competitors have greater
experience than we do in conducting preclinical and clinical trials and obtaining U.S. Food and Drug Administration (“FDA”)
and other regulatory approvals. Accordingly, our competitors may succeed in obtaining FDA or other regulatory approvals for drug
candidates more rapidly than we do. Companies that complete clinical trials, obtain required regulatory agency approvals and commence
commercial sale of their drugs before their competitors may achieve a significant competitive advantage. Locilex
®
therefore may not be commercially competitive with existing products or products under development. Competitors in the dermatology
market generally include some very large international organizations such as Pfizer, Inc., Eli Lilly and Company, Johnson &
Johnson, Merck & Co., and GlaxoSmithKline plc.
History of Locilex
®
In August 1992, the prior sponsor of Locilex
®
,
Magainin, submitted an initial Investigational New Drug (or IND) application for the prior formulation of Locilex
®
to study broad spectrum anti-infective activity for the treatment of superficial and complicated dermatological infections. Another
IND was submitted in November 1993 to cover a new indication for the treatment of DFI. In the late 1990s, the prior sponsor tested
the prior formulation of Locilex
®
, with over 1,000 human subjects exposed without safety concerns, including 835
evaluable patients in two Phase 3 clinical trials. The Phase 3 trial results showed that such prior formulation of topical
Locilex
®
had an approximate 80% response rate measured as resolution or improvement in infection in patients who
under today’s standards would be considered to have Mild or Moderate diabetic foot infections (or DFI).
The FDA Advisory Committee reviewing Locilex
®
at the time unanimously approved the safety of the product, but did not approve its efficacy and recommended an additional
Phase 3 placebo controlled trial. In its 1999 non-approvable letter, the FDA identified certain cGMP manufacturing deficiencies,
namely stability and quality control issues, and questions regarding the comparability of the product used in the Phase 3
program versus that which was produced at commercial scale. We believe that these hurdles and a lack of financing ultimately caused
Magainin (later renamed Genaera Corporation) to deprioritize the product within their product pipeline. MacroChem Corporation
(or MacroChem) licensed the technology in late 2007, after several years of attempting to remediate the manufacturing deficiencies.
In February 2009, MacroChem was acquired by Access Pharmaceuticals, Inc. (or Access), which focused on oncology and oncology
supportive care product candidates. Rights to Locilex
®
reverted to Genaera Liquidating Trust (established to sell
the drug related assets of Genaera Corporation in liquidation) when Access failed to start a Phase 3 trial by the two-year
anniversary of the effective date of the license agreement, triggering a termination right for Genaera Liquidating Trust in December
2009.
In April 2010, we acquired the worldwide
rights to pexiganan, the API in Locilex
®
, and the prior formulation of the product and all related assets
after participating in a public auction for the product conducted by Genaera Liquidating Trust. During the period between
the FDA non-approval letter received in July 1999 and the second half of 2006, SmithKline Beecham Corporation (now part of
GlaxoSmithKline plc) held the exclusive distribution rights to Locilex
®
in the U.S.
In March 2011, we exercised our exclusive option
to buy out the downstream, success-based milestones and royalty obligations related to Locilex
®
and currently own
100% of our product candidate.
In 2015 and the first half of 2016, we successfully
completed two Phase 1 clinical trials, a skin irritation trial and a skin sensitization trial, using Locilex® in healthy volunteers.
In October 2016, we reported that the OneStep-1
and OneStep-2 Phase 3 clinical trials failed to meet any of the primary or secondary endpoints. The OneStep trials were identical
studies conducted simultaneously using Locilex
®
(versus placebo cream with standardized local wound care in both
arms of each study) to treat patients with mild infections of diabetic foot ulcers.
Government Regulation and Product Approval
Governmental authorities in the U.S., at the
federal, state and local level, and other countries extensively regulate, among other things, the research, development, testing,
manufacture, labeling, packaging, promotion, storage, advertising, distribution, marketing and export and import of products such
as those we are developing. Our product candidates must be approved by the FDA through the New Drug Application (or NDA) process
before they may be legally marketed in the U.S. and by the European Medicines Agency (or EMA) through the Marketing Authorisation
Application (or MAA) process before they may be legally marketed in Europe. Our product candidates will be subject to similar
requirements in other countries prior to marketing in those countries. The process of obtaining regulatory approvals and the subsequent
compliance with applicable federal, state, local and foreign statutes and regulations require the expenditure of substantial time
and financial resources.
U.S. Government Regulation
NDA Approval Processes
In the U.S., the FDA regulates drugs under
the Federal Food, Drug, and Cosmetic Act (or FDCA) and implementing regulations. Failure to comply with the applicable U.S. requirements
at any time during the product development process or approval process, or after approval, may subject an applicant to administrative
or judicial sanctions, any of which could have a material adverse effect on us. These sanctions could include:
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refusal to approve pending applications;
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withdrawal of an approval;
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imposition of a clinical hold;
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total or partial suspension of production or distribution;
or
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injunctions, fines, disgorgement, or civil or criminal
penalties.
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The process required by the FDA before a drug may be marketed in
the U.S. generally involves the following:
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completion of nonclinical laboratory tests, animal studies
and formulation studies conducted according to Good Laboratory Practices (or GLPs) or
other applicable regulations;
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submission to the FDA of an IND, which must become effective
before human clinical trials may begin;
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performance of adequate and well-controlled human clinical
trials according to Good Clinical Practices (or GCPs) to establish the safety and efficacy
of the proposed drug for its intended use;
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submission to the FDA of an NDA;
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satisfactory completion of an FDA inspection of the manufacturing
facility or facilities at which the product is produced to assess compliance with current
cGMPs to assure that the facilities, methods and controls are adequate to preserve the
drug’s identity, strength, quality and purity; and
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FDA review and approval of the NDA.
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Once a pharmaceutical candidate is identified
for development, it enters the preclinical or nonclinical testing stage. Nonclinical tests include laboratory evaluations of product
chemistry, toxicity and formulation, as well as animal studies. An IND sponsor must submit the results of the nonclinical tests,
together with manufacturing information and analytical data, to the FDA as part of the IND. Some nonclinical testing may continue
even after the IND is submitted. In addition to including the results of the nonclinical studies, the IND will also include a
protocol detailing, among other things, the objectives of the clinical trial, the parameters to be used in monitoring safety and
the effectiveness criteria to be evaluated if the first phase lends itself to an efficacy determination. The IND automatically
becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, places the IND on clinical
hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin. A clinical
hold may occur at any time during the life of an IND, and may affect one or more specific studies or all studies conducted under
the IND.
All clinical trials must be conducted under
the supervision of one or more qualified investigators in accordance with GCPs. They must be conducted under protocols detailing
the objectives of the trial, dosing procedures, research subject selection and exclusion criteria and the safety and effectiveness
criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND, and progress reports detailing the status
of the clinical trials must be submitted to the FDA annually. Sponsors also must timely report to FDA serious and unexpected adverse
reactions, any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol
or investigation brochure, or any findings from other studies or animal or in vitro testing that suggest a significant risk in
humans exposed to the drug. An institutional review board, or IRB, at each institution participating in the clinical trial must
review and approve the protocol before a clinical trial commences at that institution and must also approve the information regarding
the trial and the consent form that must be provided to each research subject or the subject’s legal representative, monitor
the study until completed and otherwise comply with IRB regulations.
Human clinical trials are typically conducted
in three sequential phases that may overlap or be combined:
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Phase 1.
The drug is initially introduced into
healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism,
distribution and elimination. In the case of some products for severe or life-threatening
diseases, such as cancer, especially when the product may be inherently too toxic to
ethically administer to healthy volunteers, the initial human testing is often conducted
in patients.
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Phase 2.
Clinical trials are performed on a
limited patient population intended to identify possible adverse effects and safety risks,
to preliminarily evaluate the efficacy of the product for specific targeted diseases
and to determine dosage tolerance and optimal dosage.
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Phase 3.
Clinical trials are undertaken to
further evaluate dosage, clinical efficacy and safety in an expanded patient population
at geographically dispersed clinical study sites. These studies are intended to establish
the overall risk-benefit ratio of the product and provide an adequate basis for product
labeling.
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Human clinical trials are inherently uncertain
and Phase 1, Phase 2 and Phase 3 testing may not be successfully completed. The FDA or the sponsor may suspend
a clinical trial at any time for a variety of reasons, including a finding that the research subjects or patients are being exposed
to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if
the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with
unexpected serious harm to patients.
During the development of a new drug, sponsors
are given opportunities to meet with the FDA at certain points. These points may be prior to the submission of an IND, at the
end of Phase 2 and before an NDA is submitted. Meetings at other times may be requested. These meetings can provide an opportunity
for the sponsor to share information about the data gathered to date and for the FDA to provide advice on the next phase of development.
Sponsors typically use the meeting at the end of Phase 2 to discuss their Phase 2 clinical results and present their
plans for the pivotal Phase 3 clinical trial that they believe will support the approval of the new drug. If a Phase 2
clinical trial is the subject of discussion at the end of Phase 2 meeting with the FDA, a sponsor may be able to request
a SPA, the purpose of which is to reach agreement with the FDA on the Phase 3 clinical trial protocol design and analysis
that will form the primary basis of an efficacy claim.
According to published guidance on the SPA
process, a sponsor which meets the prerequisites may make a specific request for a SPA and provide information regarding the design
and size of the proposed clinical trial. The FDA is supposed to evaluate the protocol within 45 days of the request to assess
whether the proposed trial is adequate, and that evaluation may result in discussions and a request for additional information.
A SPA request must be made before the proposed trial begins, and all open issues must be resolved before the trial begins. If
a written agreement is reached, it will be documented and made part of the record. The agreement will be binding on the FDA and
may not be changed by the sponsor or the FDA after the trial begins except with the written agreement of the sponsor and the FDA
or if the FDA determines that a substantial scientific issue essential to determining the safety or efficacy of the drug was identified
after the testing began.
Concurrent with clinical trials, sponsors usually
complete additional animal safety studies and also develop additional information about the chemistry and physical characteristics
of the drug and finalize a process for manufacturing commercial quantities of the product in accordance with cGMP requirements.
The manufacturing process must be capable of consistently producing quality batches of the drug and the manufacturer must develop
methods for testing the quality, purity and potency of the drug. Additionally, appropriate packaging must be selected and tested
and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over
its proposed shelf-life.
The results of product development, nonclinical
studies and clinical trials, along with descriptions of the manufacturing process, analytical tests and other control mechanisms,
proposed labeling and other relevant information are submitted to the FDA as part of an NDA requesting approval to market the
product. The submission of an NDA is subject to the payment of user fees, but a waiver of such fees may be obtained under specified
circumstances. The FDA reviews all NDAs submitted to ensure that they are sufficiently complete for substantive review before
it accepts them for filing. It may request additional information rather than accept an NDA for filing. In this event, the NDA
must be resubmitted with the additional information. The resubmitted application also is subject to review before the FDA accepts
it for filing.
Once the submission is accepted for filing,
the FDA begins an in-depth review. NDAs receive either standard or priority review. A drug representing a significant improvement
in treatment, prevention or diagnosis of disease may receive priority review. The FDA may refuse to approve an NDA if the applicable
regulatory criteria are not satisfied or may require additional clinical or other data. Even if such data are submitted, the FDA
may ultimately decide that the NDA does not satisfy the criteria for approval. The FDA reviews an NDA to determine, among other
things, whether a product is safe and effective for its intended use and whether its manufacturing is cGMP-compliant. The FDA
may refer the NDA to an advisory committee for review and recommendation as to whether the application should be approved and
under what conditions. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations.
Before approving an NDA, the FDA will inspect the facility or facilities where the product is manufactured and tested. We anticipate
that our NDA submission, which may technically be classified as an amended NDA (a so-called Class II resubmission), will
address the manufacturing concerns previously articulated by the FDA regarding the prior formulation of Locilex
®
.
Should our NDA be accepted for review, the FDA is supposed to respond within six months of submission.
Recent Changes to the Regulatory Landscape for Anti-Infective
Drugs
The analytic approach of the FDA’s Anti-Infective
Drugs Division has undergone evolution in recent years, primarily driven by concerns that increasingly less effective antibiotics
may have been approved in the last 10 to 15 years. The impact of these changes was a rethinking of how antibiotic efficacy
is measured in clinical trials, and a review of the statistical tools used to analyze the data. In March 2009, the FDA published
a draft guidance entitled “Guidance for Industry Community-Acquired Bacterial Pneumonia: Developing Drugs for Treatment”
and in August 2010, it published draft guidance (subsequently published as final guidance in October 2013) entitled “Guidance
for Industry Acute Bacterial Skin and Skin Structure Infections: Developing Drugs for Treatment” (or 2010 Guidance). The
purpose of this guidance was to address many of the uncertainties regarding what the FDA expected from sponsors and clinical trials
for the indications of acute bacterial skin and skin structure infections and community-acquired bacterial pneumonia.
The FDA asked sponsors to include additional
measurements in their evaluation of efficacy that the FDA believes are more objective and less susceptible to interpretation by
investigators. Non-inferiority comparisons of drugs are the standards for antibiotics, and non-inferiority margins are the margins
used in the statistical analysis comparing two treatment arms in a study. These are the statistical margins or rules used to distinguish
the degree of potential difference between two antibiotics in a study. In September 2010, one month after issuing the 2010 Guidance,
the FDA approved the first antibiotic NDA reviewed pursuant to these new endpoints and non-inferiority margins. The clinical protocol
that was reviewed by the FDA in support of our SPA with the FDA includes provisions that are consistent with the 2010 Guidance,
as well as the FDA’s final guidance published in October 2013.
Expedited Review and Approval
The FDA has various programs, including Fast
Track, priority review, and accelerated approval, which are intended to expedite or simplify the process for reviewing drugs,
and/or provide for the approval of a drug on the basis of a surrogate endpoint. Even if a drug qualifies for one or more of these
programs, the FDA may later decide that the drug no longer meets the conditions for qualification or that the time period for
FDA review or approval will be shortened. Generally, drugs that are eligible for these programs are those for serious or life-threatening
conditions, those with the potential to address unmet medical needs and those that offer meaningful benefits over existing treatments.
For example, Fast Track is a process designed to facilitate the development and expedite the review of drugs to treat serious
or life-threatening diseases or conditions and fill unmet medical needs. Priority review is designed to give drugs that offer
major advances in treatment or provide a treatment where no adequate therapy exists an initial review within six months as compared
to a standard review time of ten months.
Although Fast Track and priority review do
not affect the standards for approval, the FDA will attempt to facilitate early and frequent meetings with a sponsor of a Fast
Track designated drug and expedite review of the application for a drug designated for priority review. Accelerated approval,
which is described in Subpart H of 21 CFR Part 314, provides for an earlier approval for a new drug that is intended
to treat a serious or life-threatening disease or condition and that fills an unmet medical need based on a surrogate endpoint.
A surrogate endpoint is a laboratory measurement or physical sign used as an indirect or substitute measurement representing a
clinically meaningful outcome. As a condition of approval, the FDA may require that a sponsor of a product candidate receiving
accelerated approval perform post-marketing clinical trials.
In the Food and Drug Administration Safety
and Innovation Act (or FDASIA), which was signed into law in July 2012, Congress encouraged the FDA to utilize innovative and
flexible approaches to the assessment of products under accelerated approval. The law required the FDA to issue related draft
guidance within a year after the law’s enactment and also promulgate confirming regulatory changes. In June 2013, the FDA
published a draft Guidance for Industry entitled, “Expedited Programs for Serious Conditions—Drugs and Biologics”
which provides guidance on FDA programs that are intended to facilitate and expedite development and review of new drugs as well
as threshold criteria generally applicable to concluding that a drug is a candidate for these expedited development and review
programs. In addition to the Fast Track, accelerated approval and priority review programs discussed above, the FDA also provided
guidance on a new program for Breakthrough Therapy designation. A request for Breakthrough Therapy designation should be submitted
concurrently with, or as an amendment to an IND. FDA has already granted this designation to around 30 new drugs and recently
approved a couple of Breakthrough Therapy designated drug.
Patent Term Restoration and Marketing Exclusivity
Depending upon the timing, duration and specifics
of FDA approval of the use of our drug candidates, some of our U.S. patents may be eligible for limited patent term extension
under the Hatch-Waxman Act. The Hatch-Waxman Act permits 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, patent term restoration cannot extend the
remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term restoration
period is generally one-half the time between the effective date of an IND, and the submission date of an NDA, plus the time between
the submission date of an NDA and the approval of that application. Only one patent applicable to an approved drug is eligible
for the extension and the application for extension must be made prior to expiration of the patent. The United States Patent and
Trademark Office, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration.
In the future, we intend to apply for restorations of patent term for some of our currently owned or licensed patents to add patent
life beyond their current expiration date, depending on the expected length of clinical trials and other factors involved in the
submission of the relevant NDA.
Market exclusivity provisions under the FDCA
also can delay the submission or the approval of certain applications. The FDCA provides a five-year period of non-patent marketing
exclusivity within the U.S. to the first applicant to gain approval of an NDA for a new chemical entity. A drug is a new chemical
entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion
responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an abbreviated
new drug application (or ANDA) or a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant
does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted
after four years if it contains a certification of patent invalidity or non-infringement. The FDCA also provides three years of
marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an approved NDA if new clinical investigations, other than bioavailability
studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application,
for example, for new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the conditions
associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the original
active agent. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA; however, an applicant
submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate
and well-controlled clinical trials necessary to demonstrate safety and effectiveness.
Post-approval Requirements
Once an approval is granted, the FDA may withdraw
the approval if compliance with regulatory requirements is not maintained or if problems occur after the product reaches the market.
Later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal
of the product from the market. After approval, some types of changes to the approved product, such as adding new indications,
manufacturing changes and additional labeling claims, are subject to further FDA review and approval. In addition, the FDA may
require testing and surveillance programs to monitor the effect of approved products that have been commercialized, and the FDA
has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs.
Any drug products manufactured or distributed
by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including, among other things:
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record-keeping requirements;
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reporting of adverse experiences with the drug;
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providing the FDA with updated safety and efficacy information;
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drug sampling and distribution requirements;
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notifying the FDA and gaining its approval of specified
manufacturing or labeling changes; and
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complying with FDA promotion and advertising requirements.
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Drug manufacturers and other entities involved
in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and certain state
agencies, and are subject to periodic unannounced inspections by the FDA and some state agencies for compliance with cGMP and
other laws.
We rely, and expect to continue to rely, on
third parties for the production of clinical and commercial quantities of our products. Future FDA and state inspections may identify
compliance issues at the facilities of our contract manufacturers that may disrupt production or distribution, or require substantial
resources to correct.
From time to time, legislation is drafted,
introduced and passed in Congress that could significantly change the statutory provisions governing the approval, manufacturing
and marketing of products regulated by the FDA. In addition, FDA regulations and guidance are often revised or reinterpreted by
the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative
changes will be enacted, or FDA regulations, guidance or interpretations changed or what the impact of such changes, if any, may
be.
Regulation Outside of the U.S.
In addition to regulations in the U.S., we
will be subject to regulations of other countries governing clinical trials and commercial sales and distribution of our products.
Whether or not we obtain FDA approval for a product, we must obtain approval by the comparable regulatory authorities of countries
outside of the U.S. before we can commence clinical trials in such countries and approval of the regulators of such countries
or economic areas, such as the E.U., before we may market products in those countries or areas. The approval process and requirements
governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from place to place, and the
time may be longer or shorter than that required for FDA approval.
Under E.U. regulatory systems, a company may
submit marketing authorization applications either under a centralized or decentralized procedure. The centralized procedure,
which is compulsory for medicines produced by biotechnology or those medicines intended to treat AIDS, cancer, neurodegenerative
disorders or diabetes and optional for those medicines which are highly innovative, provides for the grant of a single marketing
authorization that is valid for all E.U. member states. The decentralized procedure provides for mutual recognition of national
approval decisions. Under this procedure, the holder of a national marketing authorization may submit an application to the remaining
member states. Within 90 days of receiving the applications and assessments report, each member state must decide whether
to recognize approval. If a member state does not recognize the marketing authorization, the disputed points are eventually referred
to the European Commission, whose decision is binding on all member states.
Reimbursement
Sales of our products will depend, in part,
on the extent to which the costs of our products will be covered by third-party payors, such as government health programs, commercial
insurance and managed healthcare organizations. These third-party payors are increasingly challenging the prices charged for medical
products and services. Additionally, the containment of healthcare costs has become a priority of federal and state governments
and the prices of drugs have been a focus in this effort. The U.S. government, state legislatures and foreign governments have
shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement
and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption
of more restrictive policies in jurisdictions with existing controls and measures, could further limit our net revenue and results.
If these third-party payors do not consider our products to be cost-effective compared to other therapies, they may not cover
our products after approved as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow
us to sell our products on a profitable basis.
The Medicare Prescription Drug, Improvement,
and Modernization Act of 2003 (or MMA) imposed new requirements for the distribution and pricing of prescription drugs for Medicare
beneficiaries. Under Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private entities which
will provide coverage of outpatient prescription drugs. Part D plans include both stand-alone prescription drug benefit plans
and prescription drug coverage as a supplement to Medicare Advantage plans. Unlike Medicare Part A and B, Part D coverage
is not standardized. Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and
each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However,
Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D
drugs, though not necessarily all the drugs in each category or class. Any formulary used by a Part D prescription drug plan
must be developed and reviewed by a pharmacy and therapeutic committee. Government payment for some of the costs of prescription
drugs may increase demand for our products for which we receive marketing approval. However, any negotiated prices for our products
covered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain. Moreover, 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 payment rates. Any reduction in payment that results from the MMA may result in a similar reduction
in payments from non-governmental payors.
The American Recovery and Reinvestment Act
of 2009 provides funding for the federal government to compare the effectiveness of different treatments for the same illness.
A plan for the research will be developed by the Department of Health and Human Services, the Agency for Healthcare Research and
Quality and the National Institutes for Health, and periodic reports on the status of the research and related expenditures will
be made to Congress. Although the results of the comparative effectiveness studies are not intended to mandate coverage policies
for public or private payors, it is not clear what effect, if any, the research will have on the sales of any product, if any
such product or the condition that it is intended to treat is the subject of a study. It is also possible that comparative effectiveness
research demonstrating benefits in a competitor’s product could adversely affect the sales of our product candidates. If
third-party payors do not consider our products to be cost-effective compared to other available therapies, they may not cover
our products as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our
products on a profitable basis.
The Patient Protection and Affordable Care
Act, as amended by the Health Care and Education Affordability Reconciliation Act of 2010 (or collectively, the ACA), enacted
in March 2010, is expected to have a significant impact on the health care industry. ACA is expected to expand coverage for the
uninsured while at the same time containing overall healthcare costs. With regard to pharmaceutical products, among other things,
the ACA is expected to expand and increase industry rebates for drugs covered under Medicaid programs and make changes to the
coverage requirements under the Medicare Part D program. We cannot predict the impact of the ACA on pharmaceutical companies,
as many of the ACA reforms require the promulgation of detailed regulations implementing the statutory provisions which has not
yet occurred. In addition, some members of the U.S. Congress have been seeking to overturn at least portions of the legislation
and we expect they will continue to review and assess this legislation and alternative health care reform proposals. Any legal
challenges to the ACA, as well as Congressional efforts to repeal the ACA, add to the uncertainty of the legislative changes enacted
as part of the ACA.
In addition, in some non-U.S. jurisdictions,
the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary
widely from country to country. For example, the E.U. provides options for its member states to restrict the range of medicinal
products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products
for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct
or indirect controls on the profitability of the company placing the medicinal product on the market. There can be no assurance
that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement
and pricing arrangements for any of our products. Historically, products launched in the E.U. do not follow price structures of
the U.S. and generally tend to be significantly lower.
Our Management
Our management team has extensive experience
in leading the development of innovative therapeutics and significant expertise in operational, financial and corporate development
functions. Our co-founder, President and Chief Executive Officer, David P. Luci, Esq., has managed multiple drug development companies
including Bioenvision, Inc. (sold to Genzyme Corporation for $345 million in 2007), MacroChem (sold to Access in 2009),
Access Pharmaceuticals (now named Abeona Therapeutics) and our company. Our co-founder and Executive Chairman, Robert J. DeLuccia,
has extensive product development, sales and marketing experience as well as senior level experience in management and operation
of pharmaceutical and biotechnology companies of various sizes, including Pifzer, Inc. and Sanofi. Collectively, Messrs. Luci
and DeLuccia have over 60 years of combined experience in the pharmaceutical and biotechnology sectors.
Employees
As of December 31, 2016, we had a total of
three employees, all of which are full-time employees. We believe our relationships with our employees and consultants are satisfactory.
We have never experienced employment-related work stoppages and consider that we maintain good relations with our personnel. In
the fourth quarter of 2016 after the failure of the OneStep-1 and OneStep-2 Phase 3 clinical trials, we terminated two employees
and discontinued nearly all open work orders with our medical and scientific consultants, manufacturers, laboratories, and contract
research organizations that specialize in various aspects of drug development including clinical development, preclinical development,
manufacturing and regulatory affairs.
Available Information
Our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to
Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (which we refer to herein as the Exchange
Act), are filed with the Securities and Exchange Commission (or SEC). Such reports and other information that we file with
the SEC are available free of charge on our website at http://dipexiumpharmaceuticals.com and such filings also are available
on the SEC website. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference
Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports,
proxy and information statements and other information regarding issuers that file electronically with the SEC at
http://www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the foregoing references
to the URLs for these websites are intended to be inactive textual references only.
ITEM 1A. RISK FACTORS.
An investment in our common stock involves
a high degree of risk. You should carefully consider the risks described below, together with all of the other information included
in this annual report on Form 10-K, before making an investment decision. If any of the following risks actually occurs, our business,
financial condition or results of operations could suffer. In that case, the trading price of our shares of common stock could
decline and you may lose all or part of your investment. See “Cautionary Note Regarding Forward Looking Statements”
above for a discussion of forward-looking statements and the significance of such statements in the context of this annual report
on Form 10-K.
Risks Related to Dipexium
We have never generated revenues and do not expect to in
the near future. We have a history of operating losses, expects continuing losses and may never become profitable.
In
order to generate revenue, we must develop and commercialize successfully our own product or enter into strategic partnering agreements
with others who can develop and commercialize them successfully, or acquire additional new products that generate or have the
potential to generate revenues. Because of the numerous risks and uncertainties associated with our product development
program and our ability to acquire new products, we are unable to predict when we will be able to generate significant revenue
or become profitable, if at all. We incurred a net loss of $21.3 million for the year ended December 31, 2016.
As of December 31, 2016, our accumulated deficit was $62.4 million. We expect to continue to incur substantial and
continuing losses for the foreseeable future. These losses will increase if we decide to pursue clinical trials of Locilex®
in yet to be identified, new clinical indications or if we were to in-license new products that require further development.
Even if our Locilex® or any new products we may acquire or in-license are introduced commercially, we may never achieve market
acceptance and may never generate sufficient revenues to achieve or sustain future profitability.
Because we have no source of revenue, we must depend on financing
or partnering to sustain our operations. We likely will need to raise substantial additional capital or enter into strategic
partnering agreements to fund our operations and we are very likely unable to raise such funds or enter into strategic partnering
agreements when needed and on acceptable terms because our lead and only product candidate recently failed in Phase 3 clinical
trials.
Developing
products requires substantial amounts of capital. We have not yet identified a potential new clinical and regulatory pathway forward
for Locilex®
and therefore cannot estimate the cost of any such pathway to market. If we are not able to identify a
promising clinical and regulatory pathway forward, it is likely that we will need to raise substantial additional capital or enter
into strategic partnering agreements to fund our operations and it may be unable to raise such funds or enter into strategic partnering
agreements when needed and on acceptable terms, particularly given that Locilex® has recently failed in two Phase 3 clinical
trials.
Our future capital requirements will depend upon
numerous factors, including:
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the
ability to identify a clinical and regulatory pathway forward for Locilex® given
the recent failure in Phase 3 clinical trials in infected diabetic foot ulcers;
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the
progress, timing, cost and results of our yet-to-be identified clinical development program
if we decide to pursue them;
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the
cost, timing and outcome of regulatory actions with respect to our product;
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the
success, progress, timing and costs of our business development efforts to implement
business collaborations, licenses and other business combinations or transactions, and
our efforts to evaluate various strategic alternatives available with respect to
our product.
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our
ability to acquire or in-license additional new products and technologies and the costs
and expenses of such acquisitions or licenses;
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the
timing and amount of any royalties, milestone or other payments we may receive from or
be obligated to pay to potential licensors, licensees and other third parties;
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the
costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and
other intellectual property rights;
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the
emergence of competing products and technologies, and other adverse market developments;
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the
perceived, potential and actual commercial success of our product;
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our
operating expenses; and
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the
resolution of our pending litigation and any amount it may be required to pay in excess
of our directors’ and officers’ liability insurance.
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Our
future capital requirements and projected expenditures are based upon numerous assumptions and subject to many uncertainties, and
actual requirements and expenditures may differ significantly from our projections. To date, we have relied entirely upon
proceeds from sales of our equity securities to finance our business and operations. We likely will need to raise additional
capital to fund our operations. As of December 31, 2016, Dipexium had $16.7 million of cash. We do not have any existing
credit facilities under which we may borrow funds. Absent the receipt of any licensing income or financing, we expect our
cash balance to decrease as we continue to use cash to fund our operations. Assuming the Proposed Merger is completed during
the first half of 2017, we expect our cash as of December 31, 2016 to meet our liquidity requirements through
at least the anticipated close of the Proposed Merger, including the closing condition under the Merger Agreement to have at least
$12.0 million of “cash,” as defined in the Merger Agreement, available upon the closing of the Proposed Merger.
If the Proposed Merger is not completed, we will need to reevaluate our strategic alternatives, which may include continuing to
operate our business as an independent, stand-alone company, a sale of the company, liquidation of the company or other strategic
transaction. Our liquidity position will be dependent upon the strategic alternative selected; however, assuming we do not
enter into another strategic transaction, we expect our cash as of December 31, 2016 will be sufficient to meet our liquidity
requirements for at least the next 12 months. Additional financing would be required should we decide to commence a new clinical
program for Locilex®
in a new, yet-to-be-identified clinical indication. Cash needs to pursue a new clinical indication
cannot even be estimated until a promising new indication for Locilex® to target is identified, if ever.
The October 2016 announcement of the disappointing
results of our prior completed OneStep-1 and OneStep-2 Phase 3 clinical trials has significantly depressed the trading price of
our common stock and harmed our ability to raise additional capital. We can provide no assurance that additional financing
will be available on terms favorable to us, or at all.
We and our management are parties to a lawsuit which, if
adversely decided against, could impact our rights to Locilex®.
In April 2010, we acquired the worldwide rights
to develop pexiganan, the active pharmaceutical ingredient in Locilex®, from Genaera Liquidating Trust, which was put in place
to liquidate the assets of Genaera Corporation. In June 2012, we, along with our two senior executives and several other unrelated
defendants, were sued in the Federal District Court for the Eastern District of Pennsylvania by a former shareholder of Genaera
Corporation and purported to be on behalf of other Genaera Corporation shareholders, alleging, in pertinent part, that our company’s
acquisition of the rights to pexiganan (the active ingredient in Locilex®, and which rights included the rights to the prior
formulation of Locilex®) was for what was alleged to be inadequate consideration, and as a result, it was alleged that we
and our senior executives aided and abetted a breach of fiduciary duty by Genaera Corporation and the Genaera Liquidating Trust
to the former shareholders of Genaera Corporation. It was also alleged that we and our senior executives aided and abetted a breach
of the duty of the trustee at common law and under a certain trust agreement which was alleged to exist and which was executed
by Argyce LLC (or Argyce), as trustee. The agreement called for Argyce to create the Genaera Liquidating Trust pursuant to
which Argyce apparently was appointed to liquidate the assets formerly held by Genaera Corporation. One of these assets was pexiganan,
which we acquired via public auction conducted by Argyce on behalf of the Genaera Liquidating Trust.
The case against our company and our senior
executives was dismissed with prejudice by the Federal District Court, without leave to refile, on August 12, 2013 based
on the argument that Plaintiff’s claims were time barred, and a subsequent motion to reconsider such dismissal was denied by the
Federal District Court. Prior to the dismissal there was no request or action to seek class certification by the plaintiff though
it was purportedly filed on behalf of other former Genaera Corporation shareholders. Plaintiff appealed the dismissal of the suit
as well as the denial of the motion to reconsider to the Third Circuit Appellate Court, which granted Plaintiff’s appeal.
On October 17, 2014, the Third Circuit
Appellate Court, in a 2-1 decision with a strong dissenting opinion, reversed the trial court’s dismissal of Plaintiff’s claims
based on the expiration of the applicable statutes of limitation and remanded the case to the Federal District Court. In a 2-1
decision, the Third Circuit held that more information was necessary to determine when Plaintiff should have been on notice of
his claims to determine the applicability of the discovery rule, which could serve to extend the time frame in which Plaintiff
could bring his claims. Due to the strong dissent, all Defendants filed the necessary documents requesting a petition for rehearing
en banc, by the majority of the Third Circuit justices who are in active service. The Third Circuit denied the request for en
banc hearing and remanded this case to District Court.
Upon remand to the Federal District Court,
all Defendants moved to dismiss the complaint for reasons other than being time barred. The Company and the executives moved for
dismissal based on Plaintiff’s inability to make a case for aiding and abetting a breach of fiduciary duty because there was no
underlying breach and such an aiding and abetting claim requires an element of knowing participation in the fiduciary breach which
cannot be established by Plaintiff.
The District Court held a hearing on this in
September 2015 and the District Court delivered an Order on November 10, 2015 pursuant to which the District Court granted
the Motion to Dismiss filed by each and every defendant including the Company and its executives. In December 2015, Plaintiff
appealed the Federal District Court’s decision to the Third Circuit Appellate Court and we anticipate a decision on whether to
grant Plaintiff’s appeal by the Third Circuit Appellate Court in the first quarter of 2017. The Company will continue to vigorously
defend Plaintiff’s claims on the factual record, which it believes will prove that the Company is not liable to the Plaintiff
in any regard.
If we were to lose such case, our rights to
the prior formulation of Locilex® could be lost, which may impair the commercial viability of our product or the timeline
to potential regulatory approval. If we were required to settle the case, we may lose certain rights to Locilex® or be required
to pay damages, which could have a material adverse effect on our company, our business plans and results of operations.
Our two pivotal OneStep-1 and OneStep-2 clinical trials did
not meet the primary or secondary endpoints, which could continue to harm our business and further disappoint our stockholders
and cause the trading price of our common stock to continue to decrease.
Our lead and only product in development is Locilex® for the
treatment of mildly infected diabetic foot ulcers, for which there is currently no FDA-approved product. In October 2016, we announced
disappointing top-line data from our OneStep-1 and OneStep-2 pivotal Phase 3 clinical trials and both trials failed to meet any
of the primary or secondary endpoints. Currently, management in conjunction with its clinical and regulatory advisors have not
been able to identify a new clinical and regulatory pathway forward although this is subject to ongoing review and evaluation.
No assurance can be given that a promising clinical and regulatory pathway will be identified or that, if identified, any such
pathway could be achieved, without significantly more capital invested in the Company. No assurance can be given that additional
capital would be available or that such capital would be available at acceptable terms.
We
have not yet identified a clinical or regulatory pathway forward for Locilex
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, our only product, and the
likelihood is that Locilex
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will not be approved by regulatory authorities or introduced commercially for at
least several years, if at all.
In October 2016, we released top-line data on our only ongoing clinical
trials, OneStep-1 and OneStep-2, which were two identical Phase 3 clincial trials testing Locilex® in patients with mildly
infected diabetic foot ulcers. Both trials failed to meet all primary and secondary endpoints. We currently are evaluating whether
or not there is any clinical and regulatory pathway forward based on the data from the OneStep trials. Going forward, Locilex®
will require further development, preclinical and clinical testing and investment prior to obtaining required regulatory approvals,
if ever, and commercialization in the United States and abroad, even if a viable regulatory pathway forward is identified. We currently
have no other product candidates. We cannot provide assurance that a new clinical and regulatory pathway will be identified or
that Locilex® will be developed successfully. Even if a viable clinical and regulatory pathway forward is identified, we cannot
provide assurance that Locilex® will:
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prove to be safe and effective in clinical studies;
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meet applicable regulatory standards or obtain required
regulatory approvals;
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demonstrate substantial protective or therapeutic benefits
in the prevention or treatment of any disease;
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be capable of being produced in commercial quantities
at reasonable costs;
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obtain coverage and favorable reimbursement rates from
insurers and other third-party payors; or
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be marketed successfully or achieve market acceptance
by physicians and patients.
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If
we reallocate our resources to acquire one or more new product candidates, we may not be successful in developing such newly acquired
product candidates and we will once again be subject to all the risks and uncertainties associated with research and development
of products and technologies.
We have explored the possibility of
reallocating our resources toward acquiring, by acquisition or in-license, new product candidates. If we decide to
acquire one or more new product candidates, we cannot guarantee that any such acquisition would result in the identification
and successful development of one or more approved and commercially viable products. The development of products and
technologies is subject to a number of risks and uncertainties, including:
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the
time, costs and uncertainty associated with the clinical testing required to demonstrate
the safety and effectiveness of a product candidate to obtain regulatory approvals;
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the
ability to raise sufficient funds to fund the research and development of any one or
more new product candidates;
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the
ability to find third party strategic partners to assist or share in the costs of product
development, and potential dependence on such strategic partners, to the extent Dipexium
may rely on strategic partners for future sales, marketing or distribution;
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the
ability to protect the intellectual property rights associated with any one or more new
product candidates;
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ability
to comply with ongoing regulatory requirements;
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government
restrictions on the pricing and profitability of products in the United States and elsewhere;
and
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the
extent to which third-party payers, including government agencies, private health care
insurers and other health care payers, such as health maintenance organizations, and
self-insured employee plans, will cover and pay for newly approved therapies.
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We have very limited staffing and we are dependent upon key
employees and the limited use of independent contractors, the loss of some of which could affect adversely our operations.
Our success is dependent upon the efforts of a relatively small
management team and staff. We also have engaged independent contractors from time-to-time on an as needed, project by project,
basis. During November 2016, in order to reduce our operating expenses, we terminated all of our major independent contractor
arrangements and reduced the total employee headcount. Such reductions in force, combined with our future business prospects
and financial condition, put us at risk of losing key personnel who we will need going forward to implement our business strategies.
We have no redundancy of personnel in key development areas, including clinical, regulatory, strategic planning and finance.
We have employment arrangements in place with our executive and other officers, but none of these executive and other officers
is bound legally to remain employed with us for any specific term. We do not have key man life insurance policies covering
our executive and other officers or any of our other employees. If key individuals leave our company, our business could
be affected adversely if suitable replacement personnel are not recruited quickly. There is competition for qualified personnel
in the biotechnology and biopharmaceutical industry in the New York, New York area in all functional areas, which makes it difficult
to retain and attract the qualified personnel necessary for any potential turn around or restart of our business. Our financial
condition and recent reductions in force and expense reductions may make it difficult for us to retain current personnel and attract
qualified employees and independent contractors in the future.
Our business is subject to increasingly complex corporate
governance, public disclosure and accounting requirements that could affect adversely our business and financial results.
We are subject to changing rules and regulations of federal
and state governments as well as the stock exchange on which our common stock is listed. These entities, including the SEC
and The NASDAQ Stock Market, continue to issue new requirements and regulations in response to laws enacted by Congress.
In July 2010, the Dodd-Frank Wall Street Reform and Protection Act (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 and The NASDAQ Stock
Market to adopt additional rules and regulations in these areas. Our efforts to comply with these requirements have
resulted in, and are likely to continue to result in, an increase in expenses and a diversion of management’s time from our
other business activities.
The trading price of our common stock has been volatile, and
your investment in our common stock could decline in value.
The price of our common stock has dropped dramatically since the
failure of our OneStep Phase 3 clinical trials, OneStep-1 and OneStep-2, in October 2016 and it is likely that the price of our
common stock will continue to fluctuate in the future. From January 1, 2015 through December 31, 2016, the sale price
of our common stock ranged from $12.38 per share to $1.60 per share. The market price of our common stock may fluctuate significantly
in the future due to a variety of factors, including:
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general
stock market and general economic conditions in the United States and abroad, not directly
related to our company or our business;
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actual
or anticipated governmental agency actions, including in particular decisions or actions
by the FDA or FDA advisory committee panels with respect to other antibiotic candidates
in development;
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termination
of the previously announced Proposed Merger with PLx Pharma;
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entering
into new strategic partnering arrangements;
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developments
concerning our efforts to identify and implement strategic opportunities and the terms
and timing of any resulting transactions;
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public
concern as to the safety or efficacy of or market acceptance of products developed by
us or our competitors;
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our cash and our need and ability to obtain additional
financing;
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equity
sales by us to fund our operations;
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the
resolution of our pending litigation matter;
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developments
or disputes concerning patents or other proprietary rights;
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period-to-period fluctuations in our financial results,
including our cash, operating expenses, cash burn rate or revenues;
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loss
of key management;
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common
stock sales and purchases in the public market by one or more of our larger stockholders,
officers or directors;
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reports
issued by securities analysts regarding our common stock and articles published regarding
our business and/or products;
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changes
in the market valuations of other life science or biotechnology companies; and
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other financial announcements, including delisting of
our common stock from The NASDAQ Capital Market, review of any of our filings by the SEC, changes in accounting treatment or restatement
of previously reported financial results, delays in our filings with the SEC or our failure to maintain effective internal control
over financial reporting.
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In addition, the occurrence of any of the risks described in this
report or in subsequent reports we file with or submit to the SEC from time to time could have a material and adverse impact on
the market price of our common stock. Securities class action litigation is sometimes brought against a company following
periods of volatility in the market price of our securities or for other reasons. Securities litigation, whether with or
without merit, could result in substantial costs and divert management’s attention and resources, which could harm our business
and financial condition, as well as the market price of our common stock.
We
do not intend to pay any cash dividends in the foreseeable future; and, therefore, any return on an investment in our common stock
must come from increases in the fair market value and trading price of our common stock.
We do not intend to pay any cash dividends
in the foreseeable future; and, therefore, any return on an investment in our common stock must come from increases in the fair
market value and trading price of our common stock.
Risks Related to the Proposed Merger between
us and PLx Pharma
Our
stockholders and the stockholders of PLx Pharma may not approve the Proposed Merger of the two companies.
We have signed a Merger Agreement with PLx Pharma, pursuant to which
we have agreed to merge with PLx Pharma subject to among other closing conditions, the approval of the stockholders of both companies.
Although we believe the Proposed Merger is in the best interests of our and PLx Pharma’s stockholders, one or both companies
may not be able to obtain the stockholder vote required to approve the Proposed Merger. If our stockholders or the stockholders
of PLx Pharma do not approve the Proposed Merger, we will pursue other strategic alternatives or potentially pursue a dissolution
our company.
The
issuance of shares of our common stock to PLx Pharma stockholders in connection with the Proposed Merger will dilute substantially
the voting power of our current stockholders.
Pursuant to the terms of the Merger Agreement,
it is anticipated that we will issue shares of our common stock to PLx Pharma stockholders representing approximately 76% of the
outstanding shares of common stock of the combined company as of immediately following completion of the Proposed Merger, assuming
our cash is $12.5 million as of the determination date. After such issuance, the shares of our common stock outstanding immediately
prior to completion of the Proposed Merger will represent 23.25% of the outstanding shares of common stock of the combined company
as of immediately following completion of the Proposed Merger. These ownership percentages may change depending upon the amount
of our cash as of a determination date prior to completion of the Proposed Merger. Accordingly, the issuance of shares of
our common stock to PLx Pharma stockholders in connection with the Proposed Merger will reduce significantly the relative voting
power of each share of our common stock held by our current stockholders. Consequently, our stockholders as a group will have
significantly less influence over the management and policies of the combined company after the completion of the Proposed Merger
than prior to completion of the Proposed Merger.
The
exchange ratio in the Merger Agreement is subject to adjustment based on our cash as of a determination date prior to completion
of the Proposed Merger, which could dilute further the ownership of our stockholders in the combined company.
Subject to the terms and conditions of the
Merger Agreement, at the effective time of and as a result of the Proposed Merger, each share of PLx Pharma capital stock issued
and outstanding immediately prior to the effective time of the Proposed Merger will be converted into the right to receive that
number of shares of our common stock, if any, as determined pursuant to the exchange ratio described in the Merger Agreement.
The exchange ratio is subject to potential adjustment as described in the Merger Agreement depending upon the amount of our “cash,”
as defined in the Merger Agreement and generally consisting of our cash including certain credits for deal-related
expenses and security deposits, as of a determination date prior to the closing date of the Proposed Merger. If we have more than
$12.5 million of cash as of the determination date, then the percentage ownership of our current stockholders will be 23.25% in
the combined company. If we have less than $12.5 million of cash as of the determination date but more than $12.0 million,
then the percentage ownership of our current stockholders will be 22.5% of the combined company, which would constitute further
dilution for our stockholders in the combined company. In addition, one of the conditions to PLx Pharma’s obligations
to complete the Proposed Merger is our cash as of the closing date being no less than $12.0 million as calculated and as adjusted
pursuant to the provisions of the Merger Agreement. The items that will constitute our cash at the determination date set
forth in the Merger Agreement are subject to a number of factors, some of which are outside our control and many of which are
outside the control of PLx Pharma.
The
exchange ratio is not adjustable based on issuances by us of additional shares of our common stock either upon the exercise of
options or warrants or otherwise, which issuances would result in additional dilution to our stockholders.
As of December 31, 2016, we had outstanding
options to purchase an aggregate of 1,445,013 million shares of our common stock and warrants to purchase an aggregate
of approximately 10,500 shares of our common stock. We are not prohibited under the terms of the Merger Agreement from issuing
additional equity securities under certain circumstances, including securities issued pursuant to the exercise of outstanding
options or warrants or to certain vendors or suppliers. It is possible that prior to completion of the Proposed Merger,
we may issue additional equity securities, which would result in additional dilution to our stockholders.
The
market price of our common stock following the Proposed Merger may decline as a result of the Proposed Merger.
The market price of our common stock may decline
as a result of the Proposed Merger for a number of reasons, including if:
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investors
react negatively to the prospects of the combined organization’s business and prospects
from the Proposed Merger;
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third
parties may seek to terminate and/or renegotiate their relationships with us as a result
of the Proposed Merger, whether pursuant to the terms of their existing agreements with
us or otherwise;
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the
effect of the Proposed Merger on the combined organization’s business and prospects
is not consistent with the expectations of financial or industry analysts; or
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the
combined organization does not achieve the perceived benefits of the Proposed Merger
as rapidly or to the extent anticipated by financial or industry analysts.
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Failure
to complete the Proposed Merger could negatively impact our business, financial condition or results of operations or the trading
price of our common stock.
The completion of the Proposed Merger is subject
to a number of conditions and there can be no assurance that the conditions to the completion of the Proposed Merger will be satisfied.
If the Proposed Merger is not completed, we will be subject to several risks, including:
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the
current trading price of our common stock may reflect a market assumption that the Proposed
Merger will occur, meaning that a failure to complete the Proposed Merger could result
in a decline in the trading price of our common stock;
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certain
of our executive officers and/or directors may seek other employment opportunities, and
the departure of any of our executive officers and the possibility that the Company would
be unable to recruit and hire an executive could impact negatively our business and operating
result;
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our
board of directors will need to reevaluate our strategic alternatives, which alternatives
may include a sale of the Company, liquidation of the Company or other strategic transaction;
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we
may be required to pay a termination fee of $700,000 to PLx Pharma if the Merger Agreement
is terminated by PLx Pharma or by us under certain circumstances;
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we
have incurred and are expected to continue to incur substantial transaction costs in connection
with the Proposed Merger whether or not the Proposed Merger is
completed;
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we
would not realize any of the anticipated benefits of having completed the Proposed Merger;
and
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pursuant to the Merger Agreement, we are subject to certain
restrictions on the conduct of our business prior to completion of the Proposed Merger, which restrictions could adversely affect
our ability to realize certain of our business strategies or take advantage of certain business opportunities.
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If the Proposed Merger is not completed, these
risks may materialize and affect materially and adversely our business, financial condition, results of operations, or the trading
price of our common stock.
We
have incurred and will continue to incur significant transaction costs in connection with the Proposed Merger, some of which will
be required to be paid even if the Proposed Merger is not completed.
We have incurred and will continue to incur
significant transaction costs in connection with the Proposed Merger. These costs are primarily associated with the fees
of our attorneys, accountants and financial advisors. We will be required to pay most of these costs even if the Proposed
Merger is not completed. In addition, if the Merger Agreement is terminated due to certain triggering events specified in
the Merger Agreement, we may be required to pay PLx Pharma a termination fee of $700,000. The Merger Agreement also provides
that under specified circumstances, if the Proposed Merger is completed, the combined company will bear our transaction costs
as well as those of PLx Pharma in connection with the Proposed Merger, including financial advisor, legal and accounting fees
and expenses.
Third
party lawsuits may be filed against us in connection with the Proposed Merger which may be frivolous but costly to defend.
Third parties may assert claims against us
alleging that the terms of the Proposed Merger are somehow unfair or inappropriate. Although our board of directors and management
team may disagree, any claims against us, with or without merit, as well as claims initiated by us against third parties, can
be time-consuming and expensive to defend or prosecute and resolve. We cannot assure you that litigation asserting claims against
the Company will not be initiated or that we would prevail in any litigation. We cannot assure you that the Proposed Merger with
PLx Pharma would close if and to the extent a claim or claims were filed against the Company in this regard.
Because
the Proposed Merger will be completed after the date of our annual meeting of stockholders, it is possible under certain limited
circumstances described below that at the time of the annual meeting, our stockholders will not know the exact number of shares
of our common stock that the PLx Pharma stockholders will receive upon completion of the Proposed Merger.
Subject to the terms of the Merger Agreement,
at the effective time of the Proposed Merger, each share of PLx Pharma common stock issued and outstanding immediately prior to
the Proposed Merger will be canceled, extinguished and automatically converted into the right to receive that number of shares
of our common stock as determined pursuant to the exchange ratio described in the Merger Agreement. The exchange ratio depends
on our cash as of a determination date prior to completion of the Proposed Merger. The determination date is defined as
the date that is three days prior to the closing date. Under the Merger Agreement, our “cash” is defined as
generally consisting of our cash plus certain credits for transaction-related costs and security deposits, as of
a determination date prior to the closing date of the Proposed Merger.
Some
of our directors and executive officers have interests in the Proposed Merger that are different from, or in addition to, those
of our other stockholders.
When considering the recommendation by our
board of directors that our stockholders vote “for” each of the proposals being submitted to our stockholders at the
annual meeting of our stockholders, our stockholders should be aware that certain of our directors and executive officers have
arrangements that provide them with interests in the Proposed Merger that are different from, or in addition to, those of our
other stockholders. For instance, in connection with the Proposed Merger, David P. Luci, Esq., Dipexium’s President
& CEO and a current member of our board of directors, will continue to serve as a director of the combined company following
completion of the Proposed Merger and will receive cash and equity compensation in consideration for such service. The employment
of our three executive officers will terminate immediately following completion of the Proposed Merger and they will be entitled
to receive severance cash payments ranging from $213,000 to $1,238,000, and other severance benefits such as continuing health
insurance, in connection with such termination. Our directors and executive officers also have certain rights to indemnification
and to directors’ and officers’ liability insurance that will be provided by the combined company following completion
of the Proposed Merger. Our board of directors was aware of these potential interests and considered them in making its
recommendations to approve the proposals being submitted to our stockholders at the special meeting of our stockholders.
Certain
provisions of the Merger Agreement may discourage third parties from submitting alternative takeover proposals, including proposals
that may be superior to the arrangements contemplated by the Merger Agreement.
The terms of the Merger Agreement prohibit
each of us and PLx Pharma from soliciting alternative takeover proposals or cooperating with persons making unsolicited takeover
proposals, except in limited circumstances when our board of directors determines in good faith that an unsolicited alternative
takeover proposal is or is reasonably likely to lead to a superior takeover proposal and is reasonably capable of being consummated
and that failure to cooperate with the proponent of the proposal could reasonably be considered a breach of our board of directors’
fiduciary duties. The PLx Pharma board of directors is not permitted under any circumstances to solicit alternative takeover proposals
or cooperate with any person making unsolicited takeover proposals. In addition, if we or PLx Pharma terminate the Merger Agreement
under certain circumstances, we or PLx Pharma would be required to pay a termination fee of $700,000 or $500,000, respectively,
to the other party. This termination fee may discourage third parties from submitting alternative takeover proposals to us or
PLx Pharma or their stockholders, and may cause the respective boards of directors to be less inclined to recommend an alternative
proposal.
Because
the lack of a public market for shares of PLx Pharma capital stock makes it difficult to evaluate the fairness of the Proposed
Merger, PLx Pharma stockholders may receive consideration in the Proposed Merger that is greater than the fair value of the shares
of capital stock of PLx Pharma.
PLx Pharma is privately held and its outstanding
capital stock is not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair
value of PLx Pharma or its shares of capital stock. Since the percentage of PLx Pharma’s equity to be issued to the PLx
Pharma stockholders was determined based on negotiations between the parties, it is possible that the value of our common stock
to be issued in connection with the Proposed Merger will be greater than the fair value of PLx Pharma.
We
may waive one or more of the conditions to the Proposed Merger without resoliciting stockholder approval for the Proposed Merger.
Certain conditions to our obligations to complete
the Proposed Merger may be waived, in whole or in part, to the extent legally allowed, either unilaterally or by agreement between
us and PLx Pharma. In the event of a waiver of a condition, our board of directors will evaluate the materiality of any such waiver
to determine whether amendment of the proxy statement/prospectus and resolicitation of proxies is necessary. In the event that
our board of directors determines any such waiver is not significant enough to require resolicitation of stockholders, it will
have the discretion to complete the Proposed Merger without seeking further stockholder approval. The conditions requiring
the approval of each company’s stockholders cannot, however, be waived.
Risks Related to the Combined Company if the
Proposed Merger is Completed
The
success of the Proposed Merger will depend, in large part, on the ability of the combined company following completion of the
Proposed Merger to realize the anticipated benefits from combining our business with the business of PLx Pharma.
The Proposed Merger involves the integration
of two companies that previously have operated independently with principal offices in two distinct locations. Due to legal restrictions,
we and PLx Pharma are able to conduct only limited planning regarding the integration of the two companies prior to completion
of the Proposed Merger. Significant management attention and resources will be required to integrate the two companies after completion
of the Proposed Merger. The failure to integrate successfully and to manage successfully the challenges presented by the integration
process may result in the combined company’s failure to achieve some or all of the anticipated benefits of the Proposed
Merger.
Potential difficulties that may be encountered
in the integration process include the following:
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using
the combined company’s cash and other assets efficiently to develop the business
of the combined company;
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appropriately
managing the liabilities of the combined company;
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potential
unknown or currently unquantifiable liabilities associated with the Proposed Merger and
the operations of the combined company;
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potential
unknown and unforeseen expenses, delays or regulatory conditions associated with the
Proposed Merger; and
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performance
shortfalls at one or both of the companies as a result of the diversion of management’s
attention caused by completing the Proposed Merger and integrating the companies’
operations.
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Delays in the integration process could adversely
affect the combined company’s business, financial results, financial condition and stock price following the Proposed Merger.
Even if the combined company were able to integrate the business operations successfully, there can be no assurance that this
integration will result in the realization of the full benefits of synergies, innovation and operational efficiencies that may
be possible from this integration and that these benefits will be achieved within a reasonable period of time.
The
Proposed Merger will result in changes to the combined company’s board of directors and the combined company may pursue
different strategies than we may have pursued independently.
If
we and PLx Pharma complete the Proposed Merger, the composition of the combined company’s board of directors will change
in accordance with the Merger Agreement. Following completion of the Proposed Merger, the combined company’s board of directors
will consist of seven members, including David P. Luci, Esq., our President & CEO, from our current board of directors. Currently,
it is anticipated that the combined company will continue to advance the product development efforts and business strategies of
PLx Pharma. However, because the composition of the board of directors of the combined company will consist of directors from
both our company and PLx Pharma, the combined company may determine to pursue certain business strategies that we would not have
pursued independently.
Ownership
of the combined company’s common stock may be highly concentrated, and it may prevent our stockholders from influencing
significant corporate decisions and may result in conflicts of interest that could cause the combined company’s stock price
to decline.
Upon completion of the Proposed Merger, PLx Pharma’s directors,
executive officers continuing with the combined company and stockholders, together with their respective affiliates, are expected
to beneficially own or control a majority of the combined company. Accordingly, these directors, executive officers and their
affiliates and stockholders, acting individually or as a group, will have substantial influence over the outcome of a corporate
action of the combined company requiring stockholder approval, including the election of directors, any merger, consolidation or
sale of all or substantially all of the combined company’s assets or any other significant corporate transaction. These
stockholders also may exert influence in delaying or preventing a change in control of the combined company, even if such change
in control would benefit the other stockholders of the combined company. In addition, the significant concentration of stock
ownership may affect adversely the market value of the combined company’s common stock due to investors’ perception
that conflicts of interest may exist or arise.
The
combined company’s ability to utilize our or PLx Pharma’s net operating loss and tax credit carryforwards in the
future is subject to substantial limitations and may be further limited as a result of the Proposed
Merger.
Under Section 382 of the Internal Revenue
Code of 1986, as amended (the Code), if a corporation undergoes an “ownership change” (generally defined as a greater
than 50 percent change (by value) in its equity ownership over a three-year period), the corporation’s ability to use its
pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited.
Further, if our historic business is not treated as being continued by the combined entity for the two-year period beginning on
the date of the Proposed Merger (referred to as the “continuity of business requirement”), the pre-transaction net
operating loss carryforward deductions become substantially reduced or unavailable for use by the surviving corporation in the
transaction. It is expected that the Proposed Merger with PLx Pharma will result in an “ownership change” of our company.
Accordingly, the combined company’s ability to utilize our net operating loss and tax credit carryforwards may be substantially
limited. These limitations, in turn, could result in increased future tax payments for the combined company, which could
have a material adverse effect on the business, financial condition or results of operations of the combined company.
Under Section 384 of the Code, available
net operating loss carryovers of ours or PLx Pharma may not be available to offset certain gains arising after the Proposed Merger
from assets held by the other corporation at the effective time of the Proposed Merger. This limitation will apply to the
extent that the gain is attributable to an unrealized built-in-gain in our assets or the assets of PLx Pharma existing at the
effective time of the Proposed Merger. To the extent that any such gains are recognized in the five year period after the
Proposed Merger upon the disposition of any such assets, the net operating loss carryovers of the other corporation will not be
available to offset such gains (but the net operating loss carryovers of the corporation that owned such assets will not be limited
by Section 384 although they may be subject to other limitations under Section 382 as described above).
The
price of our common stock after the Proposed Merger is completed may be affected by factors different from those currently affecting
the price of our common stock.
Our business differs significantly from the
business of PLx Pharma and, accordingly, the results of operations of the combined company and the trading price of the combined
company’s common stock following completion of the Proposed Merger may be affected significantly by factors different from
those currently affecting the independent results of our ongoing operations.
The
NASDAQ Capital Market considers the anticipated Proposed Merger of Dipexium and PLx Pharma to be a business combination with a
non-NASDAQ entity, resulting in a change in control of our company; and, therefore, has required that we submit a new initial
listing application, which requires certain actions on the part of the combined company which may not be successful and, if unsuccessful,
could make it more difficult for holders of shares of the combined company to sell their shares.
The NASDAQ Capital Market considers the Proposed
Merger to be a business combination with a non-NASDAQ entity, resulting in a change in control of our company and has required
that we submit a new initial listing application. The NASDAQ Capital Market may not approve our new initial listing application
for The NASDAQ Capital Market on a timely basis, or at all. If this occurs and the Proposed Merger is still completed, stockholders
may have difficulty converting their investments into cash effectively. Additionally, as part of the new initial listing
application, we may be required to submit, among other things, a plan for the combined company to effect a reverse stock split.
A reverse stock split likely would increase the per share trading price by an as yet undetermined multiple. The change in
share price may affect the volatility and liquidity of the combined company’s stock, as well as the marketplace’s
perception of the stock. As a result, the relative price of the combined company’s stock may decline and/or fluctuate
more than in the past, and stockholders may have trouble converting their investments in the combined company into cash effectively.
The
combined company’s management will be required to devote substantial time to comply with public company regulations.
As a public company, the combined company will
incur significant legal, accounting and other expenses that PLx Pharma did not incur as a private company. The Sarbanes-Oxley
Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act as well as rules implemented by the SEC and The
NASDAQ Capital Market, impose various requirements on public companies, including those related to corporate governance practices.
The combined company’s management and other personnel will need to devote a substantial amount of time to these requirements.
Certain members of PLx Pharma’s management, which will continue as the management of the combined company, do not have significant
experience in addressing these requirements. Moreover, these rules and regulations will increase the combined company’s
legal and financial compliance costs relative to those of PLx Pharma and will make some activities more time consuming and costly.
After
completion of the Proposed Merger, the combined company will possess not only all of the assets but also all of the liabilities
of ours and of PLx Pharma. Discovery of previously undisclosed or unknown liabilities could have an adverse effect on the combined
company’s business, operating results and financial condition.
Acquisitions involve risks, including inaccurate
assessment of undisclosed, contingent or other liabilities or problems. After completion of the Proposed Merger, the combined
company will possess not only all of the assets, but also all of the liabilities of both companies. Although we conducted
a due diligence investigation of PLx Pharma and its known and potential liabilities and obligations, and PLx Pharma conducted
a due diligence investigation of our company and its known and potential liabilities and obligations, it is possible that undisclosed,
contingent or other liabilities or problems may arise after completion of the Proposed Merger, which could have an adverse effect
on the combined company’s business, operating results and financial condition.
We
and PLx Pharma do not anticipate that the combined company will pay any cash dividends in the foreseeable future.
The current expectation is that the combined
company will retain its future earnings to fund the development and growth of the combined organization’s business. As a
result, capital appreciation, if any, of the common stock of the combined organization will be your sole source of gain, if any,
for the foreseeable future.
Anti-takeover
provisions in the combined company charter documents and under Delaware law could make an acquisition of the combined company
more difficult and may prevent attempts by the combined company stockholders to replace or remove the combined company management.
Provisions in the combined company’s
certificate of incorporation and bylaws may delay or prevent an acquisition or a change in management. In addition, because the
combined company will be incorporated in Delaware, it is governed by the provisions of Section 203 of the DGCL, which prohibits
stockholders owning in excess of 15% of the outstanding combined company voting stock from merging or combining with the combined
company. Although we and PLx Pharma believe these provisions collectively will provide for an opportunity to receive higher bids
by requiring potential acquirors to negotiate with the combined company’s board of directors, they would apply even if the
offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by
the combined company’s stockholders to replace or remove then current management by making it more difficult for stockholders
to replace members of the board of directors, which is responsible for appointing the members of management.
Future
sales of common stock by our existing or PLx Pharma’s existing stockholders may cause the price of common stock to fall.
For
the six-month period ended December 31, 2016, the average daily trading volume of our common stock on the NASDAQ Capital Market
has been approximately 500,000 shares. Subject to the lock-up agreements entered into between each of us and PLx Pharma and certain
of each other’s stockholders, if our existing stockholders or PLx Pharma’s stockholders receiving shares of our common
stock in the Proposed Merger sell substantial amounts of the combined company’s common stock in the public market,
or
investors perceive that these sales could occur, the market price of such common stock could decrease significantly.
Risks
Relating to Our Intellectual Property
Our ability to achieve commercial
success depends to a material extent on our ability to maintain adequate intellectual property protection for our products and
technology. If we are unable to obtain and maintain adequate intellectual property rights for Locilex®, it may materially
and adversely affect our ability to market and generate sales of the product.
Due to the exclusivity
that intellectual property protection can afford, our commercial success depends to a material extent on our ability to obtain
and maintain adequate intellectual property protection for Locilex® (and any other products we may develop in the future)
in the U.S. and other countries.
As
of January 8, 2017, our patent estate included a U.S. patent (U.S. Patent No. 8,530,409), corresponding granted patents
in Australia, New Zealand, Korea, Israel, Europe and Japan, as well as corresponding applications pending in Brazil, Canada, China,
Eurasia, Indonesia, Mexico, Singapore and South Africa. We also have an exclusive sublicense from Scripps Research Institute (or
Scripps) , the inventor of the pexiganan technology, to a U.S. patent (U.S. Patent No. 5,912,231), directed to pexiganan,
the API used in Locilex®. We consider our U.S. Patent No. 8,530,409, which relates to our new, proprietary formulation
of Locilex® and methods of using it to treat skin or wound infection, to be particularly important to our company primarily
due to its substantially longer patent term coverage, its novel attributes as a topical formulation, its potentially broader scope
of coverage and its opportunity for foreign patent protection. While we currently have pending applications in foreign jurisdictions
corresponding to U.S. Patent No. 8,530,409, no assurance can be given that any foreign patents will issue, or that even if
any such patents were to issue, such patents would provide meaningful protection for Locilex®.
Our patent estate
related to Locilex® is critical to our commercial viability. There is a risk that our pending patent applications may not
result in issued patents, and that any of our issued patents will not include claims that are sufficiently broad to provide adequate
protection for Locilex®, including meaningful protection from our competitors. Additionally, the success of an application
for the patent term extension of our licensed patent will require the cooperation of the licensor, which cooperation cannot be
guaranteed. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that Locilex®
(and any other products we may develop in the future) is covered by valid and enforceable patents that are of sufficient scope
to effectively prevent competitive products or are effectively maintained as trade secrets within our organization. If third parties
disclose or misappropriate or design around our proprietary rights, it may materially and adversely impact our position in the
market.
We apply for patents
covering both our technologies and product candidates, as we deem appropriate. However, we may fail to apply for patents on important
technologies or improvements in our technologies in a timely fashion, or at all. Our existing patents and any future patents we
obtain may not be sufficiently broad to prevent others from using our technologies or from developing competing products and technologies.
Moreover, the patent positions of numerous biotechnology and pharmaceutical companies are highly uncertain and involve complex
legal and factual questions for which important legal principles remain unresolved. As a result, the validity and enforceability
of our patents cannot be predicted with certainty. In addition, no assurances can be given that:
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we
were the first to make the inventions covered by each of our issued patents and pending
patent applications;
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we
were the first to file patent applications for these inventions;
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others
will not independently develop similar or alternative technologies or duplicate any of
our technologies by inventing around our claims;
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a
third party will not challenge our proprietary rights, and if challenged that a court
will hold that our patents are valid and enforceable;
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any
patents issued to us or our collaboration partners will cover our product as ultimately
developed, or provide us with any competitive advantages, or will not be challenged by
third parties;
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we
will develop additional proprietary technologies that are patentable; or
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the
patents of others will not have an adverse effect on our business.
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In addition, there
are numerous recent changes to the patent laws and proposed changes to the rules of the USPTO which may have a significant impact
on our ability to protect our technology and enforce our intellectual property rights. For example, on September 16, 2011,
President Obama signed the Leahy-Smith America Invents Act which codifies several significant changes to the U.S. patent laws,
including, among other things, changing from a “first to invent’ to a “first inventor to file” system, limiting
where a patentee may file a patent suit, eventually eliminating interference proceedings while maintaining derivation actions,
and creating a set of procedures to challenge patents in the USPTO after they have issued. The effects of these changes are currently
uncertain as the USPTO has just implemented regulations related to these changes and the courts have yet to address many of these
provisions in the context of a dispute. Furthermore, we have not assessed the applicability of the act and new regulations on
the specific patents discussed herein. The U.S. Supreme Court has also issued decisions, the full impact of which is not yet known.
For example, on March 20, 2012 in
Mayo Collaborative Services, DBA Mayo Medical Laboratories, et al. v. Prometheus
Laboratories, Inc.
, the Court held that several claims drawn to measuring drug metabolite levels from patient samples
and correlating them to drug doses were not patentable subject matter. The decision appears to impact
diagnostics patents that merely apply a law of nature via a series of routine steps and it
has created uncertainty around the ability to patent certain biomarker-related method claims. Additionally, on June 13, 2013
in
Association for Molecular Pathology v. Myriad Genetics, Inc.
, the Court held that claims to isolated genomic
DNA are not patentable, but claims to complementary DNA (or cDNA) molecules were held to be valid. The effect of the decision
on patents for other isolated natural products is uncertain.
We are dependent on a third party
to maintain the patent exclusivity for the API in Locilex®
We
hold an exclusive, worldwide sublicense to the composition-of-matter patent, U.S. Patent No. 5,912,231, which could have expired
in June 2016 without the interim patent term restoration which we received from the USPTO in June 2016. Our rights to practice
the pexiganan technology are derived through a license agreement between Scripps and Multiple Peptide Systems Inc. (or MPS).
MPS subsequently sublicensed the pexiganan technology to the prior sponsor of the pexiganan clinical and regulatory program. On
October 1, 1996, both the license agreement and sublicense agreement were amended by the parties to confirm that the license
and sublicense were fully-paid and royalty-free with no further economic obligations for the practice of the pexiganan technology.
In June 2016, we received
the cooperation of Scripps and filed an interim patent extension of U.S Patent No. 5,912,231 under the Hatch Waxman Act which
was approved by the USPTO in June 2016. In the future, should we decide to file for a formal five-year patent term extension of
U.S. Patent No. 5,912,231 under the Hatch-Waxman Act, we would need further cooperation from Scripps to complete the submission
and such cooperation is not guaranteed. Although U.S. Patent 5,912,231 supplements our existing intellectual property portfolio,
we are chiefly reliant on our U.S. Patent 8,530,409, which covers the novel formulation and method of use for Locilex® and
provides for substantially longer patent coverage (until June 2032) than U.S. Patent 5,912,231. Because a patent term extension
is filed only after regulatory approval, we would need to consider the possibility for a patent term extension at a later date
even if we are able to identify a promising new clinical indication to target for further clinical development. An inability to
extend the patent past June 2017 may impair our competitive position if other companies use pexiganan as an API to develop a product
that, once approved by the FDA, competes with Locilex®.
We may become subject to third parties’
claims alleging infringement of their patents and proprietary rights or seeking to invalidate our patents or proprietary rights,
or we may need to become involved in lawsuits to protect or enforce our patents, which could be costly, time consuming, delay
or prevent the development and commercialization of our product candidates, or put our patents and other proprietary rights at
risk.
Litigation relating
to infringement or misappropriation of patent and other intellectual property rights in the pharmaceutical and biotechnology industries
is common. We may become subject to third-party claims in the future relating to our technologies, processes, formulations, methods,
or products that would cause us to incur substantial expenses and which, if successful, could cause us to pay substantial damages
and attorney’s fees, if we are found to be infringing a third party’s patent rights. We may also become subject to claims that
we have misappropriated the trade secrets of others. These risk are exacerbated by the fact that the validity and breadth of claims
covered in pharmaceutical patents is, in most instances, uncertain and highly complex. We would be particularly at risk if any
such claims relate to our key U.S. Patent No. 8,530,409 covering our particular formulation of and method of use for Locilex®.
Furthermore,
if a patent infringement suit is brought against us relating to Locilex® (or any other products we may develop or acquire
in the future), our research, development, manufacturing or sales activities relating to Locilex® or the product candidate
that is the subject of the suit may be delayed or terminated. As a result of patent infringement claims, or in order to avoid
potential infringement claims, we or our collaborators may choose to seek, or be required to seek, a license from the third
party, which would be likely to include a requirement to pay license fees or royalties or
both. These licenses may not be available on acceptable terms, or at all. Even if a license can be obtained on acceptable terms,
the rights may be nonexclusive, which would give our competitors access to the same intellectual property rights. If we are unable
to enter into a license on acceptable terms, we or our collaborators could be prevented from commercializing Locilex® (or
any other products we may develop or acquire in the future), or forced to modify such product candidates, or to cease some aspect
of our business operations, which could harm our business significantly.
In addition, competitors
may infringe our patents, or misappropriate or violate our other intellectual property rights. To counter infringement or unauthorized
use, we may find it necessary to file infringement or other claims to protect our intellectual property rights. In addition, in
any infringement proceeding brought by us against a third party to enforce our rights, a court may decide that a patent of ours
is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the basis that our patents
do not cover the technology in question. An adverse result in any such litigation proceeding could put one or more of our patents
at risk of being invalidated or interpreted narrowly, which could open us up to additional competition and have a material adverse
effect on our business.
The cost to us of
any patent litigation or other proceedings, even if resolved in our favor, could be substantial. Such litigation or proceedings
could substantially increase our operating losses and reduce our resources available for development activities. We may not have
sufficient financial or other resources to adequately conduct such litigation or proceedings, and such litigation could impair
our ability to raise funding for our company. Some of our competitors may be able to sustain the costs of such litigation or proceedings
more effectively than we can because of their substantially greater financial resources. In addition, there could be public announcements
of the results of hearings, motions or other interim proceedings or developments, and, if securities analysts or investors perceive
these results to be negative, there could be a substantial adverse effect on the price of our common stock. Uncertainties resulting
from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability
to compete in the marketplace. Patent litigation and other proceedings may also require significant time and attention of management
and technical staff, which may materially and adversely impact our financial position and results of operations. Furthermore,
because of the substantial amount of discovery required in connection with any intellectual property litigation, there is a risk
that some of our confidential information could be compromised by disclosure during this type of litigation.
As a result of any
such litigation, we may also be required to: (i) cease selling, making, importing, incorporating or using one or more or
all of our products that incorporate intellectual property of others, which would adversely affect our revenue; or (ii) redesign
our products, which would be costly and time-consuming.
Restrictions on our patent rights
relating to Locilex® may limit our ability to prevent third parties from competing against us.
Assuming
FDA approval, our ability to market and sell Locilex® will depend, in part, on our ability to obtain and maintain patent
protection for Locilex® (or any products we may develop in the future), preserve our trade secrets, prevent third parties
from infringing upon our proprietary rights and operate without infringing upon the proprietary rights of others. The U.S.
patent that we sublicense from Scripps (U.S. Patent No. 5,912,231), which is directed to the composition of matter of
pexiganan, expires in June 2017 without any term extension. The foreign patents corresponding to U.S. Patent
No. 5,912,231 expired in 2009. As a result, we have no foreign patent protection for the pexiganan API. We have recently
been issued a U.S. patent, U.S. Patent No. 8,530,409, covering our new formulation of Locilex® as well as a method
of using this new formulation to treat skin or wound infections. The U.S. Patent No. 8,530,409 claims are directed to
very specific formulations of the pexiganan API, and
their
methods of use to treat skin or wound infections. As a result, U.S. Patent No. 8,530,409 would not prevent third party
competitors from creating, making and marketing alternative formulations of pexiganan, including topical formulations, that
fall outside the scope of the U.S. Patent No. 8,530,409 claims. There can be no assurance that any such alternative
formulations will not be equally effective as Locilex®. Introduction of any such competitive product could have a
material adverse effect on sales of Locilex®. Moreover, even if these competitors do not actively promote their product
for our targeted indication, 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.
We may not be able to protect our
intellectual property rights throughout the world.
Filing, prosecuting
and defending patents on Locilex® or any product candidates we may develop or acquire in the future throughout the world would
be prohibitively expensive. Competitors may use our technologies in jurisdictions where we have not obtained patent protection
to develop their own products and furthermore, may export otherwise infringing products to territories where we have patent protection,
but where enforcement is not as strong as that in the U.S. These products may compete with our future products in jurisdictions
where we do not have any issued patents and our patent claims or other intellectual property rights may not be effective or sufficient
to prevent them from so 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 cost and divert our efforts and attention from other aspects
of our business.
Obtaining and maintaining our patent
protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental
patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
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.
If our Locilex® trademark is
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 trademark,
Locilex®, 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 this trademark, which we need to build name recognition by potential partners or customers
in our markets of interest. Over the long term, if we are unable to establish name recognition based on our trademark, then we
may not be able to compete effectively and our business may be adversely affected.
If we are unable to protect the
confidentiality of our trade secrets, our business and competitive position would be harmed.
In
addition to seeking patent protection for Locilex®, we also rely on trade secrets, including unpatented know-how, technology
and other proprietary information, to maintain our competitive
position.
We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who
have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers,
consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements
with our employees and consultants that obligate them to assign their inventions to us. Despite these efforts, any of these parties
may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain
adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult,
expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the U.S., including
in foreign jurisdictions, are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully
obtained or independently developed by a competitor, we would have no right to prevent them from using that technology or information
to compete with us. If any of our trade secrets were to be disclosed to or independently developed by competitor, our competitive
position would be harmed.