MTP Midatech Pharma PLC

ITEM 3.

KEY INFORMATION.

 

A.	Selected Financial Data.

 

Midatech prepares its consolidated financial statements in accordance with International Financial Reporting Standards ( “ IFRS ” ) as issued by the International Accounting Standards Board ( “ IASB ” ). The following table sets forth certain of Midatech ’ s consolidated financial data. The selected historical consolidated financial data as of December 31, 2016, 2015 and 2014 and for the years ended December 31, 2016, 2015 and 2014 is derived from Midatech ’ s consolidated financial statements, which are included elsewhere in this annual report.

 

Acquisitions of Q Chip Limited and DARA BioSciences, Inc.

 

On December 8, 2014, Midatech acquired Q Chip Limited, a company incorporated under the laws of England and Wales, subsequently renamed Midatech Pharma (Wales) Limited ( “ Midatech Wales ” ). Midatech ’ s financial and operating data for fiscal 2014 was not adjusted to reflect the full year effect of Midatech ’ s acquisition of Midatech Wales, whereas statement of financial position data and subsequent periods include contributions from Midatech Wales.

 

On December 4, 2015, Midatech acquired DARA and subsequently changed its name to Midatech US. Midatech ’ s financial and operating data for fiscal 2015 and 2014 was not adjusted to reflect the full year effect of Midatech ’ s acquisition of DARA, whereas statement of financial position data and subsequent periods include contributions from DARA.

 

Thus Midatech ’ s financial and operating data are not fully comparable in this annual report.

 

The selected historical financial data presented below should be read in conjunction with “ Item 5. Operating and Financial Review and Prospects ” and Midatech ’ s financial statements and the related notes thereto, which are included elsewhere in this annual report. The selected historical financial information in this section is not intended to replace Midatech ’ s financial statements and the related notes thereto.

  

 

Exchange Rates

 

Midatech ’ s financial reporting currency is the British pound sterling. Fluctuations in the exchange rate between the British pound sterling and the United States dollar will affect the United States dollar amounts received by owners of Depositary Shares on conversion of dividends, if any, paid in British pound sterling on the Ordinary Shares and will affect the United States dollar price of the Depositary Shares on the NASDAQ Capital Market.

 

The following table shows, for the periods indicated, information concerning the exchange rate between the British pound sterling and the United States dollar. This information is provided solely for your information, and Midatech does not represent that the British pound sterling could be converted into United States dollars at these rates or at any other rate. These rates may differ from the actual rates used in the preparation of the consolidated financial statements included in this annual report and other financial data appearing in this annual report.

 

The data provided in the following table is expressed in United States dollars per British pound sterling and is based on noon buying rates published by the Federal Reserve Bank of New York for the British pound sterling. On March 31, 2017, the noon buying rate was £ 1.00 = $1.2537.

 

 

(1)

The average rates were calculated by taking the simple average of the daily noon buying rates, as published by the Federal Reserve Bank of New York, on the last day of each month during the period.

 

B.	Capitalization and Indebtedness

 

Not Applicable

 

C.	Reasons for the Offer and Use of Proceeds

 

Not Applicable

 

 

D.	Risk Factors

 

Our business has significant risks. In addition to the other information included in this annual report, including the matters addressed in the section of the annual report entitled “Cautionary Note Regarding Forward-Looking Statements” and in our financial statements and the related notes, you should consider carefully the risks described below.   The risks and uncertainties described below are not the only risks and uncertainties we may face. Additional risks and uncertainties not presently known to us, or that we currently consider immaterial could also negatively affect our business, financial condition, results of operations, prospects, profits and stock prices. If any of the risks described below actually occur, our business, financial condition, results of operations, prospects, profits and stock prices could be materially adversely affected.

  

Risks Related to Midatech’s Financial Operations and Capital Needs

 

Midatech (including its predecessor entity, Midatech Limited) has incurred significant losses since its inception and anticipates that it will continue to incur losses in the future.

 

Midatech is an early-stage biopharmaceutical company. Investment in biopharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that a product candidate will fail to gain regulatory approval or become commercially viable. Prior to the acquisition of DARA in December 2015, Midatech had not generated any revenue from product sales, and it continues to incur significant development and other expenses related to its ongoing operations. As a result, Midatech is not profitable and has incurred substantial losses since its inception. For the year ended December 31, 2016, Midatech had a net loss of £20.16 million, and an accumulated deficit of £ 59.11 million.

 

Midatech expects to continue to incur losses for the foreseeable future, and expects these losses to increase as it continues its development of, and seeks regulatory approvals for, its product candidates, and begins to commercialize any approved products. Midatech may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect its business. The size of Midatech ’ s future net losses will depend, in part, on the rate of future growth of its expenses and its ability to generate revenues, particularly from Midatech US operations. If any of Midatech ’ s or its subsidiaries products fail to develop a market, or if any of their product candidates fail in clinical trials or do not gain regulatory approval, or if approved, fail to achieve market acceptance, Midatech may never become profitable. Even if Midatech achieves profitability in the future, it may not be able to sustain profitability in subsequent periods. Midatech ’ s prior losses and expected future losses have had and will continue to have an adverse effect on its stockholders ’ equity and working capital.

 

A substantial part of Midatech’s operations are in early-stage development with no source of revenue and there is no assurance that Midatech will successfully develop and commercialize its product candidates or ever become profitable.

 

Midatech is at a relatively early stage of its commercial development. To date, Midatech has not generated any revenue from its product candidates. Midatech ’ s ability to generate revenue and become and remain profitable depends, in part, on its ability to successfully commercialize products, including any of its product candidates, or other product candidates it may in-license or acquire. Even if Midatech were to successfully achieve regulatory approval of its product candidates, Midatech does not know when any of the product candidates will generate revenue, if at all. Midatech ’ s ability to generate revenue from its current or future product candidates also depends on a number of additional factors, including its ability to:

 

·

successfully complete development activities, including preclinical development and clinical trials for its product candidates;

 

·

complete and submit new drug applications to the European Medicines Agency (the “ EMA ” ), the Medicines and Healthcare Products Regulatory Agency in the United Kingdom (the “ MHRA ” ), the United States Food and Drug Administration (the “ FDA ” ), and any other foreign regulatory authorities, and obtain regulatory approval for testing and for products for which there is a commercial market;

 

·

set a commercially viable price for its products;

 

·

obtain commercial qualities of its products at acceptable cost levels;

 

·

develop a commercial organization capable of sales, marketing and distribution in its markets; and

 

·

obtain adequate reimbursement from third-parties, including government, departments and healthcare payors.

 

 

In addition, because of the numerous risks and uncertainties associated with product development, including that Midatech ’ s product candidates may not advance through development or achieve the endpoints of applicable clinical trials, Midatech is unable to predict the timing or amount of increased expenses, or when or if it will be able to achieve or maintain profitability. Even if Midatech is able to complete the process described above, it anticipates incurring significant costs associated with commercializing these products.

 

Even if Midatech is able to generate revenues from the sale of its products, it may not become profitable and may need to obtain additional funding to continue operations. If Midatech fails to become profitable or is unable to sustain profitability on a continuing basis, then it may be unable to continue its operations at planned levels and may be forced to reduce its operations.

 

Potential investors should be aware of the risks associated with an investment in companies with limited trading histories. There can be no assurance that Midatech will operate profitably, produce a reasonable return, if any, on investment, or remain solvent. If Midatech ’ s strategy proves unsuccessful, stockholders could lose all or part of their investment.

 

If Midatech requires or seeks to raise additional capital to fund its operations and it fails to obtain necessary financing, Midatech may be unable to complete the development and commercialization of its product candidates.

 

Midatech expects to continue to spend substantial amounts of its cash resources going forward in order to advance the clinical development of its product candidates and launch and commercialize any product candidates for which it receives regulatory approval. Midatech believes that its existing cash and cash equivalents and interest thereon will be sufficient to fund its projected operating requirements for at least the next 12 months.  However, Midatech may require, or may determine to seek, additional capital for the further development and commercialization of its product candidates from time to time.

 

Until such time as Midatech can generate a sufficient amount of revenue from its products, if ever, it expects that it may finance future cash needs through, among things, public or private equity or debt offerings. Such offerings may take place in the United Kingdom, the United States or other foreign countries. Additional capital may not be available on reasonable terms, if at all. If Midatech is unable to raise additional capital in sufficient amounts or on terms acceptable to it, Midatech may have to significantly delay, scale back or discontinue the development or commercialization of one or more of its product candidates. If Midatech raises additional funds through the issuance of additional debt or equity securities, such issuance could result in dilution to Midatech ’ s existing stockholders and/or increased fixed payment obligations. Furthermore, these securities may have rights senior to those of Midatech ’ s Ordinary Shares and could contain covenants that would restrict its operations and potentially impair its competitiveness, such as limitations on Midatech ’ s ability to incur additional debt, limitations on Midatech ’ s ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact Midatech ’ s ability to conduct its business. Any of these events could significantly harm Midatech ’ s business, financial condition and prospects.

 

Midatech ’ s forecast of the period of time through which its financial resources will be adequate to support its operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “ Item 3.D   Risk Factors ” section. Midatech has based this estimate on assumptions that may prove to be wrong, and it could utilize its available capital resources sooner than it currently expects. Midatech ’ s future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

 

·

the success of products acquired in connection with the acquisition of DARA or any additional acquisitions and the commercialization of other assets;

 

·

the initiation, progress, timing, costs and results of clinical trials for its product candidates and future product candidates it may in-license or acquire;

 

·

the attainment of milestones and the need to make any royalty payments on any of its product candidates or any other future product candidates;

·

the number and characteristics of product candidates it in-license or acquires and develop;

 

·

the outcome, timing and cost of regulatory approvals by the EMA, the MHRA, the FDA and any other comparable foreign regulatory authorities, including the potential for such regulatory authorities to require that Midatech perform more studies than those it currently expects;

 

·

the cost of filing, prosecuting, defending and enforcing any patent claims or other intellectual property rights;

 

 

·

the effect of competing technological and market developments; and

 

·

the cost of establishing sales, marketing and distribution capabilities for any product candidates for which it may receive regulatory approval.

 

If a lack of available capital means that Midatech is unable to expand its operations or otherwise capitalize on its business opportunities, its business, financial condition and results of operations could be materially adversely affected.

 

Midatech’s future potential financial obligation to former stockholders of DARA may harm its financial condition and results of operations.

 

Midatech has one future potential liability in the form of a contingent value right ( “ CVR ” ) payment to the former stockholders of DARA upon the achievement of certain commercial targets. The CVRs represent the right to receive a cash payment from Midatech of up to $3.325 million in the aggregate. The commercial targets for fiscal 2016 were not achieved, and no CVR payment was due, but a second potential CVR payment in the following amounts may be made in 2018 if the following milestones are achieved:

In addition, in connection with the Merger, Midatech set aside an aggregate of $300,000 ( “ Bonus Pool ” ), to be offered to employees of DARA who became employees of Midatech US following the closing of the Merger. Any payments made from the Bonus Pool will be made at the same time, upon the same circumstances, and in a proportional amount, that any payments are made to CVR holders.

 

Midatech cannot predict if these payments could have a materially adversely effect on its business at the time of payment, however, the fair value of these payments is zero, as the targets associated with them are not considered to be achievable.

 

The vote by the United Kingdom electorate in favor of the United Kingdom’s exit from the European Union and the result of the recent United States presidential election could lead to increased market volatility and could adversely impact the market price for our Ordinary Shares and Depositary Shares, make it more difficult for Midatech to do business in Europe or have other adverse effects on our business, results of operations and financial condition.

 

On June 23, 2016, the United Kingdom government held an in-or-out referendum on the United Kingdom ’ s membership of the European Union in which voters approved the United Kingdom’s exit from the European Union (commonly referred to as “ Brexit ” ).  On March 29, 2017, the United Kingdom formally initiated its withdrawal from the European Union by triggering Article 50 of the Treaty of Lisbon.  As a result of the triggering of Article 50, the process of negotiation will commence between the United Kingdom and European Union member states to determine the future terms of the United Kingdom ’ s relationship with the European Union.  This has led to a period of uncertainty and volatility particularly in relation to United Kingdom financial and banking markets.  Asset valuations, currency exchange rates and credit ratings may be especially subject to increased market volatility.

Depending on the terms of Brexit, which are negotiated between the United Kingdom and the European Union member states, Midatech may face new regulatory costs and challenges that may have a material adverse effect on it and its operations. A significant portion of Midatech ’ s manufacturing infrastructure is located in Spain, which is a member of the European Union. When the United Kingdom ceases to be a member of the European Union, Midatech ’ s ability to integrate its United Kingdom and Spanish operations could be adversely affected. For example, depending on the terms of Brexit, Midatech could become subject to export tariffs and regulatory restrictions that could increase the costs and time related to doing business in Spain.

 

 

Additionally, Brexit could allow the United Kingdom to significantly alter its regulations affecting the pharmaceutical industry, which may result in significant costs for Midatech. It may also be time-consuming and expensive for Midatech to alter its internal operations in order to comply with new regulations. Altered regulations could also add time and expense to the process by which Midatech ’ s product candidates receive regulatory approval in the United Kingdom and the European Union.

Depending on the terms of Brexit negotiated between the United Kingdom and the European Union member states, the United Kingdom could lose access to the single European Union market and to the global trade deals negotiated by the European Union on behalf of its members. Such a decline in trade could affect the attractiveness of the United Kingdom as a global investment center and, as a result, could have a detrimental impact on growth. Although Midatech has international operations and customer base, it could be adversely affected by reduced growth and/or volatility in the United Kingdom economy. Any of the foregoing factors could have a material adverse effect on the business, results of operations or financial condition of Midatech.

On January 20, 2017, Donald J. Trump was sworn in as the forty-fifth president of the United States. As a candidate, President Trump proposed changes to existing trade policies and agreements, proposed reforming the FDA, repealing the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the “ Affordable Care Act ” ) and changing the manner in which drug prices are negotiated by Medicare. Changes in United States social, political, regulatory and economic conditions in the United States or in laws and policies governing foreign trade, importation, manufacturing, development, registration and approval, commercialization and reimbursement of our products in the United States could adversely affect our business.

Midatech recognized a material intangible asset impairment loss as of December 31, 2016 and may be required to recognize additional non-cash impairment losses in the future.

 

As of December 31, 2016, Midatech recognized an impairment loss for marketing and intangible product rights of £11.4 million, which arose as a result of the underperformance of Oravig in comparison to forecast sales at the time of acquisition.  The underperformance was caused in part by the heavily genericized market in which Oravig is sold.  There was no goodwill impairment as of December 31, 2016, and there was no impairment to any of Midatech’s intangible assets or goodwill for the year ended December 31, 2015.

 

These impairment charges discussed above and any additional impairment charges could materially increase Midatech’s expenses and reduce Midatech’s profitability. The process of testing goodwill and intangible assets for impairment involves numerous judgments, assumptions and estimates made by Midatech’s management including expected future profitability, cash flows and the fair values of assets and liabilities, which inherently reflect a high degree of uncertainty and may be affected by significant variability. If the business climate deteriorates, including the markets in which certain of our products are sold, then actual results may not be consistent with these judgments, assumptions and estimates, and Midatech’s goodwill and intangible assets may become impaired in future periods. This would in turn have an adverse impact on our financial position and results of operations.

 

Risks Related to Midatech’s Business and Industry

 

Midatech’s future success is dependent on product development, regulatory approval and commercialization of its products, product candidates and any product candidates it may acquire in the future.

 

While Midatech has recently acquired products that have received regulatory approval and has begun commercialization, Midatech must continue to conduct clinical trials and research and development for its additional product candidates, and there can be no assurance that any of Midatech ’ s targeted developments will be successful. Midatech must develop functional products that address specific market needs. It must therefore engage in new development activities, which may not produce innovative, commercially viable results in a timely manner or at all. In addition, Midatech may not be able to develop new technologies or identify specific market needs that are addressable by its technologies, or technologies available to it. Midatech may encounter delays and incur additional development and production costs and expenses, over and above those expected, in order to develop technologies and products suitable for licensing. If Midatech ’ s development program is curtailed due to any of the above issues, this may have a material adverse effect on Midatech ’ s business and financial conditions.

 

 

Midatech ’ s business is dependent on its ability to complete the development of, obtain regulatory approval for and/or commercialize its products and product candidates in a timely manner. Midatech cannot commercialize a product without first obtaining regulatory approval from the appropriate regulatory authorities in a country. Before obtaining regulatory approvals for the commercial sale of any product candidate for a target indication, Midatech must demonstrate with substantial evidence gathered in preclinical and well-controlled clinical studies that the product candidate is safe and effective for use for that target indication and that the manufacturing facilities, processes and controls are adequate. The process to develop, obtain regulatory approval for and commercialize product candidates is long, complex and costly. Even if a product candidate were to successfully obtain approval from the EMA, the MHRA, the FDA and/or comparable foreign regulatory authorities, any approval might contain significant limitations related to use restrictions for certain age groups, warnings, precautions or contraindications, or may be subject to burdensome post-approval study or risk management requirements. If Midatech is unable to obtain regulatory approval for its product candidates in one or more jurisdictions, or any approval contains significant limitations, it may not be able to obtain sufficient funding or generate sufficient revenue to continue the development of any other product candidate that it is currently developing or that it may in-license or acquire in the future. Furthermore, even if Midatech obtains approval for a product candidate from the regulatory authorities, it is likely that it will need to expand its commercial operations, establish commercially viable pricing and obtain approval for adequate reimbursement from third parties and government departments and healthcare payors for such products. If Midatech is unable to successfully commercialize its current product candidates, it may not be able to earn sufficient revenues to continue its business

 

Clinical drug development involves a risky, lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.

 

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of any preclinical studies and early clinical trials of Midatech ’ s product candidates may not be predictive of the results of later-stage clinical trials, even after seeing promising results in earlier clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. For example, in May 2016, Midatech announced that the results of its Phase IIa study of Midatech’s transbuccal insulin delivery system, which delivered insulin through the mouth, were unfavorable compared to the traditional sub-cutaneous, or through the skin, insulin delivery system.  As a result, Midatech and its joint venture partner, MonoSol Rx have ended their joint transbuccal insulin program.  Midatech ’ s future clinical trial results for its other products and programs may also be unsuccessful.

 

Midatech is about to embark on a clinical trials program for its Q-Octreotide product, which is expected to commence its first-in-human study in the first half of 2017.  Other clinical development programs are also expected to commence during 2017. Midatech may experience delays in its ongoing or future clinical trials and it does not know whether planned clinical trials will begin or enroll subjects on time, need to be redesigned or be completed on schedule, if at all. Clinical trials may be delayed, suspended or prematurely terminated for a variety of reasons, such as:

 

·

delay or failure in reaching agreement with the applicable regulatory authorities on a trial design that Midatech is able to execute;

 

·

delay or failure in obtaining authorization to commence a trial or inability to comply with conditions imposed by a regulatory authority regarding the scope or design of a clinical study;

 

·

delay or failure in reaching agreement on acceptable terms with prospective contract research organizations ( “ CROs ” ), and clinical trial providers and sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

·

delay or failure in obtaining institutional review board approval ( “ IRB ” ) or the approval of other reviewing entities, including regulatory authorities, to conduct a clinical trial at each site;

 

·

withdrawal of clinical trial sites from Midatech ’ s clinical trials as a result of changing standards of care or the ineligibility of a site to participate in Midatech ’ s clinical trials;

 

·

delay or failure in recruiting and enrolling suitable subjects to participate in a trial;

 

·

delay or failure in having subjects complete a trial or return for post-treatment follow-up;

 

·

clinical sites and investigators deviating from trial protocol, failing to conduct the trial in accordance with regulatory requirements, or dropping out of a trial;

 

·

inability to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs, including some that may be for the same indication;

 

 

·

failure of Midatech ’ s third party clinical trial managers to satisfy their contractual duties or meet expected deadlines;

 

·

failure to receive the recommendation of the United Kingdom National Institute for Health and Care Excellence ( “ NICE ” );

 

·

delay or failure in adding new clinical trial sites;

 

·

ambiguous or negative interim results, or results that are inconsistent with earlier results;

 

·

feedback from the EMA, the MHRA, the FDA, the IRB, data safety monitoring boards, or other regulatory authority, or results from earlier stage or concurrent preclinical and clinical studies, which might require modification to the protocol;

 

·

decisions by the EMA, the MHRA, the FDA, the IRB, other regulatory authorities, or Midatech, or recommendation by a data safety monitoring board or other regulatory authority, to suspend or terminate clinical trials at any time for safety issues or for any other reason;

 

·

unacceptable risk-benefit profile or unforeseen safety issues or adverse side effects;

 

·

failure to demonstrate a benefit from using a drug;

 

·

manufacturing, including manufacturing or obtaining from third parties sufficient quantities of a product candidate for use in clinical trials; or

 

·

changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.

 

If Midatech experiences delays in the completion of, or termination of, any ongoing or future clinical trial of Midatech ’ s product candidates, the commercial prospects of its product candidates will be harmed, and its ability to generate product revenues from any of these product candidates will be delayed. In addition, any delays in completing Midatech ’ s clinical trials may increase Midatech ’ s costs, slow down its product candidate development and approval process and jeopardize its ability to commence product sales and generate revenues. Any of these occurrences may harm Midatech ’ s business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of Midatech ’ s product candidates.

 

The regulatory approval processes in the United States and Europe are lengthy, time consuming and inherently unpredictable, and if Midatech is ultimately unable to obtain regulatory approval for its product candidates, its business may be substantially harmed.

  

The time required to obtain approval by the EMA, the MHRA, the FDA and other comparable foreign regulatory authorities is unpredictable, but typically takes many years following the commencement of preclinical studies and clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate ’ s clinical development and may vary among jurisdictions. It is possible that none of its existing product candidates or any product candidates it may in-license or acquire and seek to develop in the future will ever obtain regulatory approval.

 

Midatech ’ s product candidates could fail to receive regulatory approval from the EMA, the MHRA, the FDA and other comparable foreign regulatory authorities for many reasons, including:

 

·

disagreement with the design or implementation of Midatech ’ s clinical trials;

 

·

failure to demonstrate that a product candidate is safe and effective for its proposed indication;

 

·

failure of clinical trials to meet the level of statistical significance required for approval;

 

 

·

failure to demonstrate that a product candidate ’ s clinical and other benefits outweigh its safety risks;

 

·

disagreement with Midatech ’ s interpretation of data from preclinical studies or clinical trials;

 

·

the insufficiency of data collected from clinical trials of Midatech ’ s product candidates to support the submission and filing of a new drug application or other submission or to obtain regulatory approval;

 

·

disapproval of the manufacturing processes or facilities of third party manufacturers, if any, with whom Midatech contracts for clinical and commercial supplies; or

 

·

changes in the approval policies or regulations that render Midatech ’ s preclinical and clinical data insufficient for approval.

 

In addition, the EMA, the MHRA, the FDA and other comparable foreign regulatory authorities may require more information, including additional preclinical or clinical data to support approval, which may delay or prevent approval and Midatech ’ s commercialization plans, or Midatech may decide to abandon the development program. If Midatech were to obtain approval, regulatory authorities may approve any of its product candidates for fewer or more limited indications than it requests, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate. In addition, if Midatech ’ s product candidate produces undesirable side effects or safety issues, the regulatory authorities (the FDA, MHRA, EMA or a comparable foreign regulatory authority) may require the establishment of Risk Mitigation Strategy, which may, for instance, restrict distribution of Midatech ’ s products and impose burdensome implementation requirements on it. Any of the foregoing scenarios could materially harm the commercial prospects for Midatech ’ s product candidates.

 

Midatech’s product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval and limit the commercial profile of an approved label, and such side effects or other properties could result in significant negative consequences following any marketing approval of any of Midatech’s products or product candidates.

 

Undesirable side effects caused by any of Midatech ’ s product candidates could cause it or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the EMA, the MHRA, the FDA or other comparable foreign regulatory authority. Results of Midatech ’ s trials could reveal a high and unacceptable severity and prevalence of side effects. In such an event, Midatech ’ s trials could be suspended or terminated and the regulatory authorities could order it to cease further development of or deny approval of its product candidates for any or all targeted indications. The drug-related side effects could affect patient recruitment or the ability of enrolled subjects to complete the trial or result in potential product liability claims. Any of these occurrences may harm Midatech ’ s business, financial condition and prospects significantly.

 

Additionally, if undesirable side effects of Midatech ’ s products are identified following marketing approval, a number of potentially significant negative consequences could result, including:

 

·

Midatech may suspend marketing of such product;

 

·

regulatory authorities may withdraw approvals of such product or may require additional warnings on the label;

 

·

Midatech may be required to develop a Risk Mitigation Strategy for each product or, if a strategy is already in place, to incorporate additional requirements;

 

·

Midatech may be required to conduct post-market studies; and

 

·

Midatech could be sued and held liable for harm caused to subjects or patients.

 

Consequently, Midatech ’ s reputation may suffer.

 

Any of these events could prevent Midatech from achieving or maintaining market acceptance of the particular product or product candidate, if approved, and could significantly harm its business, results of operations and prospects.

 

Midatech’s products may face future development, manufacturing and regulatory difficulties.

 

 

Midatech ’ s products, and any of its product candidates once they receive regulatory approval, are subject to the ongoing requirements of the EMA, the MHPA, the FDA and other regulatory agencies governing the manufacture, quality control, further development, labeling, packaging, storage, distribution, safety surveillance, import, export, advertising, promotion, recordkeeping and reporting of safety and other post-market information. The safety profile of any product is closely monitored by the EMA, the MHRA, the FDA and other regulatory authorities after approval. If the EMA, the MHRA, the FDA or other regulatory authorities become aware of new safety information after approval of any of Midatech ’ s products or product candidates, regulatory authorities may require labeling changes or establishment of a risk mitigation strategy or similar strategy, impose significant restrictions on a product ’ s indicated uses or marketing, or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance.

 

In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the EMA, the MHRA, the FDA and other governmental regulatory authorities for compliance with current good manufacturing practices ( “ cGMP ” ) regulations. If Midatech or a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility or Midatech, including requiring recall or withdrawal of the product from the market or suspension of manufacturing. If Midatech, its products, product candidates or the manufacturing facilities for its products or product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:

 

·

issue warning letter or untitled letters;

 

·

mandate modifications to, or the withdrawal of, marketing and promotional materials or require Midatech to provide corrective information to healthcare practitioners;

 

·

require Midatech to enter into a consent decree, which can include the imposition of various fines against Midatech, reimbursements of inspection costs, required due dates for specific actions and penalties for noncompliance;

  

·

seek an injunction or impose civil or criminal penalties or monetary fines;

 

·

suspend or withdraw its regulatory approval;

 

·

suspend any ongoing clinical studies;

 

·

refuse to approve pending applications or supplements to applications filed;

 

·

suspend or impose restrictions on operations, the products, manufacturing or Midatech itself;

 

·

require Midatech to change its product labeling; or

 

·

seize or detain products, refuse to permit the import or export of products or require Midatech to initiate a product recall.

 

The occurrence of any of these events may inhibit Midatech ’ s ability to commercialize its products and generate revenue.

 

Any advertising and promotion of any product or any future product Midatech may commercialize will be heavily scrutinized.

 

Advertising and promotion of any of Midatech ’ s products or any future product Midatech may commercialize will be heavily scrutinized by various regulatory authorities in the jurisdictions in which the product is promoted. Violations, including promotion of Midatech ’ s products for unapproved (or off-label) uses, are subject to enforcement letters, inquiries and investigations, and civil and criminal sanctions by the FDA and other governmental agencies.

 

 

In the United States, engaging in impermissible promotion of Midatech ’ s products for off-label uses can subject Midatech to false claims litigation under federal and state statutes, which, if successful, could result in civil and criminal penalties and fines and agreements that materially restrict the manner in which a company promotes or distributes drug products. These false claims statutes include the federal False Claims Act, which allows any individual to bring a lawsuit against a pharmaceutical company, on behalf of the federal government, alleging submission of false or fraudulent claims, or causing to present such false or fraudulent claims, for payment by a federal program such as Medicare or Medicaid. If the government prevails in the lawsuit, the individual will share in any fines or settlement funds. Since 2004, these False Claims Act lawsuits against pharmaceutical companies have increased significantly in volume and breadth, leading to several substantial civil and criminal settlements based on certain sales practices promoting off-label drug uses. For instance, in 2009, Pfizer, Inc. paid $2.3 billion to settle civil and criminal allegations for illegally marketing four products and in 2012 GlaxoSmithKline paid $3 billion to resolve United States government investigations focused in large part on promotional practices, the largest False Claims Act settlement to date. This growth in litigation has increased the risk that a pharmaceutical company will have to defend a false claim action, pay settlement fines or restitution, agree to comply with burdensome reporting and compliance obligations, and be excluded from the Medicare, Medicaid, and other federal and state healthcare programs. If Midatech does not lawfully promote its approved products, it may become subject to such litigation and, if it is not successful in defending against such actions, those actions may have a material adverse effect on its business, financial condition and results of operations.

 

Midatech’s future commercialization strategy may include possible revenue generation from product royalty revenue, which could expose Midatech to risks.

 

Midatech ’ s future commercialization strategy may include possible revenue generation from product royalty deals. The right to receive possible product royalty revenues in the future may be challenged by the customer or licensee or there may be legal restrictions on the payment of royalties on product sales. Remittance of royalty revenues to Midatech may be restricted from certain territories or subject to withholding taxes that Midatech may not be able to recover or offset.

 

The commercial success of Midatech’s products is not guaranteed.

 

There can be no assurance that any of Midatech ’ s products or its product candidates currently in development will be successfully developed into any commercially viable product or products and/or be manufactured in commercial quantities at an acceptable cost or be marketed successfully and profitably. If Midatech, or its partners, encounters delays at any stage, and fails successfully to address such delays, it may have a material adverse effect on Midatech ’ s business, financial condition and prospects. In addition, Midatech ’ s success will depend on the market ’ s acceptance of its products and there can be no guarantee that this acceptance will be forthcoming or that Midatech ’ s technologies will succeed as an alternative to competing products. The development of a market for Midatech ’ s products is affected by many factors, some of which are beyond Midatech ’ s control, including the emergence of newer, more effective technologies and products, and the cost of Midatech ’ s products themselves, including the availability of products for which healthcare reimbursement is available. Notwithstanding the technical merits of a product developed or acquired by Midatech, there can be no guarantee that the customer base of Midatech ’ s distributors for the products will purchase or continue to purchase the particular product. Demand for Midatech ’ s products may also decrease if competitor products are introduced with perceived advantages over Midatech ’ s products or product candidates, or governments amend their policies on limiting drug costs or reimbursement practice or other healthcare reform measures within public health provision or private insurance-based models. If a market fails to develop or develops more slowly than anticipated, Midatech may be unable to recover the costs it may have incurred in the development of particular products and may never achieve profitable revenues from that product. In addition, Midatech cannot guarantee that it will continue to identify, develop, manufacture or market its products if market conditions do not support the continuation of such product.

 

Midatech’s ability to generate revenues or profits from products originally licensed to DARA will be dependent upon successful operation of the dedicated sales force that is contractually provided to Midatech by a third party. Any challenges that may arise in connection with the ongoing operations of the dedicated sales force, or any failure of Midatech’s marketing strategy to achieve the desired results, could have a material adverse effect on Midatech’s financial condition, operating results and stock price.

 

In October 2013, DARA entered into an agreement with Alamo Pharma Services ( “ Alamo ” ) for a 20 person national sales team in the United States oncology market. Pursuant to the agreement and a shared sales force agreement with Mission Pharmacal ( “ Mission ” ), Alamo ’ s parent company, since January 2014 the Alamo sales team has promoted Soltamox (tamoxifen citrate) and Gelclair, as well as Mission ’ s Ferralet 90 (for anemia) and Aquoral (for cancer related dry mouth) and, beginning in the fourth quarter of 2015, Oravig (for oral candidiasis), all products acquired by Midatech in the DARA transaction. From the first quarter of 2016, Mission also started promoting Zuplenz (for nausea and vomiting), acquired by Midatech separately to the DARA transaction. Mission ’ s products are concurrently being promoted by Mission in other non-oncology related therapeutic markets and all are under patent protection throughout the term of the agreement. In March of 2015, DARA also entered into a co-promotion agreement with Mission to co-promote Oravig in the primary care market.

 

 

Midatech ’ s ability to successfully market its product portfolio, and to generate revenues or profits from its products, will depend upon successful operation of the shared sales force that Alamo provides under contract. There can be no assurances that the sales representatives will achieve the desired results or that they will be successful in marketing Midatech ’ s products. Pursuant to the contractual arrangements governing the sales force, Midatech is responsible for significant financial obligations whether or not the sales force achieves the desired results, including fixed monthly fees subject to an annual escalator, reimbursement for certain expenses, implementation fees, and recruiting fees in connection with new hires for the sales force. If the sales force does not effectively market Midatech ’ s products as desired, Midatech ’ s financial condition, results of operations and stock price could be materially adversely affected.

  

If Midatech is unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell its products and product candidates, it may be unable to generate any revenue.

 

With the December 2015 acquisition of DARA, as well as the acquisition of Zuplenz, Midatech is in the early stage of its commercial operations and has only a limited operating history on which to base an evaluation of its current business and prospects. For example, Midatech’s sales and marketing organization is still relatively new and Midatech US has only recently established a national sales team. In order to market any products that may be approved by the EMA, the MHRA, the FDA and other comparable foreign regulatory authorities, Midatech must build its sales, marketing, managerial and other non - technical capabilities or make arrangements with third parties to perform these services. If Midatech is unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, it may not be able to generate product revenue and may not become profitable. Midatech will be competing with many companies that currently have extensive and well-funded sales and marketing operations. Without an internal commercial organization or the support of a third party to perform sales and marketing functions, Midatech may be unable to compete successfully against these more established companies.

 

Some of Midatech’s revenues are derived from licensing or collaboration agreements with other organizations.

 

Some of Midatech ’ s revenues are derived from licensing or collaboration agreements with other biopharmaceutical companies, research institutes and universities. Midatech ’ s success is dependent on these commercial arrangements and on similar arrangements for future exploitation of product candidates in development that have not yet been partnered. Midatech ’ s collaborators have substantial responsibility for some of the development and commercialization of Midatech ’ s product candidates. Certain of Midatech ’ s collaborators also have significant discretion over the resources they devote to these efforts. Midatech ’ s success, therefore, will in part depend on the ability and efforts of those third parties. Midatech cannot guarantee that these collaborators will devote sufficient resources to collaborations with Midatech or that Midatech ’ s product candidates can be developed and commercialized without these collaborators. In addition, there can be no assurance that any company that enters into agreements with Midatech will not pursue alternative technologies, either on its own or in collaboration with others, including Midatech ’ s competitors, as a means of developing treatments for the conditions targeted by those products which Midatech has licensed. Some of Midatech ’ s collaboration agreements are contracted, and are likely to be contracted in the future, with partners who are in strong negotiating positions and who have greater financial resources than Midatech. While Midatech seeks to negotiate contracts on terms that it considers are the most beneficial to it, a number of existing contracts contain, and Midatech expects that future contracts may contain, what could be considered potentially onerous terms for Midatech, such as (in some cases) on-demand termination, uncapped indemnities, extensive warranties and broad confidentiality restrictions (in terms of scope and time).

 

If claims on liability and indemnity were to be successfully made under such contracts (i) Midatech could be liable for substantial damage awards that may significantly exceed its liability insurance coverage by unknown but significant amounts; (ii) such claims could result in early termination of contracts; and/or (iii) Midatech could incur financial penalties, all of which could materially and adversely affect Midatech ’ s financial condition.

 

Further, if Midatech fails to meet its obligations under its licensing agreements or collaboration agreements, Midatech ’ s licensors or collaborators may have the right to terminate these agreements. Any uncured, material breach under the licenses or collaboration agreements could result in Midatech ’ s loss of its rights and may lead to a complete termination of its product development and any commercialization efforts for the applicable product candidate.

 

The pharmaceutical and biotechnology industries are highly competitive.

 

The development and commercialization of new drug products is highly competitive. Midatech ’ s business faces competition from a range of major and specialty pharmaceutical and biotechnology companies worldwide with respect to its products and product candidates, and will face competition in the future with respect to any product candidates that it may seek to develop or commercialize. In addition to developing its product candidates, Midatech ’ s focus is on the commercialization of the following oncology supportive care and oncology treatment pharmaceutical products:

 

 

·

Zuplenz, the only FDA-approved oral soluble film indicated for moderately emetogenic chemotherapy-induced nausea and vomiting ( “ CINV ” ), radiotherapy-induced nausea and vomiting ( “ RINV ” ), and post-operative nausea and vomiting ( “ PONV ” );

 

·

Gelclair, an FDA-cleared product indicated for the management and relief of pain due to oral mucositis;

 

·

Oravig, an orally dissolving buccal tablet approved for oral thrush; and

 

·

Soltamox, an FDA-approved oral liquid solution of tamoxifen citrate, for the prevention of breast cancer.

 

In addition, the Alamo sales team also co-promotes (with Mission) two Mission products, Ferralet 90 (for anemia) and Aquoral (for dry mouth).

Sales of Oravig in 2016 did not meet the level expected when the DARA business was acquired, resulting in an impairment as of December 31, 2016, for marketing and intangible product rights of £11.4 million. The market in which this product is sold is heavily genericized and Oravig has struggled to gain significant market share.

 

There are a number of pharmaceutical and biotechnology companies that currently market and sell products or are pursuing development of products similar to Midatech ’ s technology, products and product candidates. With respect to its product candidates, from a technology perspective, Midatech believes other companies using gold nanoparticle technologies include AuraSense Therapeutics, CytImmune Sciences, Inc., and Nanospectra Biosciences, Inc. In oncology, there are marketed nanodrugs on the market including a paclitaxel protein-bound particles for injectable suspension, known by its brand name Abraxane and marketed by Celgene Corporation for breast and various other cancers, doxorubicin HCI liposome injection, known by its brand name Doxil and marketed by Janssen Products for ovarian cancer, lyso-thermosensitive liposomal doxorubicin, known by its brand name ThermoDox and marketed by Celsion Corporation for breast and liver cancer, as well as a number of drugs in development for various cancers at Phase I or II.

 

With respect to the products Midatech commercializes, Gelclair competes with similarly categorized products, as well as a compounded, drug prescription product known as “ Magic Mouthwash, ” which is not marketed or sold by any pharmaceutical company, but rather often compounded by independent pharmacies. While Zuplenz and Solatamox have no specific competition, each of the ondansetron and tamoxifen markets are comprised of generic oral tablets. With respect to Oravig, the oral thrush market is currently serviced only by generic products, such as nystatin.

 

Some of these competitive products and therapies are based on scientific approaches that are the same or similar to Midatech ’ s approach, and others are based on entirely different approaches. Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization.

 

Midatech ’ s competitors in the biotechnology and pharmaceutical industries may have superior research and development capabilities, products, manufacturing capability or sales and marketing expertise. Many of Midatech ’ s competitors may have significantly greater financial and human resources and may have more experience in research and development.

 

As a result of these factors, Midatech ’ s competitors may obtain regulatory approval of their products more rapidly than Midatech is able to or may obtain patent protection of other intellectual property rights that limit Midatech ’ s ability to develop or commercialize its product candidates. Midatech ’ s competitors may also develop products that are more effective, more widely used and less costly than its own products, and may be more successful in manufacturing and marketing their products.

 

Midatech anticipates that it will face increased competition in the future as new companies enter Midatech ’ s markets and alternative products and technologies become available. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of Midatech ’ s competitors. Smaller and other early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with Midatech in recruiting and retaining qualified scientific, management and commercial personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, its programs.

  

 

The success of any products Midatech may commercialize will depend on the degree of market acceptance by physicians, patients, healthcare payers and others in the medical community.

 

Any products that Midatech acquires or brings to the market may not gain market acceptance by physicians, patients, healthcare payers and others in the medical community. If these products do not achieve an adequate level of acceptance, Midatech may not generate material product revenues and may not become profitable. The degree of market acceptance of Midatech ’ s products and product candidates, if approved for commercial sale, will depend on a number of factors, including, but not limited to:

 

·

the prevalence and severity of any side effects;

 

·

the efficacy and potential advantages of alternative treatments;

 

·

price;

 

·

the willingness of physicians to prescribe Midatech ’ s products; and

 

·

sufficient coverage or reimbursement by the Centers for Medicare and Medicaid Services and third party payers.

 

Midatech’s products, and any product candidates it may commercialize, may become subject to unfavorable pricing regulation, third party reimbursement practices or healthcare reform initiatives, which could harm Midatech’s business.

 

The regulations that govern marketing approvals, pricing and reimbursement for new drug and biological products vary widely from country to country. Some countries require approval of the sale price of a product before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, Midatech may obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay its commercial launch of the product, possibly for lengthy time periods, which could negatively impact the revenues it is able to generate from the sale of the product in that particular country. Adverse pricing limitations may hinder Midatech ’ s ability to recoup its investment in one or more product candidates even if its product candidates obtain marketing approval.

 

Midatech ’ s ability to commercialize any products successfully will also depend in part on the extent to which coverage and reimbursement for these products and related treatments will be available from government health administration authorities, private health insurers and other organizations. Government authorities and third party payors, such as private health insurers and health maintenance organizations, determine which medications they will cover and establish reimbursement levels. A primary trend in the healthcare industry is cost containment. Government authorities and third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. Third party payors also may seek additional clinical evidence, beyond the data required to obtain marketing approval, demonstrating clinical benefits and value in specific patient populations, before covering Midatech ’ s products for those patients. Midatech cannot be sure that coverage and reimbursement will be available for any product that it commercializes and, if reimbursement is available, what the level of reimbursement will be. Coverage and reimbursement may impact the demand for, or the price of, any product Midatech commercializes or any product candidate for which it obtains marketing approval. If reimbursement is not available or is available only to limited levels, Midatech may not be able to successfully commercialize any product or product candidate for which it obtains marketing approval.

 

In the United States in the past, payors have implemented reimbursement metrics and periodically revised those metrics as well as the methodologies used as the basis for reimbursement rates, such as average sales price ( “ ASP ” ), average manufacturer price ( “ AMP ” ), and actual acquisition cost. For drugs furnished by hospital outpatient departments, separate payment is not made by Medicare for products that do not exceed a cost per day threshold. It is possible that Midatech ’ s products also would not be paid separately by Medicare in this setting. The existing data for reimbursement based on these metrics is relatively limited, although certain states have begun to survey acquisition cost data for the purpose of setting Medicaid reimbursement rates. The Centers for Medicare and Medicaid Services ( “ CMS ” ), the federal agency that administers the Medicare and Medicaid programs, has made draft National Average Drug Acquisition Cost ( “ NADAC ” ) and draft National Average Retail Price ( “ NARP ” ) data publicly available on at least a monthly basis. In July 2013, CMS suspended the publication of draft NARP data, pending funding decisions. In November 2013, CMS moved to publishing final rather than draft NADAC data and has since made updated NADAC data publicly available on a weekly basis. As a result of this continuous evolution, it may be difficult to project the impact of these evolving reimbursement mechanics on the willingness of payors to cover Midatech ’ s products in the United States for which it receives regulatory approval. In most European Union countries, prescription drug pricing and/or reimbursement is subject to governmental control. In those countries that impose price controls, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries may require conducting a clinical trial that compares the cost effectiveness of Midatech ’ s products to other available therapies.

 

 

There may be significant delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the EMA, the MHRA, the FDA or comparable foreign regulatory authorities. Moreover, eligibility for coverage and reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers Midatech ’ s costs, including research, development, manufacturing, selling and distribution costs. Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover Midatech ’ s costs and may only be temporary. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and, in the United States, by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. In the United States, third party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. Midatech ’ s inability to promptly obtain coverage and profitable reimbursement rates from both government-funded and private payors for any approved products that it develops could have a material adverse effect on its operating results and overall financial condition.

 

Currently enacted and future legislation in the United Kingdom, United States and other foreign jurisdictions may increase the difficulty and cost for Midatech to obtain marketing approval of and commercialize its products and product candidates and affect the prices it may obtain.

 

In the United Kingdom, United States and other foreign jurisdictions, legislative and regulatory changes and proposed changes regarding the healthcare system could prevent or delay marketing approval of Midatech ’ s product candidates, restrict or regulate post-approval activities and affect its ability to profitably sell any products or product candidates for which it obtains marketing approval. Members of the European Union, or signatories thereto, are obliged to integrate directives into their national laws. European Union regulations, as in other European Union Member States, become immediately and directly enforceable in the member territories. These include without limitation:

 

·

Directive 2001/83/EC of 6 November 2001 on the European Community code as regards medicinal products for human use;

 

·

Commission Directive 2003/94/EC of October 8, 2003 enforcing principles and guidelines of good manufacturing practice as they related to medicinal products and investigational medicinal products for human use;

 

·

Commission Directive 2005/28/EC of April 8, 2005 establishing the principles and guidelines for good clinical practice relating to investigational medicinal products for human use, and the authorization requirements for the manufacturing or import thereof; and

 

·

Council Directive 89/105/EEC, of December 21, 1988, addressing the transparency of measures that regulate pricing of medicinal products for human use and their inclusion in national health insurance systems.

 

In the United Kingdom, the regulation of medicinal products derives from European Union legislation, particularly Directive 2001/83/EC on the European Community code relating to medicinal products for human use, and Regulation (EC) 726/2004 on the authorization and supervision of medicinal products and establishing the EMA. This legislation has been adopted in the United Kingdom by the Human Medicines Regulations 2012 (SI 2012/1916) and applied through the MHRA, which is the executive agency of the Department of Health implementing pharmaceutical legislation in the United Kingdom.  Accordingly, the terms of Brexit, which are negotiated between the United Kingdom and the European member states, may alter such regulation.

 

In the European Union, marketing approvals can be submitted through the national, mutual recognition or decentralized procedures. For marketing authorizations submitted through the centralized procedure, the EMA is responsible. The EMA advises the European Commission in relation to decisions on marketing authorizations.

 

 

Reimbursement in the European Union is typically controlled by statutory stipulations and controls on pharmaceutical pricing. Healthcare is broadly divided into public and private health. Products that are not to be supplied through the countries ’ public health services are typically less subject to price controls. All medicines validly prescribed on a public health prescription are in principle reimbursed from that country ’ s public funds.

 

In many European Union member states and signatories, a separate cost/benefit analysis may be required or requested (not a legal requirement) in order for prescribed products to be reimbursed. In the United Kingdom, most new medicines undergo an assessment by the NICE, which will issue guidance on if and how to use the product in the National Health Service (the “ NHS ” ), in England and Wales. This decision is largely based on the opinion of NICE regarding clinical effectiveness and cost effectiveness relative to alternative therapies. NICE appraisals follow a comprehensive and inclusive process including consultations with and contributions from stakeholders. Clinicians are expected to take NICE ’ s guidance into account when making prescribing decisions. Where NICE issues a positive recommendation, NHS bodies are required to make funding available to cover the cost of the product as a treatment option, consistent with NICE ’ s guidance. In contrast, products which are not recommended by NICE are generally not funded on a routine basis.

 

In the United States, in recent years, Congress has considered reductions in Medicare reimbursement levels for drugs administered by physicians. CMS also has authority to revise reimbursement rates and to implement coverage restrictions for some drugs. Cost reduction initiatives and changes in coverage implemented through legislation or regulation could decrease utilization of and reimbursement for any approved products, which in turn would affect the price Midatech can receive for those products. While Medicare regulations apply only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from federal legislation or regulation may result in a similar reduction in payments from private payors.

 

In March 2010, President Obama signed into law the Affordable Care Act. This law substantially changes the way healthcare is financed by both governmental and private insurers in the United States, and significantly impacts the pharmaceutical industry. The Affordable Care Act is intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medical device manufacturers, and impose additional health policy reforms. The Affordable Care Act expanded manufacturers ’ rebate liability under the Medicaid program from fee-for-service Medicaid utilization to include the utilization of Medicaid managed care organizations as well; increased the minimum Medicaid rebate due for most innovator drugs in general from 15.1% of average manufacturer price to 23.1% of average manufacturer price; and capped the total rebate amount for innovator drugs at 100% of average manufacturer price. The Affordable Care Act and subsequent legislation also changed the definition of AMP. The Affordable Care Act requires pharmaceutical manufacturers of branded prescription drugs to pay a branded prescription drug fee to the federal government. Each such manufacturer pays a prorated share of the branded prescription drug fee of $3.0 billion in 2015, based on the dollar value of its branded prescription drug sales to certain federal programs identified in the law. Substantial new provisions affecting compliance have also been enacted, which may affect Midatech ’ s business practices with healthcare practitioners if its product candidates are approved and marketed in the United States. The Affordable Care Act also expanded the 340B program to include additional types of covered entities.  Final CMS regulations to implement the changes to the Medicaid drug rebate program under the Affordable Care Act became effective on April 1, 2016.  If not repealed or amended, it is likely that the Affordable Care Act will continue the pressure on pharmaceutical pricing, especially under the Medicare and Medicaid programs, and may also increase our regulatory burdens and operating costs.

 

President Trump and the United States Congress have proposed repealing and replacing the Affordable Care Act.  It remains to be seen, however, precisely what the new legislation would provide, when it will be enacted and what impact it will have on the availability of healthcare and containing of lowering the cost of healthcare.  Such reforms, however, could have an adverse effect on anticipated revenue from product candidates that Midatech may successfully develop and for which Midatech may obtain marketing approval and may affect Midatech’s overall financial condition and ability to develop or commercialize product candidates.  For example, President Trump and congressional leaders have expressed interest in repealing certain Affordable Care Act provisions and replacing them with alternatives that may be less costly and provide state Medicaid programs and private health plans more flexibility.  It is possible that these repeal and replacement initiatives, if enacted into law, could ultimately result in fewer individuals having health insurance coverage or in individuals having insurance coverage with less generous benefits.  The scope of potential future legislation to repeal and replace the Affordable Care Act provisions is highly uncertain in many respects, as is the effect of such future legislation on Midatech’s business and prospects.  It is possible that some of the Affordable Care Act provisions that generally are not favorable for the research-based pharmaceutical industry could also be repealed along with Affordable Care Act coverage expansion provisions.

 

 

In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. Beginning April 1, 2013, Medicare payments for all items and services, including drugs and biologics, were reduced by 2% under the sequestration (i.e., automatic spending reductions) required by the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012. The Bipartisan Budget Act of 2013 extended the 2% reduction to 2023, and the Protecting Access to Medicare Act of 2014 extended the 2% reduction, on average, to 2025. If Congress does not take action in the future to modify these sequestrations, Medicare Part D plans could seek to reduce their negotiated prices for drugs.

 

Midatech cannot be sure whether additional legislative changes will be enacted, or whether FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on its products or product candidates, if any, may be.

 

Midatech is subject to environmental laws and regulations in the United Kingdom, the European Union, and the United States that govern the use, storage, handling and disposal of hazardous materials and other waste products.

 

Midatech is subject to English law, the European Union ’ s laws and regulations, and European Union and United States environmental laws and regulations governing the use, storage, handling and disposal of hazardous materials and other waste products. Midatech has health and safety policies and procedures in place to assess the risks associated with use of hazardous materials, and the assessment includes information for employees on how the substances should be used to avoid contamination of the environment and inadvertent exposure to themselves and their colleagues. Despite its precautions for handling and disposing of these materials, Midatech cannot eliminate the risk of accidental contamination or injury. In the event of a hazardous waste spill or other accident, Midatech could be liable for damages, penalties or other forms of censure. If Midatech fails to comply with any laws or regulations, or if an accident occurs, Midatech may have to pay significant penalties and may be held liable for any damages that result. This liability could exceed Midatech ’ s financial resources and could harm its reputation. Midatech may also have to incur significant additional costs to comply with current or future environmental laws and regulations. Midatech ’ s failure to comply with any government regulation applicable to its laboratory and the materials used in its laboratory may adversely affect its ability to develop, produce, market or partner any products it may commercialize or develop.

 

Midatech’s success depends in part on its ability to protect its rights in its intellectual property, which cannot be assured.

 

Midatech ’ s success and ability to compete effectively are in large part dependent upon exploitation of proprietary technologies and products that Midatech has developed internally or through joint ventures or has acquired or in- licensed. To date, Midatech has relied on copyright, trademark and trade secret laws, as well as confidentiality procedures, non-compete and/or work for hire invention assignment agreements and licensing arrangements with its employees, consultants, contractors, customers and vendors, to establish and protect its rights to its technology and, to the best extent possible, control the access to and distribution of its technology, software, documentation and other proprietary information, all of which offer only limited protection. Where Midatech has the right to do so under its agreements, it seeks to protect its proprietary position by filing patent applications in the United States, the United Kingdom and worldwide related to its novel technologies and products that are important to its business. The patent positions of biotechnology and pharmaceutical companies generally are highly uncertain, involve complex legal and factual questions and have in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of Midatech ’ s patents, including those patent rights licensed to Midatech by third parties, are highly uncertain. There can be no assurance that:

  

·

the scope of Midatech ’ s patents provides and will provide Midatech with exclusivity with respect to any or all of its products and technologies, as well as any other technologies and/or products that address the same problems as Midatech ’ s technologies and products by a different means, whether in the same manner as Midatech or not;

 

·

pending or future patent applications will be issued as patents;

 

·

Midatech ’ s patents, and/or those patents to which Midatech is licensed, are and will remain valid and enforceable and will not be subject to invalidity or revocation proceedings and that such proceedings will not result in a complete or partial loss of rights;

 

·

Midatech ’ s entitlement to exploit patents from time to time (including patents registered solely in Midatech or its affiliates ’ name or in the joint names of Midatech or an affiliate and a third party or patents which are licensed to Midatech) is and will be sufficient to protect Midatech ’ s core intellectual property rights against third parties, its commercial activities from competition or to support comprehensively its ability to develop and market its proposed products either now or in the future;

 

·

the lack of any particular patents or rights to exploit any particular patents, and the scope of Midatech ’ s patents, will not have a material adverse effect on Midatech ’ s ability to develop and market its proposed products, either now or in the future;

 

 

·

Midatech has or will have the resources to pursue any infringer of: (i) patents registered in its name (whether solely or jointly with a third party) from time to time; or (ii) patents licensed to Midatech where Midatech or an affiliate has the financial responsibility to bring such infringement actions pursuant to the relevant license agreement;

 

·

Midatech will develop technologies or products which are patentable, either alone or in conjunction with third parties;

 

·

the ownership, scope or validity of any patents registered in Midatech ’ s name (either solely or jointly) from time to time will not be challenged by third parties, including parties with whom Midatech, or any affiliate, has entered into collaboration projects or co-ownership arrangements and that any such challenge will not be successful;

 

·

any patent or patent application owned solely or jointly by Midatech will not be challenged on grounds that Midatech failed to identify the correct inventors or that Midatech failed to comply with its duty of disclosure to the United States Patent and Trademark Office or any equivalent office in a foreign jurisdiction having a disclosure requirement;

 

·

any issued patent in Midatech ’ s sole or joint name from time to time will not be challenged in one or more post-grant proceedings, including but not limited to inter partes review, derivation proceedings, interferences, and that like; and that any such challenge will not result in a complete or partial loss of rights to such issued patent or patents;

 

·

any patent applications in Midatech ’ s sole or joint name from time to time will not be opposed by any third party, including parties to collaboration, co-existence and any other contractual relationship with Midatech or any of its members;

 

·

the license agreements between Midatech and third parties are and will be valid and subsisting in the future or until their expiry dates, and that Midatech has complied with its contractual obligations under the license agreements;

 

·

all intellectual property capable of being commercialized that is or has been generated pursuant to collaboration agreements between Midatech and third parties will be or has been identified;

 

·

all intellectual property generated pursuant to collaboration agreements and to which Midatech has a contractual entitlement or generated by employees has been lawfully assigned into Midatech ’ s sole name (or to one of its subsidiaries);

 

·

in respect of all intellectual property generated pursuant to a collaboration agreement between Midatech and a third party to which Midatech and that third party have a joint contractual entitlement, that such intellectual property has been lawfully assigned into joint names and the rights between Midatech and that third party are properly regulated by a co-ownership agreement; and

 

·

beyond contractual warranties, the licensors of intellectual property to Midatech or affiliate own the relevant patents and that those patents have not and will not be the subject of, or subject to, infringement, invalidity or revocation actions.

 

The steps Midatech has taken to protect its proprietary rights may not be adequate to preclude misappropriation of its proprietary information or infringement of its intellectual property rights, both inside and outside of the United Kingdom and United States. The rights already granted under any of Midatech ’ s currently issued patents and those that may be granted under future issued patents may not provide Midatech with the proprietary protection or competitive advantages it is seeking. If Midatech is unable to obtain and maintain patent protection for its technology and products, or if the scope of the patent protection obtained is not sufficient, Midatech ’ s competitors could develop and commercialize technology and products similar or superior to Midatech, and Midatech ’ s ability to successfully commercialize Midatech ’ s technology and products may be adversely affected.

 

 

With respect to patent rights, Midatech does not know whether any of the pending patent applications for any of its licensed compounds will result in the issuance of patents that protect its technology or products, or which will effectively prevent others from commercializing competitive technologies and products. Although Midatech has a number of issued patents covering its technology, its pending applications cannot be enforced against third parties practicing the technology claimed in such applications unless and until a patent issues from such applications. Further, the examination process may require Midatech to narrow the claims, which may limit the scope of patent protection that may be obtained. Because the issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, issued patents that Midatech owns or has licensed from third parties may be challenged in the courts or patent offices in the European Union, United Kingdom, the United States and other foreign jurisdictions. Overall, such challenges may result in the loss of patent protection, the narrowing of claims in such patents, or the invalidity or unenforceability of such patents, which could limit Midatech ’ s ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection for its technology and products. Protecting against the unauthorized use of Midatech ’ s patented technology, trademarks and other intellectual property rights is expensive, difficult and may in some cases not be possible. In some cases, it may be difficult or impossible to detect third party infringement or misappropriation of Midatech ’ s intellectual property rights, even in relation to issued patent claims, and proving any such infringement may be even more difficult.

 

The patent prosecution process is expensive and time-consuming, and Midatech may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that Midatech will fail to identify patentable aspects of inventions made in the course of its development and commercialization activities before it is too late to obtain patent protection on them. Further, given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. Midatech expects to seek extensions of patent terms where they are available in any countries where it is prosecuting patents. However, the applicable authorities, including the FDA in the United States, and any equivalent regulatory authority in other countries, may not agree with Midatech ’ s assessment of whether such extensions are available, and may refuse to grant extensions to its patents, or may grant more limited extensions than it requests. If this occurs, Midatech ’ s competitors may be able to take advantage of its investment in development and clinical trials by referencing its clinical and preclinical data and launch their product earlier than might otherwise be the case. Changes in either the patent laws or interpretation of the patent laws in the European Union, the United Kingdom, the United States and other countries may diminish the value of Midatech ’ s patents or narrow the scope of its patent protection. The laws of foreign countries may not protect Midatech ’ s rights to the same extent as the laws of the United Kingdom or the United States, and these foreign laws may also be subject to change. Publication of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications typically are not published until 18 months after filing or, in some cases, not at all. Therefore, Midatech cannot be certain that it was the first to make the inventions claimed in its owned or licensed patents or pending patent applications, or that it was the first to file for patent protection of such inventions.

  

Previously, in the United States, assuming the other requirements for patentability are met, the first to make the claimed invention was entitled to the patent. Outside the United States, the first to file a patent application is entitled to the patent. In March 2013, the United States transitioned to a “ first to file ” system in which the first inventor to file a patent application will be entitled to the patent. Under either the previous or current system, third parties will be allowed to submit prior art prior to the issuance of a patent by the United States Patent and Trademark Office, and may become involved in opposition, derivation, reexamination, inter-partes review or interference proceedings challenging Midatech ’ s patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, Midatech ’ s patent rights, which could adversely affect its competitive position with respect to third parties.

 

Midatech’s commercial success depends, in part, upon Midatech not infringing intellectual property rights owned by others.

 

Although Midatech believes that it has a proprietary platform for its technologies and products, Midatech cannot determine with certainty whether any existing third party patents or the issuance of any third party patents in the future would require it to alter its technology, obtain licenses or cease certain activities. Midatech may become subject to claims by third parties that its technology infringes their intellectual property rights, in which case it will have no option other than to defend the allegation, which may be possible to resolve through negotiation or which might result in court proceedings. An adverse outcome in any of these circumstances is that Midatech might be subject to significant liabilities, be required to cease using a technology or to pay license fees (both prospectively and retrospectively); and may be subject to the payment of significant damages. Midatech could incur substantial costs in any litigation or other proceedings relating to patent rights, even if it is resolved in Midatech ’ s favor. If the proceedings occur in the United States, it is likely that Midatech will be responsible for its own legal costs, no matter the outcome of the litigation. In contrast, in the United Kingdom, the losing party typically is ordered to pay the winning party ’ s costs, although it is rare to have a complete recovery of all costs from the losing side. Some of Midatech ’ s competitors may be able to sustain the costs of complex litigation more effectively or for a longer time than Midatech can because of their substantially greater resources. In addition, uncertainties or threatened or actual disputes relating to any patent, patent application or other intellectual property right (including confidential information) could have a material adverse effect on Midatech ’ s ability to market a product, enter into collaborations in respect of the affected products, or raise additional funds.

 

 

The policing of unauthorized use of Midatech ’ s patented technologies and products is difficult and expensive. There can be no assurance that the steps Midatech takes will prevent misappropriation of, or prevent an unauthorized third party from obtaining or using, the technologies, know-how and products Midatech relies on. In addition, effective protection may be unavailable or limited in some jurisdictions. Any misappropriation of Midatech ’ s proprietary technology, products and intellectual property could have a negative impact on Midatech ’ s business and its operating results. Litigation may be necessary in the future to enforce or protect Midatech ’ s rights or to determine the validity or scope of the proprietary rights of others. Litigation could cause Midatech to incur substantial costs and divert resources and management attention away from its daily business and there can be no guarantees as to the outcome of any such litigation. In addition, a defendant in any such litigation may counterclaim against Midatech, resulting in additional time and expense to defend against such a counterclaim, which defense may not be successful.

 

Midatech may become involved in lawsuits to protect or enforce its intellectual property, which could be expensive, time consuming and unsuccessful.

 

Competitors may infringe Midatech ’ s patents or misappropriate or otherwise violate its intellectual property rights. To counter infringement or unauthorized use, litigation may be necessary in the future to enforce or defend Midatech ’ s intellectual property rights, to protect its trade secrets or to determine the validity and scope of its own intellectual property rights or the proprietary rights of others. This can be expensive and time consuming. Many of Midatech ’ s current and potential competitors have the ability to dedicate substantially greater resources to defend their intellectual property rights than it can. Accordingly, despite Midatech ’ s efforts, it may not be able to prevent third parties from infringing upon or misappropriating its intellectual property. Litigation could result in substantial costs and diversion of management resources, which could harm Midatech ’ s business and financial results. In addition, in an infringement proceeding, a court may decide that a patent owned by or licensed to Midatech is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that Midatech ’ s patents do not cover the technology in question. An adverse result in any litigation proceeding could put one or more of Midatech ’ s patents at risk of being invalidated, held unenforceable or interpreted narrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of Midatech ’ s confidential information could be compromised by disclosure during this type of litigation.

 

Third parties may initiate legal proceedings alleging that Midatech is infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of Midatech’s business.

 

Midatech ’ s commercial success depends upon Midatech ’ s ability and the ability of its collaborators to develop, manufacture, market and sell its product candidates, and to use its proprietary technologies without infringing the proprietary rights of third parties. Midatech may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to its products and technology. Third parties may assert infringement claims against Midatech based on existing patents or patents that may be granted in the future. If Midatech is found to infringe a third party ’ s intellectual property rights, it could be required to obtain a license from such third party to continue developing and commercializing its products and technology. However, Midatech may not be able to obtain any required license on commercially reasonable terms or at all. Even if Midatech is able to obtain a license, it may be non-exclusive, thereby giving its competitors access to the same technologies licensed to it. Midatech could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, in any such proceeding or litigation, Midatech could be found liable for monetary damages. A finding of infringement could prevent Midatech from commercializing its products or product candidates or force it to cease some of its business operations, which could materially harm its business. Any claims by third parties that Midatech has misappropriated their confidential information or trade secrets could have a similar negative impact on its business.

 

Midatech may be subject to claims that its employees have wrongfully used or disclosed alleged trade secrets of their former employers.

 

Many of Midatech ’ s employees, including its senior management, were previously employed at other biotechnology or pharmaceutical companies. Some of these employees, including members of Midatech ’ s senior management, executed proprietary rights, non-disclosure and non-competition agreements in connection with such previous employment. Although Midatech tries to ensure that its employees do not use the proprietary information or know-how of others in their work for Midatech, Midatech may be subject to claims that it or these employees have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee ’ s former employer. Midatech is not aware of any threatened or pending claims related to these matters or concerning the agreements with its senior management, but in the future litigation may be necessary to defend against such claims. If Midatech fails in defending any such claims, in addition to paying monetary damages, it may lose valuable intellectual property rights or personnel. Even if Midatech is successful in defending against such claims, litigation could result in substantial costs and be a potential distraction to management.

  

 

If Midatech were unable to protect the confidentiality of its trade secrets, its business and competitive position could be harmed.

 

In addition to seeking patents for some of Midatech ’ s technology and products, Midatech also relies on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain its competitive position. Midatech seeks to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as its employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties. Midatech also enters into confidentiality and invention or patent assignment agreements with its employees and consultants. Despite these efforts, any of these parties may breach the agreements and disclose Midatech ’ s proprietary information, including Midatech ’ s trade secrets, and Midatech may not be able to obtain adequate remedies for such breaches. In addition, a court may determine that Midatech failed to take adequate steps to protect its trade secrets, in which case it may not be possible to enforce its trade secret rights. 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 may be less willing or unwilling to protect trade secrets. If any of Midatech ’ s trade secrets were to be lawfully obtained or independently developed by a competitor, Midatech would have no right to prevent such competitor from using that technology or information to compete with it, which could harm Midatech ’ s competitive position.

 

Midatech may face product liability claims stemming from its products.

 

In carrying out its activities, Midatech may potentially face contractual and statutory claims, or other types of claims from customers, suppliers and/or investors. In addition, Midatech is exposed to potential product liability risks that are inherent in the research, development, production and supply of its products. Subjects enrolled in Midatech ’ s clinical trials, consumers, healthcare providers or other persons administering or selling products based on Midatech ’ s and its collaborators ’ technology may be able to bring claims against Midatech based on the use of such products. If Midatech cannot successfully defend itself against claims that its product candidates or products caused injuries, Midatech could incur substantial costs and liabilities. Irrespective of their merits or actual outcome, liability claims may result in:

 

·

decreased demand for any product candidates or product that Midatech may develop;

 

·

termination of clinical trial sites or entire trial programs;

 

·

significant negative media attention and injury to Midatech ’ s reputation;

 

·

withdrawal of clinical trial participants;

 

·

significant costs to defend the related litigation;

 

·

substantial monetary awards to trial subjects or patients;

 

·

loss of revenue;

 

·

diversion of management and scientific resources from Midatech ’ s business operations; and

 

·

the inability to commercialize any products that Midatech may develop.

 

Midatech has obtained product liability insurance coverage with a £ 8.0 million annual aggregate coverage. Midatech ’ s insurance coverage may not be sufficient to cover all of its product liability related expenses or losses and may not cover it for any expenses or losses it may suffer. Moreover, insurance coverage is becoming increasingly expensive and, in the future, Midatech may not be able to maintain insurance coverage at a reasonable cost, in sufficient amounts or upon adequate terms to protect it against losses due to product liability. If Midatech determines that it is prudent to increase its product liability coverage based on sales of its products, Midatech may be unable to obtain this increased product liability insurance on commercially reasonable terms or at all. Large judgments have been awarded in class action or individual lawsuits based on drugs that had unanticipated side effects, including side effects that may be less severe than those of Midatech ’ s products. A successful product liability claim or series of claims brought against Midatech could cause the price of the Ordinary Shares and/or Depositary Shares to decline and, if judgments exceed Midatech ’ s insurance coverage, could decrease its cash and have a material adverse effect its business, results of operations, financial condition and prospects.

  

 

Midatech’s products may be faced with recalls.

 

Midatech may be faced with the necessity of recalling one or more products or batches of products from the market. This necessity may also occur if no de facto product property exists that makes a recall obligatory, in particular a side effect or defect, but rather if such a property is merely suspected of being present. A recall may result in loss of revenue, damage to reputation and consequential fall in cash flow, among other things. Affected products could not be sold any longer, and moreover, trust among, in particular, doctors and patients could be affected, which could lead to reductions in sales or profits. Further, options for refinancing on the capital market could be negatively affected or even excluded.

 

Midatech relies on third parties to conduct its preclinical and clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, Midatech may not be able to obtain regulatory approval for or commercialize its product candidates and its business could be substantially harmed.

 

Midatech is, and may continue to be, reliant on other parties for the successful development and commercialization of many of its products. Midatech relies upon CROs for the conduct of its clinical studies. Midatech relies on these parties for execution of its preclinical and clinical trials, and controls only certain aspects of their activities. Nevertheless, Midatech is responsible for ensuring that each of its studies is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and Midatech ’ s reliance on the CROs or collaboration partners does not relieve it of its regulatory responsibilities. Midatech also relies on third parties to assist in conducting its preclinical studies in accordance with Good Laboratory Practices and requirements with respect to animal welfare. Midatech and its CROs or collaboration partners are required to comply with Good Clinical Practices ( “ GCP ” ), which are regulations and guidelines enforced by the MHRA, the FDA, the EMA and comparable foreign regulatory authorities for all of its products in clinical development. Regulatory authorities enforce these GCP through periodic inspections of trial sponsors, principal investigators and trial sites. If Midatech or any of its CROs or partners fail to comply with applicable GCP, the clinical data generated in Midatech ’ s clinical trials may be deemed unreliable and the EMA, the MHPA, the FDA or comparable foreign regulatory authorities may require Midatech to perform additional clinical trials before approving its marketing applications. Midatech cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of its clinical trials comply with GCP requirements. In addition, Midatech ’ s clinical trials must be conducted with product produced under cGMP requirements. Failure to comply with these regulations may require Midatech to repeat preclinical and clinical trials, which would delay the regulatory approval process.

 

Midatech ’ s CROs are not its employees, and except for remedies available to it under such agreements with such CROs, Midatech cannot control whether or not they devote sufficient time and resources to its on-going clinical, nonclinical and preclinical programs. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to Midatech ’ s clinical protocols, regulatory requirements or for other reasons, then Midatech ’ s clinical trials may be extended, delayed or terminated and it may not be able to obtain regulatory approval for or successfully commercialize its product candidates. As a result, Midatech ’ s results of operations and the commercial prospects for its product candidates would be harmed, its costs could increase and its ability to generate revenues could be delayed.

 

Because Midatech has relied on third parties, its internal capacity to perform these functions is limited. Outsourcing these functions involves risk that third parties may not perform to Midatech ’ s standards, may not produce results in a timely manner or may fail to perform at all. In addition, the use of third party service providers requires Midatech to disclose its proprietary information to these parties, which could increase the risk that this information will be misappropriated. Midatech currently has a small number of employees, which limits the internal resources it has available to identify and monitor its third party providers. To the extent it is unable to identify and successfully manage the performance of third party service providers in the future, Midatech ’ s business may be adversely affected. Though Midatech carefully manages its relationships with its CROs, there can be no assurance that it will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on Midatech ’ s business, financial condition and prospects.

 

Midatech is dependent on third party suppliers, and if it experiences problems with any of these third parties, the manufacturing of its product candidates or products could be delayed, which could harm its results of operations.

 

Midatech is also dependent upon certain qualified suppliers, of which there are a limited number, for the supply of raw materials, components and manufacturing equipment. Thus, the success of Midatech ’ s business may be adversely affected by the underperformance of third parties, exploitation by third parties of Midatech ’ s commercial dependence and by unforeseen interruptions to third parties ’ businesses. Although the existence of several alternative suppliers for each function mitigates the risks associated with this dependence, as does the availability of commercial insurance in respect of the impact of accidental events, the failure of a third party to properly to carry out their contractual duties or regulatory obligations would be disruptive to Midatech ’ s business. Further, any action taken by a third party that is detrimental to Midatech ’ s reputation could have a negative impact on Midatech ’ s ability to register its trademarks and/or market and sell its products.

 

 

In the future, Midatech intends to license certain of its products to other companies for later stages of development and subsequent marketing, and consequently Midatech will be increasingly reliant on securing and retaining such partners once its products advance through the development process. There can be no assurance that Midatech will be able to secure such partners or that, once secured, Midatech ’ s partners will continue to make the necessary and timely investments in its products to complete their development in the expected time and achieve commercial success.

 

Midatech is exposed to risks related to its partnerships in joint ventures.

 

Midatech participates in, and may expand through, joint ventures. There are certain risks associated with joint venture partners, including the risk that joint venture partners may:

 

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have economic or business interests or goals that are inconsistent with those of Midatech and be in a position to take or influence actions contrary to Midatech ’ s interests and plans, which may create impasses on decisions and affect Midatech ’ s ability to implement its strategies;

 

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veto proposals in respect of joint venture operations;

 

·

be unable or unwilling to fulfill their obligations under the joint venture or other agreements; or

 

·

experience financial or other difficulties.

 

Any joint venture arrangements may expose Midatech to the risk that disputes develop between Midatech and joint venture partners, with any litigation or arbitration resulting from any such disputes increasing the Midatech ’ s expenses and distracting management resources. In addition, there can be no assurance that Midatech will always have a controlling interest in any joint venture in which it currently participates or into which it may enter in the future. As such, joint ventures may disproportionately divert financial and management resources, which may have a material adverse effect on Midatech ’ s business, financial condition, operating results or prospects.

 

Midatech’s counterparties may become insolvent.

 

There is a risk that parties with whom Midatech trades or has other business relationships with (including partners, joint venturers, customers, suppliers, subcontractors and other parties) may become insolvent. This may be due to general economic conditions or factors specific to that company. In the event that a party with whom Midatech trades becomes insolvent, this could have an adverse impact on the revenues and profitability of Midatech.

 

Midatech may lose its sterile production license and may encounter unexpected difficulties in the scale-up of production to viable clinical trial or commercialization levels.

  

Midatech completed a major upgrade of its infrastructure in Spain in September 2014 by integrating a separated sterile production unit within the manufacturing containment area. Through integrating the separated sterile production unit within the manufacturing facility, Midatech can produce clinical candidate compounds under sterile conditions, allowing Midatech to clinically test and evaluate candidate gold nanoparticles-based cancer therapies, which are administered by intravenous injection. A further upgrade was completed in December 2016 with the addition of a non-sterile production unit for Midatech’s sustained release products. The Spanish regulatory authority has inspected the manufacturing facility and has granted the required sterile production licenses and is due to issue an updated cGMP license for European compliance in respect of the sustained release production suite. If the Spanish regulatory authority were to revoke or fail to issue the requisite licenses, Midatech may need to outsource its requirements of the sterile production and cGMP manufacturing, which will increase Midatech ’ s reliance on third parties to manufacture the candidate compounds to the required standards, and will be therefore be at risk of underperformance and unforeseen interruptions, which could adversely affect Midatech ’ s business and financial performance.

 

Because of the complex nature of Midatech ’ s product candidates, it may not be able to manufacture the product candidates in a timely manner at cost or in quantities necessary to successfully commercialize Midatech ’ s products. Certain of Midatech ’ s product candidates have historically only been manufactured in small quantities. Later stage development and commercial supply of such products will require Midatech to scale up the manufacture of its products. There can be no assurance that this can be successfully completed or that, if completed, it will result in commercially acceptable manufacturing costs.

 

 

Midatech’s relationships with customers and third party payors are subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose it to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

 

Healthcare providers, physicians and third party payors play a primary role in the recommendation and prescription of any of Midatech ’ s products or any product candidate for which Midatech obtains marketing approval. Midatech ’ s arrangements with third party payors and customers exposes it to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which it markets, sells and distributes its products for which it obtains marketing approval. For example, in the United States, restrictions under applicable federal and state healthcare laws and regulations include the following:

 

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the federal healthcare anti-kickback statute prohibits any person from, among other things, knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchasing, leasing, ordering or arranging for or recommending of any good or service for which payment may be made, in whole or in part, under federal and state healthcare programs such as Medicare and Medicaid. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand, and prescribers, purchasers, and formulary managers on the other. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly and practices that involve remuneration to those who prescribe, purchase, or recommend pharmaceutical and biological products, including certain discounts, or engaging consultants for as speakers or consultants, may be subject to scrutiny if they do not fit squarely within the exemption or safe harbor. Midatech ’ s practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability. Moreover, there are no safe harbors for many common practices, such as educational and research grants or patient assistance programs;

 

·

the federal civil False Claims Act imposes civil penalties, and provides for whistleblower or qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented, claims for payment of government funds that are false or fraudulent, or knowingly making, using or causing to be made or used, a false record or statement material to an obligation to pay money to the government, or knowingly concealing or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. In recent years, several pharmaceutical and other healthcare companies have faced enforcement actions under the federal False Claims Act for, among other things, allegedly submitting false or misleading pricing information to government health care programs and providing free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have faced enforcement actions for causing false claims to be submitted because of the company ’ s marketing the product for unapproved, and thus non-reimbursable, uses. In addition, violation of the federal anti-kickback statute may be actionable under the federal civil False Claims Act. Criminal prosecution is possible for making or presenting a false or fictitious or fraudulent claim to the federal government;

  

·

the federal Health Insurance Portability and Accountability Act of 1996 ( “ HIPAA ” ), as amended by the Health Information Technology for Economic and Clinical Health Act, among other things, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information. HIPAA also prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation, or making or using any false writing or document knowing the same to contain any materially false fictitious or fraudulent statement or entry in connection with the delivery of or payment for healthcare benefits, items or services;

 

·

the federal Physician Payment Sunshine Act, being implemented as the Open Payments Program, requires certain manufacturers of drugs, devices, biologics and medical supplies to engage in extensive tracking of payments and other transfers of value to physicians and teaching hospitals, including physician ownership and investment interests, and to publicly report such data. Pharmaceutical and biological manufacturers with products for which payment is available under Medicare, Medicaid or the State Children ’ s Health Insurance Program started tracking such payments in August 2013, and must submit a report on or before the 90th day of each calendar year disclosing reportable payments made in the previous calendar year; and

 

 

·

analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non - governmental third party payors, including private insurers. Several states also require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products in those states and to report gifts and payments to individual health care providers in those states. Some of these states also prohibit certain marketing-related activities, including the provision of gifts, meals, or other items to certain health care providers. In addition, several states require pharmaceutical companies to implement compliance programs or marketing codes.

 

Midatech, through Midatech US, has initiated participation in the federal Medicaid Rebate Program established by the Omnibus Budget Reconciliation Act of 1990, as well as several state supplemental rebate programs, in connection with the sale of Soltamox and would anticipate participating in these programs with respect to future pharmaceutical products, including Oravig and Zuplenz. Though to date invoices for rebates have not been material, under the Medicaid rebate program, Midatech anticipates paying a rebate to each state Medicaid program for its products that are reimbursed by those programs. Federal law requires that any company that participates in the Medicaid rebate program extend comparable discounts to qualified purchasers under the Public Health Service Act pharmaceutical pricing program, which requires Midatech to sell its products to certain customers at prices lower than Midatech otherwise might be able to charge. If products are made available to authorized users of the Federal Supply Schedule, additional pricing laws and requirements apply. Pharmaceutical companies have been prosecuted under federal and state false claims laws in connection with allegedly inaccurate information submitted to the Medicaid Rebate Program or for knowingly submitting or using allegedly inaccurate pricing information in connection with federal pricing and discount programs.

 

Pricing and rebate calculations vary among products and programs. The calculations are complex and may be subject to interpretation by Midatech or its contractors, governmental or regulatory agencies and the courts. Midatech ’ s methodologies for calculating these prices could be challenged under false claims laws or other laws. Midatech or its contractors could make a mistake in calculating reported prices and required discounts, revisions to those prices and discounts, or determining whether a revision is necessary, which could result in retroactive rebates (and interest, if any). Governmental agencies may also make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid. If this were to occur, Midatech could face, in addition to prosecution under federal and state false claims laws, substantial liability and civil monetary penalties, exclusion of Midatech ’ s products from reimbursement under government programs, criminal fines or imprisonment or the entry into a corporate integrity agreement, deferred prosecution agreement, or similar arrangement.

  

In the United Kingdom and other European Union member states, comparable regulations and laws exist in order to maintain a fair healthcare market. The United Kingdom Bribery Act 2010 may also have jurisdiction in relation to unlawful payments or kickbacks in the United Kingdom and elsewhere.

 

Efforts to ensure that Midatech ’ s business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that Midatech ’ s business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If Midatech ’ s operations, including activities conducted by Midatech ’ s sales team in the promotion of Midatech ’ s licensed or co-promoted products, are found to be in violation of any of these laws or any other governmental regulations that may apply to us, Midatech may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid in the United States, and the curtailment or restructuring of Midatech ’ s operations. If any of the physicians or other providers or entities with whom Midatech expects to do business is found to not be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

 

If Midatech is unable to retain and recruit qualified scientists or if any of its ke y executives, ke y emplo y ees or key consultants discontinues his or her employment or consulting relationship with us, this may delay its development efforts or otherwise harm its business.

 

Midatech ’ s future development and prospects depend to a large degree on the experience, performance and continued service of its senior management team, including members of its Board of Directors. Midatech has invested in its management team at all levels. Midatech has entered into contractual arrangements with its directors and senior management team with the aim of securing the services of each of them. However, retention of these services or the identification of suitable replacements cannot be guaranteed. There can be no guarantee that the services of the current directors and senior management team will be retained, or that suitably skilled and qualified individuals can be identified and employed, which may adversely impact Midatech ’ s ability to develop its technologies and/or provide its services at the time requested by its customers or its ability to market its services and technologies, and otherwise to grow its business, could be impaired. The loss of the services of any of the directors or other members of the senior management team and the costs of recruiting replacements may have a material adverse effect on Midatech and its commercial and financial performance.

 

 

The ability to continue to attract and retain employees with the appropriate expertise and skills also cannot be guaranteed. Finding and hiring any additional personnel and replacements could be costly and might require Midatech to grant significant equity awards or other incentive compensation, which could adversely impact its financial results, and there can be no assurance that Midatech will have sufficient financial resources to do so. Effective product development and innovation, upon which Midatech ’ s success is dependent, is in turn dependent upon attracting and retaining talented technical and scientific personnel, who represent a significant asset and serve as the source of Midatech ’ s technological and product innovations. If Midatech is unable to hire, train and retain such personnel in a timely manner, the development and introduction of Midatech ’ s products could be delayed and its ability to sell its products and otherwise to grow its business will be impaired and the delay and inability may have a detrimental effect upon the performance of Midatech.

  

Midatech’s employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could have a material adverse effect on its business.

 

Midatech is exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with applicable regulations, provide accurate information to regulatory authorities, comply with manufacturing standards, comply with healthcare fraud and abuse laws and regulations, report financial information or data accurately, or disclose unauthorized activities to Midatech. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to Midatech ’ s reputation. Midatech has adopted a Code of Business Conduct and Ethics, but it is not always possible to identify and deter employee misconduct, and the precautions Midatech has taken to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against Midatech and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on its business and results of operations, including the imposition of significant fines or other sanctions.

 

Unexpected facility shutdowns or system failures may occur and Midatech’s disaster recovery plans may not be sufficient.

 

Midatech depends on the performance, reliability and availability of its properties, plant, machinery, laboratory equipment and information technology systems. Midatech may not be able to access its facilities as a result of events beyond its control, such as extreme weather conditions, flood, fire, theft, terrorism and acts of God. Any damage to or failure of its equipment and/or systems could also result in disruptions to Midatech ’ s operations. A complete or partial failure of Midatech ’ s information technology systems, or those of its CROs and other third parties on which it relies, or corruption of data could result in Midatech being unable to access information that it needs in order to meet its obligations to its customers or a breach of confidentiality with respect to Midatech ’ s or its customers ’ proprietary information. If such an event were to occur and cause interruptions in Midatech ’ s operations, it could result in a material disruption of its drug development programs. For example, the loss of clinical trial data from completed or ongoing or planned clinical trials could result in delays in Midatech ’ s regulatory approval efforts and significantly increase Midatech ’ s costs to recover or reproduce the data. Midatech ’ s disaster recovery plans may not adequately address every potential event and its insurance policies may not cover any loss in full or in part (including losses resulting from business interruptions) or damage that it suffers fully or at all. The occurrence of one or more of these events could have a material adverse effect on Midatech ’ s business, financial position, reputation or prospects, and might lead to a claim for damages.

 

Midatech’s business may be adversely affected by economic conditions and current economic weakness.

 

Any economic downturn either globally, regionally or locally in any country in which Midatech operates may have an adverse effect on the demand for Midatech ’ s products. A more prolonged economic downturn may lead to an overall decline in Midatech ’ s sales, limiting Midatech ’ s ability to generate a profit and positive cash flow. The markets in which Midatech offers its products are directly affected by many national and international factors that are beyond Midatech ’ s control, such as political, economic, currency, social and other factors.

 

 

Midatech is exposed to the risks of doing business internationally.

 

In addition to operations in the United States, Midatech also currently operates in a number of countries in Europe. Midatech ’ s international operations are subject to a number of risks inherent in operating in different countries. These include, but are not limited to, risks regarding:

 

·

currency exchange rate fluctuations;

 

·

restrictions on repatriation of earnings;

 

·

efforts to develop an international sales, marketing and distribution organization, which may increase Midatech ’ s expenses, divert management ’ s attention from the acquisition or development of product candidates or cause it to forgo profitable licensing opportunities in these geographies;

 

·

unexpected changes in foreign laws and regulatory requirements, including pharmaceutical regulations;

  

·

difficulty of effective enforcement of contractual provisions in local jurisdictions;

 

·

inadequate intellectual property (including confidentiality) protection in foreign countries;

 

·

trade-protection measures, import or export licensing requirements and fines, penalties or suspension or revocation of export privileges; and

 

·

changes in a specific country ’ s or a region ’ s political or economic conditions, particularly in emerging markets.

 

The occurrence of any of these events or conditions could adversely affect Midatech ’ s ability to increase or maintain its operations in various countries.

 

Midatech has undertaken, and may in the future undertake, additional strategic acquisitions. Failure to integrate acquisitions could adversely affect Midatech’s value.

 

One of the ways Midatech has grown its pipeline and business is through strategic acquisitions, such as its recent acquisition of DARA and the acquisition of Zuplenz from Galena Biopharma. Midatech may, from time to time, evaluate additional acquisition opportunities, and may, in the future, strategically make further acquisitions of, and investments in, businesses and technologies when it believes the opportunity is advantageous to its prospects. There can be no assurance that in the future Midatech will be able to find appropriate acquisitions or investments. In connection with these acquisitions or investments, Midatech may:

 

·

issue stock that would dilute its stockholders ’ percentage of ownership;

 

·

incur debt and assume liabilities; and

 

·

incur amortization expenses related to intangible assets or incur large and immediate write-offs.

 

Midatech also may be unable to find suitable acquisition candidates and may not be able to complete acquisitions on favorable terms, if at all. If Midatech does complete an acquisition, this may not ultimately strengthen its competitive position or ensure that it will not be viewed negatively by customers, financial markets or investors. Further, acquisitions, including the acquisition of DARA, could also pose numerous additional risks to Midatech ’ s operations, including:

 

·

problems integrating the purchased business, products or technologies, including the failure to achieve the expected benefits and synergies;

 

·

increases to Midatech ’ s expenses;

 

·

the failure to have discovered undisclosed liabilities of the acquired asset or company;

 

·

diversion of management ’ s attention from their day-to-day responsibilities;

 

·

harm to Midatech ’ s operating results or financial condition;

 

·

entrance into markets in which Midatech has limited or no prior experience; and

 

 

·

potential loss of key employees, particularly those of the acquired entity.

 

Midatech may not be able to complete one or more acquisitions or effectively integrate the operations, products or personnel gained through any such acquisition without a material adverse effect on its business, financial condition and results of operations.

  

Risks Related to Ownership of Midatech’s Securities

 

The price of each Ordinary Share has been subject to movements on the AIM Market and may continue to do so.

 

Each Depositary Share represents two Ordinary Shares. A public market has only recently been established for the Depositary Shares and such a market may not be sustained. Both the United States and United Kingdom stock markets have experienced significant volatility, including in pharmaceutical and biotechnology stocks. In particular, the closing price of Midatech ’ s Ordinary Shares on the AIM Market of the London Stock Exchange ( “ AIM ” ) has fluctuated between £ 1.01 and £ 3.30 between December 8, 2014 and December 31, 2016, and the closing price of Midatech ’ s Depositary Shares on NASDAQ has fluctuated between $2.40 and $8.09 between December 7, 2015 and December 31, 2016. The volatility of pharmaceutical and biotechnology stocks does not often relate to the operating performance of the companies represented by the stock. Other price fluctuations are, or may be, directly attributable to financial performance.

 

Factors that could cause volatility in the market price of each Ordinary Share and the Depositary Shares include:

·

the progress of preclinical development, laboratory testing and clinical trials of Midatech ’ s product candidates;

·

the results from Midatech ’ s clinical programs and any future trials Midatech may conduct;

·

developments in the clinical trials of potentially similar competitive products;

·

EMA, FDA or international regulatory actions;

·

failure of any of Midatech ’ s product candidates, if approved, to achieve commercial success;

·

announcements of the introduction of new products by Midatech or its competitors;

·

developments concerning intellectual property rights;

·

litigation or public concern about the safety of Midatech ’ s products;

·

market research and comments by securities analysts;

·

actual and anticipated fluctuations in Midatech ’ s operating results;

·

deviations in Midatech ’ s operating results from the estimates of securities analysts;

·

rumors relating to Midatech or its competitors;

·

additions or departures of key personnel;

·

third party reimbursement policies;

·

Brexit and any resulting economic or currency volatility;

·

developments concerning current or future collaborations, strategic alliances, joint ventures or similar relationships; and

·

reviews of long-term values of Midatech ’ s assets, which could lead to impairment charges that could reduce Midatech ’ s earnings.

These and other external factors may cause the market price and demand for Depositary Shares or Ordinary Shares to fluctuate substantially, which may limit or prevent investors from readily buying and selling the securities and may otherwise negatively affect the liquidity of, the Depositary Shares or the Ordinary Shares. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of Midatech ’ s stockholders brought a lawsuit against Midatech, it could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of Midatech ’ s management.

 

Depositary Shares may not be as liquid as Ordinary Shares.

 

Some companies that have issued American Depositary Shares on United States stock exchanges have experienced lower levels of liquidity in their American Depositary Shares than is the case for their ordinary shares listed on their domestic exchange. There is a possibility that Depositary Shares may be less liquid than Ordinary Shares listed on AIM. In addition, investors may incur higher transaction costs when buying and selling Depositary Shares than they would incur in buying and selling common stock.

 

The rights of holders of Depositary Shares are not the same as the rights of holders of Ordinary Shares.

 

 

Midatech is a public limited company organized under the laws of England and Wales. The Depositary Shares represent a beneficial ownership interest in Ordinary Shares. The rights of holders of Depositary Shares will be governed by English law, Midatech ’ s constitutional documents, the listing rules of AIM (the “ AIM Rules ” ), and the deposit agreement pursuant to which the Depositary Shares are issued. The rights and terms of the Depositary Shares are designed to replicate, to the extent reasonably practicable, the rights attendant to the Ordinary Shares, for which there is currently no active trading market in the United States. However, because of aspects of British law, Midatech ’ s constitutional documents and the terms of the deposit agreement, the rights of holders of Depositary Shares will not be identical to and, in some respects, may be less favorable than, the rights of holders of Ordinary Shares.

 

The market price of the Depositary Shares may not be identical, in United States dollar terms, to the market price of the Ordinary Shares.

 

While the market price of Depositary Shares typically fluctuates according to the market price of the Ordinary Shares and according to changes in the United States dollar and British pound sterling exchange rate, there is no guarantee that this relationship will be observed at all times, or at any time. The market price of Depositary Shares may differ from the market price of the Ordinary Shares in United States dollar terms for a number of reasons, including the relative liquidity of the Depositary Shares and Ordinary Shares.

 

You may not receive distributions on Ordinary Shares represented by Depositary Shares or any value for them if it is illegal or impractical to make them available to holders of Depositary Shares.

 

The depositary of the Depositary Shares has agreed to pay to you distributions with respect to cash or other distributions it or the custodian receives on Ordinary Shares or other deposited securities after deducting its agreed fees and expenses. You will receive these distributions in proportion to the number of Ordinary Shares your Depositary Shares represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of Depositary Shares. Midatech has no obligation to take any other action to permit the distribution of its Depositary Shares, Ordinary Shares, rights or anything else to holders of its Depositary Shares. As a result, you may not receive the distributions made on Ordinary Shares or any value from them if it is illegal or impractical for Midatech to make them available to you. These restrictions may have a material adverse effect on the value of your Depositary Shares.

 

You may be subject to limitations on transfer of your Depositary Shares.

 

Your Depositary Shares are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may refuse to deliver, transfer or register transfers of your Depositary Shares generally when Midatech ’ s books or the books of the depositary are closed, or at any time if Midatech or the depositary deems it advisable to do so because of any requirement of law or government or governmental body, or under any provision of the deposit agreement, or for any other reason.

 

It may be difficult for you to bring any action or enforce any judgment obtained in the United States against Midatech or members of Midatech’s Board of Directors, which may limit the remedies otherwise available to you.

 

Midatech is incorporated as a public limited company in England and Wales and the majority of Midatech ’ s assets are located outside the United States. In addition, all of the members of the Midatech Board of Directors are nationals and residents of countries, including the United Kingdom, outside of the United States. Most or all of the assets of these individuals are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States if you believe your rights have been infringed under the securities laws or otherwise. In addition, a United Kingdom court may prevent you from enforcing a judgment of a United States court against Midatech or these individuals based on the securities laws of the United States or any state thereof. A United Kingdom court may not allow you to bring an action against Midatech or its directors based on the securities laws of the United States or any state thereof.

 

A significant number of Ordinary Shares (in form of Depositary Shares) are issuable pursuant to outstanding options and warrants assumed by Midatech in connection with the acquisition of DARA, and Midatech may sell additional Ordinary Shares in the future. Sales of these shares will dilute the interests of other security holders and may depress the price of the Ordinary Shares and Depositary Shares.

 

As of December 31, 2016, Midatech had 48,699,456 Ordinary Shares outstanding, of which 3,826,756 Ordinary Shares were represented by 1,913,378 Depositary Shares. As of December 31, 2016, there were 3,017,773 Ordinary Shares issuable upon the exercise of outstanding warrants assumed by Midatech in connection with the acquisition of DARA, with a weighted average exercise price of $9.44 per share, and 322,685 Ordinary Shares   issuable upon the exercise of outstanding options assumed by Midatech in connection with the acquisition of DARA, with a weighted average exercise price of $6.56 per share.

 

 

In addition to the foregoing, Midatech may issue additional Ordinary Shares (and Depositary Shares underlying such Ordinary Shares), or other securities convertible into Ordinary Shares, from time to time to finance Midatech ’ s operations. Midatech may also issue additional shares in connection with stock options or restricted stock granted to our employees, officers, directors and consultants under Midatech ’ s equity compensation plans. The issuance of the securities underlying these instruments, or perception that issuance may occur, will have a dilutive impact on other stockholders and could have a material negative effect on the market price of our Ordinary Shares and Depositary Shares.

 

Midatech has no present intention to pay dividends on its Ordinary Shares in the foreseeable future and, consequently, your only opportunity to achieve a return on your investment during that time is if the price of Depositary Shares appreciates.

 

Midatech has no present intention to pay dividends on its Ordinary Shares in the foreseeable future. Any determination by Midatech ’ s Board of Directors to pay dividends will depend on many factors, including its financial condition, results of operations, legal requirements and other factors. Accordingly, if the price of the Depositary Shares falls in the foreseeable future and you sell your Depositary Shares, you will lose money on your investment, without the likelihood that this loss will be offset in part or at all by cash dividends.

 

Midatech is a “foreign private issuer” under the rules and regulations of the SEC and, as a result, is exempt from a number of rules under the Exchange Act and is permitted to file less information with the SEC than a company incorporated in the United States.

 

Midatech is incorporated as a public limited company in England and Wales and is deemed to be a “ foreign private issuer ” under the rules and regulations of the SEC. As a foreign private issuer, Midatech is exempt from certain rules under the Exchange Act that would otherwise apply if Midatech were a company incorporated in the United States, including:

·

the requirement to file periodic reports and financial statements with the SEC as frequently or as promptly as United States companies with securities registered under the Exchange Act;

 

·

the requirement to file financial statements prepared in accordance with GAAP;

 

·

the proxy rules, which impose certain disclosure and procedural requirements for proxy solicitations; and

 

·

the requirement to comply with Regulation FD, which imposes certain restrictions on the selective disclosure of material information.

 

In addition, Midatech ’ s officers, directors and principal shareholders are exempt from the reporting and “ short-swing ” profit recovery provisions of Section 16 of the Exchange Act and the related rules with respect to their purchases and sales of Ordinary Shares and Depositary Shares. Accordingly, you may receive less information about Midatech than you would receive about a public company incorporated in the United States and may be afforded less protection under the United States federal securities laws than you would be if Midatech were incorporated in the United States.

 

Additional reporting requirements may apply if Midatech loses its status as a foreign private issuer.

 

If Midatech loses its status as a foreign private issuer at some future time, then it will no longer be exempt from such rules and, among other things, will be required to file periodic reports and financial statements as if it were a company incorporated in the United States. The costs incurred in fulfilling these additional regulatory requirements could be substantial.

 

As a foreign private issuer, Midatech is not required to comply with many of the corporate governance standards of NASDAQ applicable to companies incorporated in the United States.

 

The Midatech Board of Directors is required to maintain an audit committee comprised solely of three or more directors satisfying the independence standards of NASDAQ applicable to audit committee members. As a foreign private issuer, however, Midatech is not required to comply with most of the other corporate governance rules of NASDAQ, including the requirement to maintain a majority of independent directors, and nominating and compensation committees of its Board of Directors comprised solely of independent directors. Although the AIM Rules and the United Kingdom Corporate Governance Code have comparable requirements, holders of Depositary Shares may not be afforded the benefits of the corporate governance standards of NASDAQ to the same extent applicable to companies incorporated in the United States.

 

 

Midatech is exposed to risks related to currency exchange rates.

 

Midatech conducts a significant portion of its operations outside of the United Kingdom. Because Midatech uses the British pound sterling as its financial statement reporting currency, changes in currency exchange rates have had and could have a significant effect on its operating results when its operating results are translated from U.S. dollars or Euros into British pound sterling. Exchange rate fluctuations between local currencies and the British pound sterling create risk in several ways, including the following: weakening of the British pound sterling may increase the British pound sterling cost of overseas research and development expenses and the cost of sourced product components outside the United Kingdom; strengthening of the British pound sterling may decrease the value of Midatech’s revenues denominated in other currencies; the exchange rates on non-sterling transactions and cash deposits can distort Midatech’s financial results; and commercial pricing and profit margins are affected by currency fluctuations.  Future changes in currency exchange rates could have a material adverse effect on Midatech ’ s financial results.

 

Midatech is an “emerging growth company” and it cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make its securities less attractive to investors.

 

Midatech is an “ emerging growth company, ” as defined under the Jumpstart Our Business Startups Act. Midatech will remain an “ emerging growth company ” for up to five years; provided, however, that if Midatech ’ s annual gross revenues exceed $1.0 billion, or its non-convertible debt issued within a three-year period or revenues exceeds $1 billion, or the market value of its common shares that are held by non-affiliates exceeds $700 million on the last day of the second fiscal quarter of any given fiscal year, Midatech would cease to be an emerging growth company as of the following fiscal year. As an emerging growth company, Midatech is not required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), it has reduced disclosure obligations, including with regard to its financial statements and executive compensation, and it is exempt from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

 

The Sarbanes-Oxley Act requires, among other things, that Midatech maintain effective internal controls for financial reporting and disclosure controls and procedures. Midatech is required, under Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of its internal control over financial reporting. This assessment includes disclosures of any material weaknesses identified by management in its internal control over financial reporting.

A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting that results in more than a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. Section 404 of the Sarbanes-Oxley Act also generally requires an attestation from Midatech’s independent registered public accounting firm on the effectiveness of its internal control over financial reporting. However, for as long as Midatech remains an emerging growth company, it intends to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirement.

In preparing our financial statements for the year ended December 31, 2016, Midatech and its independent registered public accounting firm identified the following material weakness in the effectiveness of its internal controls over financial reporting:

·

The incorrect presentation of credits for product returns, rebates, discounts and other incentives based on sales price throughout 2016 as part of cost of sales as opposed to being shown as deductions from revenue.

In the case of this material weakness, Midatech had incorrectly mapped such amounts from our trial balance to our financial statements as cost of sales instead of as a reduction of revenues, and we did not prevent this error from being recorded and nor did we detect it after it had occurred.

 

Although Midatech has instituted remedial measures to address the material weaknesses identified and to continually review and evaluate its internal control systems to allow management to report on the sufficiency of our internal control over financial reporting, Midatech cannot assure you that it will not discover additional weaknesses in its internal control over financial reporting. Any such additional weaknesses or failure to adequately remediate any existing weakness could materially and adversely affect Midatech’s financial condition and results of operations, as well as Midatech’s ability to accurately report its financial condition and results of operations in a timely and reliable manner.

Additionally, the material weaknesses described above, or other material weaknesses or significant deficiencies Midatech may become aware of in the future, could result in Midatech determining that its controls and procedures are not effective in future periods or could result in a material misstatement of the consolidated financial statements that would not be prevented or detected.

Any failure to maintain effective internal controls over financial reporting could severely inhibit Midatech’s ability to accurately report its financial condition, results of operations or cash flows. If Midatech is unable to conclude that its internal control over financial reporting is effective, or if its independent registered public accounting firm determines it has a material weakness or significant deficiency in its internal control over financial reporting once that firm begin its Section 404 reviews, Midatech could lose investor confidence in the accuracy and completeness of its financial statements and reports, the market price of the Ordinary Shares and/or Depositary Shares could decline, and Midatech could be subject to sanctions or investigations by the NASDAQ, the SEC or other regulatory authorities. Failure to remedy any material weakness in its internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict Midatech’s future access to the capital markets.

Midatech is incurring increased costs as a result of operating as a public company, and management will be required to devote substantial time to new compliance initiatives.

 

As a public company in the United Kingdom and United States, Midatech is incurring significant legal, accounting and other expenses that it did not incur as a private company, and these expenses may increase even more after Midatech is no longer an “ emerging growth company. ” Midatech will be subject to the reporting requirements of the AIM Rules, the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Protection Act, as well as rules adopted, and to be adopted, by the SEC and the NASDAQ Stock Market. Midatech ’ s management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, Midatech expects these rules and regulations to substantially increase its legal and financial compliance costs and to make some activities more time-consuming and costly. For example, Midatech expect these rules and regulations to make it more difficult and more expensive for it to obtain director and officer liability insurance and it may be required to incur substantial costs to maintain the sufficient coverage. The Company cannot predict or estimate the amount or timing of additional costs it may incur to respond to these requirements. The impact of these requirements could also make it more difficult for Midatech to attract and retain qualified persons to serve on its Board of Directors, its board committees or as executive officers.

  

Midatech intends to operate so as to be treated exclusively as a resident of the United Kingdom for tax purposes, but the relevant tax authorities may treat it as also being a resident of another jurisdiction for tax purposes.

 

Midatech is a public limited company incorporated under the laws of England and Wales. Under current English law, the decisions of the English courts and the published practice of HM Revenue and Customs suggest that Midatech is likely to be regarded as being a United Kingdom resident and should remain so if, as Midatech intends that, (i) all major meetings of its Board of Directors and most routine meetings are held in the United Kingdom with a majority of directors present in the United Kingdom for those meetings; (ii) at those meetings there are full discussions of, and decisions are made regarding, the key strategic issues affecting Midatech and its subsidiaries; (iii) those meetings are properly minuted; (iv) at least some of the directors of Midatech, together with supporting staff, are based in the United Kingdom; and (v) Midatech has permanent staffed office premises in the United Kingdom sufficient to discharge its functions.

 

 

Even if Midatech is considered by HM Revenue and Customs as resident in the United Kingdom for United Kingdom tax purposes, as expected, it would nevertheless not be treated as resident in the United Kingdom if (a) it were concurrently resident in another jurisdiction (applying the tax residence rules of that jurisdiction) that has a double tax treaty with the United Kingdom and (b) there is a tiebreaker provision in that tax treaty which allocates exclusive residence to that other jurisdiction. Because this analysis is highly factual and may depend on future changes in Midatech ’ s management and organizational structure, there can be no assurance regarding the final determination of Midatech ’ s tax residence. Should Midatech be treated as resident for tax purposes in another jurisdiction other than the United Kingdom, it would be subject to taxation in such jurisdiction in accordance with such jurisdiction ’ s laws, which could result in additional costs and expenses.