Item 1. Business.
Background
Oncolix, Inc. was incorporated in the State of Florida in June 2013. During September 2017, the name of the corporation was changed from Advanced Environmental Petroleum Producers, Inc. (“AEPP”) to Oncolix, Inc. in connection with the reorganization described in the following paragraph.
On April 8, 2017, Oncolix, Inc., a private Delaware corporation (“Oncolix/DE”) acquired approximately 66% of the outstanding common stock of AEPP, a public Florida corporation traded on the OTC Pink with limited or no operating activities and no indebtedness. Oncolix/DE paid $315,000 in cash to a controlling shareholder of AEPP and also paid a fee to an investment banker of $50,000 in connection with this transaction. On August 3, 2017, AEPP Merger Sub, Inc., a wholly-owned subsidiary of AEPP (“Merger Sub”), merged with Oncolix/DE, and AEPP assumed responsibility for the issuance of equity securities in exchange for the equity securities of Oncolix/DE (“Merger”). On September 28, 2017, AEPP filed an amendment with the Florida Secretary of State and changed its name to Oncolix, Inc.
The Merger was treated as a reverse acquisition of AEPP (subsequently renamed Oncolix, Inc. as noted above) by Oncolix/DE for financial accounting and reporting purposes. As such, Oncolix/DE is treated as the acquirer for accounting and financial reporting purposes while AEPP is treated as the acquired entity for accounting and financial reporting purposes. Accordingly, the financial statements included in this Form 10-K for all periods prior to August 3, 2017 are those of Oncolix/DE. Because of the acquisition of a controlling interest on April 8, 2017, the financial statements of AEPP have been consolidated with Oncolix/DE since April 2017. AEPP’s assets, liabilities and results of operations for periods after April 2017 are the consolidated assets, liabilities and results of operations of Oncolix, Inc. and its wholly owned subsidiary Oncolix/DE.
Oncolix/DE commenced operations on January 24, 2007. At its formation, certain intellectual property was transferred to Oncolix/DE by a subsidiary of Greenville Health Corporation (collectively, “GHC”), a component unit of Greenville Health System (“GHS”), a hospital system in South Carolina.
As used in this Annual Report on Form 10-K (“Form 10-K), “we”, “us”, “our”, “Oncolix,” or the “Company” refers to Oncolix, Inc., the Registrant, unless otherwise noted. “AEPP” or “Oncolix/DE” refer to the separate activities of such entities prior to the Merger.
Overview
We are a clinical-stage biopharmaceutical company developing medical therapies for the treatment of cancer. We currently own issued or pending patent applications related to the use of Prolanta™, a recombinant protein analogue of human prolactin that is designed to bind to the prolactin receptor on human cells. The human hormone prolactin is associated with various cancers, including ovarian, breast, uterine and prostate. We have developed a drug Prolanta™ that is designed to block the effect of human prolactin in cancers, either as a stand-alone therapy or in combination with other drugs, by blocking the effect of human prolactin. We believe Prolanta
TM
may also affect the cellular mechanisms that assist cancer cells to develop resistance to chemotherapy.
Our initial focus is the development, clinical testing and commercialization of Prolanta™ for the treatment of ovarian cancer. The US Food and Drug Administration (“FDA”) has provided us with clearance to commence a Phase 1 clinical trial of Prolanta™ in the treatment of ovarian cancer, and we have dosed three subjects in the first phase of this clinical trial. We chose ovarian cancer as the first human application of Prolanta™ because of the significant unmet medical need as well as favorable regulatory status. Because of the size of the US market, the FDA has granted Prolanta™ status as an Orphan Drug, providing potential tax benefits and market exclusivity for the Prolanta™ molecule. We intend to apply for Orphan designation in the European Union and in Japan.
If we successfully complete the Phase 1 study, we will seek regulatory clearance by the FDA to conduct additional clinical trials in larger numbers of ovarian cancer patients to establish safety and efficacy. We expect that at least two clinical studies will be required, and possibly more, to establish the efficacy and safety of Prolanta™ in sufficient numbers of ovarian cancer patients in order to seek approval to market Prolanta™ for this cancer. The design of these studies will be finalized after the completion of the Phase 1 study and after consultation with the FDA, but we currently believe we will first evaluate the use of Prolanta™ in combination with other chemotherapy drugs such as platinum-based drugs and taxanes. Our scientific collaborators have tested Prolanta™ in cell lines and xenograft (human cells grown in mice) models, and we believe that Prolanta™ may be synergistic with these other therapies, allowing a broader market opportunity. However, there can be no assurance that cell line and animal tests will have equivalent results in clinical trials. We intend to seek a distribution partner to market Prolanta™, but may develop our own sales force in the event we cannot make suitable arrangements.
Depending on the availability of resources, we also intend to evaluate Prolanta™ for the treatment of other cancers. These studies may be performed in collaboration with larger pharmaceutical companies, either through licenses or joint ventures. Our scientific collaborators have demonstrated in animal models the efficacy of Prolanta™ in treating breast cancer, and we intend to engage academic collaborators to develop data for the treatment of other cancer types.
We may also consider in-licensing or acquiring other drug candidates, preferably in oncology. We operate with a small staff of employees and key consultants and have utilized contractors for certain operations. We do not intend to develop the infrastructure or acquire the facilities necessary to manufacture Prolanta™, and instead we plan to utilize contract manufacturers. We also plan to utilize contract research organizations to assist us in conducting clinical trials. We intend to employ additional administrative and clinical personnel as necessary to conduct our clinical trials and commercialize Prolanta™.
Recent
Developments
Acquisition of Oncolix
On August 3, 2017, the Company closed the Merger and a total of 71,770,200 shares of Company Common Stock were issued to the former common stock holders of Oncolix/DE and 62,138,680 shares of Company Series A Preferred Stock were issued to the former series A preferred stock holders of Oncolix/DE. Each share of Series A Preferred Stock issued by the Company is convertible currently into approximately 1.0608 shares of Company Common Stock, has voting rights, a liquidation preference, and other customary rights and preferences. As a result of the Merger, the shares of Company Common Stock owned by Oncolix were cancelled. In addition, pursuant to the Merger, all outstanding options and warrants to acquire Oncolix/DE common stock and Series A Preferred Stock were converted into the right to acquire or convert into Company Common Stock or Company Series A Preferred Stock. As of December 31, 2017, there are 104,477,936 shares of Company Common Stock issued and outstanding and 63,038,284 shares of Series A Preferred Stock issued and outstanding that are convertible into 66,871,012 shares of Company Common Stock.
As discussed in “Background”, the Merger was treated as a reverse acquisition of AEPP, a public shell company, by Oncolix/DE for financial accounting and reporting purposes. As such, Oncolix/DE is treated as the acquirer for accounting and financial reporting purposes while AEPP is treated as the acquired entity for accounting and financial reporting purposes. Further, as a result, the financial statements for periods prior to the Merger that will be reflected in this filing and the Company’s future financial statements filed with the United States Securities and Exchange Commission (“SEC”) will be those of Oncolix/DE.
Change of Name from AEPP to Oncolix, Inc.
On September 29, 2017, the Secretary of State of Florida approved an amendment to AEPP’s articles of incorporation to change its name to Oncolix, Inc.
Debt and Warrant Financing
On August 3, 2017, we entered into agreements with investors in connection with a $4,190,463 convertible debt and warrant financing (the “Units”). Such investment was effected through the issuance and sale of Units of Convertible Notes and Warrants for (i) $2,000,000 in cash for Convertible Notes in the principal amount of $2,352,941 and Warrants to acquire 31,372,547 shares of our Common Stock (the “Cash Offering”) and (ii) (A) the exchange of outstanding secured notes, related accrued interest and amounts payable under a consulting agreement in the amount of $1,561,894 and warrants to acquire 17,608,280 shares of Common Stock (formerly Oncolix warrants prior to being assumed by the Company in the Merger) issued by Oncolix/DE to existing noteholders (“Existing Investors”), for (B) the issuance and sale of Units of Convertible Notes issued by the Company in the aggregate principal amount of $1,837,522 and Warrants to acquire 24,500,290 shares of Common Stock (the “Exchange Offering” and collectively with the Cash Offering, referred to as the “Unit Offering). The investors in the Unit Offering are collectively referred to as “Purchasers”. In addition, Warrants to acquire an additional 3,200,000 shares of Company Common Stock were issued in July 2017 in connection with debt exchanged in August 2017, are held by a Purchaser and included in Warrants herein.
The Unit Offering is documented with the Purchasers pursuant to the following: (i) a Securities Purchase Agreement, dated August 3, 2017, by and among AEPP, Purchasers and Oncolix (the “Purchase Agreement”); (ii) 10% Senior Secured Convertible Notes of AEPP issued in favor of the Purchasers (the “Convertible Notes”); (iii) a Registration Rights Agreement, dated August 3, 2017, by and between AEPP and the Purchasers (the “Registration Rights Agreement”); (iv) a Security Agreement, dated August 3, 2017, by and among AEPP, Oncolix and Purchasers (the “Security Agreement”); (v) an IP Security Agreement, dated August 3, 2017, by and among AEPP, Oncolix and the collateral agent of the Unit Offering (the “IP Security Agreement”); (vi) five-year warrants to purchase AEPP Common Stock dated August 3, 2017, issued by AEPP to the Purchasers (“Warrants”); (vii) a Lock-Up Agreement, dated August 3, 2017, by and among AEPP, Oncolix and certain existing equity holders (the “Lock-Up Agreement”); and (viii) a Subsidiary Guarantee, dated August 3, 2017, by and between Oncolix and Purchasers (the “Guarantee” and collectively with the Purchase Agreement, Convertible Notes, Registration Rights Agreement, Security Agreement, IP Security Agreement, Warrants and Lock-Up Agreement, the “Transaction Documents”), pursuant to which AEPP issued and sold the Convertible Notes and the Warrants to the Purchasers pursuant to the Transaction Documents.
Convertible Notes
Pursuant to the Purchase Agreement, the Company issued Convertible Notes to the Purchasers in an aggregate principal amount of $4,190,463 for a purchase price of $3,561,894, consisting of gross cash proceeds of $2,000,000 and the exchange of existing convertible debt, related accrued interest, and amounts payable under a consulting agreement of Oncolix totaling $1,561,894. The Convertible Notes were issued at a 15% discount.
The Convertible Notes bear interest at a rate of 10% per annum, payable quarterly on November 1, 2017, February 1, 2018, and May 1, 2018 and thereafter, on a monthly basis until maturity. The interest is payable in cash or, at the option of the Company, subject to compliance with Equity Conditions (as defined below), in fully tradable Company Common Stock at the lesser of the then conversion price or a 25% discount to the average of the five lowest closing bid prices for the twenty trading days prior to the interest payment date. The final maturity of the Convertible Notes is November 1, 2018, but commencing on May 1, 2018 and on the first day of each month thereafter until maturity, we are required to redeem an amount of the Convertible Notes equal to 1/7th of the original principal amount, plus 10% of such monthly redemption amount as a bonus. The principal payments shall be made in cash or, subject to the satisfaction of Equity Conditions, in our Common Stock valued at the lesser of the then conversion price or a 25% discount to the average of the five lowest closing bid prices for the twenty trading days prior to the amortization date.
The Convertible Notes are convertible at the option of the Purchasers at a conversion price equal to $0.0545. Assuming that all of the principal amount of $4,190,463 and related accrued interest payable after December 31, 2017 on the Convertible Notes are converted into shares of Common Stock at $0.0545 per share, an aggregate of 82,719,997 shares would be issuable. The Convertible Notes contain customary anti-dilution protection, including full-ratchet anti-dilution adjustments in the event of certain dilutive issuances (that adjust both conversion price and share amounts to be issued upon conversion).
In the event of a closing of an $8 million financing in connection with a change in listing of our Common Stock to Nasdaq or the NYSE, the Convertible Notes shall be subject to mandatory conversion into our Common Stock at a 30% discount to the offering price.
We shall be required to offer to prepay in cash the aggregate principal amount of the Convertible Notes at 120% of the principal amount thereof plus any unpaid accrued interest to the date of repayment, at maturity, on the sale of substantially all of our assets, upon a change of control, upon a qualified offering, or upon a “fundamental transaction” (tender offer, reclassification, sale of substantially all assets and merger); in such an event, the Purchasers shall have the right to convert the Convertible Notes prior to the date of any such prepayment.
The Convertible Notes contain standard negative covenants customary for transactions of this type. The events of default are also customary for transactions of this type, including default in timely payment of principal or interest, failure to observe or perform any covenant or agreement contained in the Convertible Note and Transaction Documents (including the Registration Rights Agreement), the commencement of bankruptcy or insolvency proceedings, failure to timely deliver conversion shares underlying the Convertible Notes, failure to timely file Exchange Act filings, and failure to satisfy certain Equity Conditions.
Equity Conditions mean, during the period in question, (a) the Company shall have duly honored all conversions and redemptions of the Convertible Notes, (b) we shall have complied with all conversion and other provisions of the Convertible Notes and shall have paid all liquidated damages and other amounts owing in respect of this Convertible Note, (c)(A) there is an effective registration statement pursuant to which the holder is permitted to utilize the prospectus thereunder to resell at least the number of shares of Common Stock issuable pursuant to the Transaction Documents at such time or (B) all of the underlying shares may be resold pursuant to Rule 144 without volume or manner-of-sale restrictions or current public information requirements, (d) our Common Stock is trading on a trading market, (e) there is a sufficient number of authorized but unissued and otherwise unreserved shares of our Common Stock for the issuance of five times all of the shares issuable pursuant to the Convertible Notes and Warrants, (f) there is no existing event of default or no existing event which, with the passage of time or the giving of notice, would constitute an event of default, (g) the issuance of the shares in question would not violate the beneficial ownership limitations in the Transaction Documents, (h) there has been no public announcement of a pending or proposed fundamental transaction or change of control transaction that has not been consummated, (i) the holder is not in possession of any information provided by the Company that constitutes, or may constitute, material non-public information, (j) our Common Stock is DWAC eligible and not subject to a DTC “chill;” and (k) for each trading day in a period of 10 consecutive trading days prior to the applicable date in question (A) the daily dollar trading volume for our Common Stock on the principal trading market exceeds $75,000 per trading day and (B) the weighted average stock price for our Common Stock on the principal trading market is above 50% of the closing stock price on August 3, 2017 (as adjusted for all stock splits stock dividends, stock combinations, reclassifications and other transactions).
We have the right at any time to redeem all, but not less than all, of the total outstanding amount of principal amount then remaining under the Convertible Notes at a price equal to 120% of such principal amount.
Warrants
In connection with the Purchase Agreement, the Company issued the Purchasers five-year Warrants to purchase an aggregate of 55,872,837 shares of our Common Stock at a purchase price of $0.09 per share, exercisable for cash or on a cashless basis. In addition, in connection with the debt incurred in July 2017 a five-year Warrants to acquire 3,200,000 shares of our Common Stock at a purchase price of $0.0825 per share, exercisable for cash or on a cashless basis, was issued. This July 2017 debt was also converted in the Exchange Offering and is included in the Warrants described herein. The Warrants contain customary anti-dilution provisions, including full-ratchet anti-dilution adjustments in the event of certain dilutive issuances (that adjust both exercise price and share amounts to be issued upon exercise).
Security Agreements and Guarantee
In connection with the issuance of the Convertible Notes, the Company and its wholly-owned subsidiary Oncolix/DE pledged substantially all of their assets as security and collateral for the Convertible Notes, including all intellectual property of Oncolix/DE and the shares of capital stock of Oncolix/DE owned by the Company. Additionally, Oncolix/DE guaranteed the obligations of the Convertible Notes.
Registration Rights Agreement
In connection with the execution of the Purchase Agreement, the Company and the Purchasers also entered into the Registration Rights Agreement. Pursuant to the Registration Rights Agreement, the Company has agreed to file an initial registration statement (“Initial Registration Statement”) with the SEC to register, subject to reduction in accordance with Rule 415 of the Securities Act, the resale of all shares of Common Stock issuable under conversion of the Convertible Notes and upon exercise of the Warrants and any securities issued or then issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect to the foregoing (the “Registrable Shares”) on or prior to September 2, 2017, and have it declared effective at the earlier of (i) the 120th calendar day after August 3, 2017 and (ii) the 5th business day after the date the Company is notified by the SEC that the registration statement will not be subject to further review. The Initial Registration Statement registered the resale of 42,615,928 shares of Common Stock by certain security holders and was declared effective by the SEC on November 30, 2017. Of the 42,615,928 shares of Common Stock, the resale of which was registered in the Initial Registration Statement, (i) 25,435,582 shares are issuable upon conversion of a principal amount of $1,288,526 of the Convertible Notes, including accrued interest associated therewith, and (ii) 17,180,346 shares of Common Stock are issuable upon exercise of certain Warrants.
The Company also agreed to file additional registration statements to cover all of the Registrable Securities that are not covered by the Initial Registration Statement on or prior to 30 days following the date the Company first knows that such additional registration statement is required to be filed (the “Additional Registration Statements”) and have it declared effective no later than the earlier of (i) the 60th calendar day following the date the Company first knows that it is required to file such Additional Registration Statement and (ii) the 5th business day after the date the Company is notified by the SEC that the registration statement will not be reviewed or will not be subject to further review. The Company has filed an Additional Registration Statement for the resale of 8,900,000 shares of Common Stock which was declared effective by the SEC on February 8, 2018.
If (i) the Initial Registration Statement is not declared effective on or before the 120th calendar day following the date of the Purchase Agreement, (ii) any Additional Registration Statement is not declared effective on or before its effectiveness deadline, or (iii) any registration statement is declared effective by the SEC but shall thereafter cease to be effective for a period of time of 10 consecutive calendar days but not more than an aggregate of 15 calendar days in any one 12-month period (each such event, a “Non-Registration Event”), then the Company shall deliver to the Purchasers, as liquidated damages, an amount equal to ten percent of the outstanding principal amount of the Convertible Notes then held by the Purchasers for the first 30 days (or part thereof) and after such 30 days, an additional 10% of the outstanding principal amount of the Convertible Notes for a subsequent 30-day period (or part thereof); provided that the maximum amount of liquidated damages shall not exceed 18% of the aggregate outstanding principal amount of the Convertible Notes. The Company may pay the liquidated damages in cash or through the issuance of shares of Common Stock (valued at 75% of the average of the five lowest closing bid prices for the twenty consecutive trading days prior to the Non-Registration Event) provided the Equity Conditions are met. In addition, if there is not an effective registration statement covering all the Registrable Securities and the Company elects to register the issuance or resale of other Company securities, the Company is required to include such Registrable Securities in such registration statement filed with the SEC.
As described in the preceding paragraphs, certain shares were not registered as of December 31, 2017. The Company believes no liquidated damages have accrued with respect to these unregistered shares. For the benefit of the holders of the Convertible Notes, the Company has filed and will continue to file registration statements to seek to register the resale of these shares. While the Company believes no damages have accrued as of December 31, 2017, certain holders of Convertible Notes have verbally asserted that damages do accrue under the agreements. As of December 31, 2017, such amount claimed by the holders equals 18% of the related Convertible Notes, or $522,349, and accrued interest at 24% per annum of $6,068. Interest would continue to accrue until paid. This potential liability is not recorded in the accompanying financial statements because the Company believes no damages are due as of December 31, 2017. However, depending on the timing of future registration statements, future damages may accrue.
The Company also agreed, among other things, to indemnify the Purchasers from certain liabilities and fees and expenses of the Purchasers incident to the Company’s obligations under the Registration Rights Agreement, including certain liabilities under the Securities Act. The Purchasers have agreed to indemnify and hold harmless the Company and each of its directors, officers and persons who control the Company against certain liabilities that may be based upon written information furnished by the Purchasers to the Company for inclusion in a registration statement pursuant to the Registration Rights Agreement, including certain liabilities under the Securities Act.
Other Terms
The Purchase Agreement contains customary representations, warranties and covenants by, among and for the benefit of the parties. Additionally, the Purchase Agreement provides for (i) liquidated damages in the event of the failure to timely (A) deliver our Common Stock upon conversion of the Notes or issuance of shares upon exercise of Warrants and (B) remove restrictive legends, (ii) a right to participate in future financings, (iii) a most-favored nation’s right with respect to future financings, and (iv) certain “down-round” protection. The Purchase Agreement also provides for indemnification of the Purchasers and its affiliates in the event that the Purchasers incur losses, liabilities, obligations, claims, contingencies, damages, costs and expenses related to the Company’s breach of any of its representations, warranties or covenants under the Purchase Agreement.
The officers and directors of the Company at the Merger Date, Michael T. Redman and J. Donald Payne, as well as Health Science Center LLC (“HSC”), successor in interest to GHC Research Development Corporation (“GHC”), agreed for a period of fifteen months from August 3, 2017, not to sell, assign or otherwise transfer any of their shares of our Common Stock or our Series A Preferred Stock.
At no time will the Purchasers be entitled to convert any portion of the Convertible Notes or exercise any portion of the Warrants, to the extent that after such conversion and/or exercise, the Purchasers (together with their affiliates) would beneficially own more than 4.99% of the outstanding shares of our Common Stock as of such date, which limit may be increased to 9.99% at the election of the Purchasers but no greater than 9.99%.
Summary of Our Business Strategy
We are a clinical-stage biopharmaceutical company developing medical therapies for the treatment of cancer. The human hormone prolactin is associated with various cancers, including ovarian, breast, uterine and prostate. We have developed a drug Prolanta™ that is designed to block the effect of human prolactin in cancers, either as a stand-alone therapy or in combination with other drugs, by blocking the effect of human prolactin. We believe Prolanta™ may also affect the cellular mechanisms that assist cancer cells to develop resistance to chemotherapy.
Our initial focus is the development, clinical testing and commercialization of Prolanta™ for the treatment of ovarian cancer. The FDA has provided us with clearance to commence a Phase I clinical trial of Prolanta™ in the treatment of ovarian cancer, and we have dosed three subjects in the first phase of this clinical trial. We chose ovarian cancer as the first human application of Prolanta™ because of the significant unmet medical need as well as favorable regulatory status. Because of the size of the US market, the FDA has granted Prolanta™ status as an Orphan Drug. We intend to apply for Orphan designation in the European Union and in Japan.
If we successfully complete the Phase 1 study as determined by the FDA, we will seek regulatory clearance to conduct additional clinical trials in larger numbers of ovarian cancer patients to establish efficacy. We expect that at least two clinical studies will be required, and possibly more, to evaluate Prolanta™ in sufficient numbers of ovarian cancer patients in order to seek approval to market Prolanta™ for this cancer. The design of these studies will be finalized after the completion of the Phase I study and after consultation with the FDA, but we currently believe we will first evaluate the use of Prolanta™ in combination with other chemotherapy drugs such as platinum-based drugs and taxanes. Our scientific collaborators have tested Prolanta™ in cell lines and xenograft (human cells grown in mice) models, and we believe that Prolanta™ may be synergistic with these other therapies, allowing a broader market opportunity. However, there can be no assurance that cell line and animal tests will have equivalent results in clinical trials. We intend to seek a distribution partner to market Prolanta™, but may develop our own sales force in the event we cannot make suitable arrangements.
Depending on the availability of resources, we also intend to evaluate Prolanta™ for the treatment of other cancers. These studies may be performed in collaboration with larger pharmaceutical companies, either through licenses or joint ventures. Our scientific collaborators have demonstrated in animal models the efficacy of Prolanta™ in treating breast cancer, and we intend to engage academic collaborators to develop data for the treatment of other cancer types.
We may also consider in-licensing or acquiring other drug candidates, preferably in oncology.
We operate with a small staff of employees and key consultants and have utilized contractors for certain operations. We do not intend to develop the infrastructure or acquire the facilities necessary to manufacture Prolanta™, and instead we plan to utilize contract manufacturers. We also plan to utilize contract research organizations to assist us in conducting clinical trials. We intend to employ additional administrative and clinical personnel as necessary to conduct our clinical trials and commercialize Prolanta™.
Scientific Background on Human Prolactin
Human prolactin is a single-chain polypeptide of 199 amino acids with a molecular weight of approximately 23,000 Daltons. Prolactin is mainly synthesized and secreted by cells in the anterior pituitary gland, but is also produced at sites outside the pituitary gland, such as mammary gland, ovary, uterus, prostate, lymphocytes, and several types of tumor cells. The most well-known function of prolactin is the control of lactation during pregnancy, but also may be involved in angiogenesis and regulation of the immune system.
Human prolactin activates certain intracellular activities by binding with two receptors on the surface of a cell (also referred to as “dimerization”). When the two receptors are bound by prolactin, the receptors come closer together triggering a complex web of intracellular activity, including Janus kinase 2 (JAK2), Src kinase, phosphatidylinositol 3’-kinase (PI3K), protein kinase C (PKC) and mitogen-activated protein kinase (MAPK). The best-characterized signaling pathway is the JAK2/STAT5 pathway, which has been shown to play a central role in cell proliferation, differentiation and cell death. In addition, the
ras
/
raf
/MAPK pathway is also activated by prolactin and may be involved in the effects of the protein on cell proliferation.
In addition to the association of human prolactin with tumor cell growth, some researchers have conducted cell line studies to determine if prolactin may protect cells from some chemotherapy drugs by activating a detoxification enzyme. This research has been performed in cell lines (and not in humans) with either the platinum-based drug cisplatin on ovarian cancer cells, and in another published paper, demonstrated that human prolactin can reduce the effectiveness of cisplatin, taxol, vinblastine and doxorubicin on breast cancer cells. (Asai-Sato et al, “Prolactin inhibits apoptosis of ovarian carcinoma cells induced by serum starvation or cisplatin treatment.” Int J Cancer. 2005 Jul 1;115(4):539-44. .LaPensee, et al “Prolactin confers resistance against cisplatin in breast cancer cells by activating glutathione-S-transferase.” Carcinogenesis. 2009 Aug;30(8):1298-304.)
Accordingly, we believe that blocking the effect of prolactin at the cancer cell level may provide an effective therapy for ovarian and other cancers and may improve the effectiveness of existing drugs. We intend to evaluate this hypothesis in a future clinical trial.
Description of Prolanta™
Our drug Prolanta™ is a recombinant human prolactin analogue with an amino acid substitution of arginine for glycine at position 129. As such, Prolanta™ has also been referred to as G129R in the scientific literature. As a result of this amino acid substitution, Prolanta™ acts as an antagonist to the human prolactin receptor. Prolanta™ will bind to one prolactin receptor on a cancer cell, but the arginine amino acid replacement is designed to prevent binding to a second receptor. As a result, we believe Prolanta™ will compete with normal human prolactin and may prevent the dimerization (the binding to two prolactin receptors), preventing the intracellular activity normally triggered by prolactin binding.
The Cancer Market
The American Cancer Society estimates that over 1.6 million people in the U.S. are expected to be diagnosed with cancer in 2017, excluding basal and squamous cell skin cancers and in situ carcinomas (other than urinary bladder carcinomas).
Despite continuous advances every year in the field of cancer research, there remains a significant unmet medical need in the treatment of cancer, as the overall five-year survival rate for a cancer patient is approximately 68% according to the American Cancer Society. According to that same source, cancer is the second leading cause of mortality in the U.S. behind heart disease. Overall, the American Cancer Society estimates that approximately one in four deaths in the U.S. is due to cancer.
Treatments for advanced cancer may include, among other approaches: chemotherapy (toxic drugs generally selected to kill rapidly growing cells); biological therapies (including antibodies, proteins or other molecules designed to alter cancer cell processes, recruit the patient’s body to assist in fighting the disease, or act as a carrier for other toxic molecules); surgical intervention to remove the cancerous areas; and radiation therapies to damage rapidly growing cells like cancer. The treatment varies widely by cancer type, and the effectiveness of different drugs or therapies will vary both by type of cancer as well as by patient.
Ovarian Cancer
Our initial focus is to develop Prolanta™ for the treatment of ovarian cancer, which is the fourth leading cause of cancer-related death in women in the US and the leading cause of gynecologic death. According to the National Cancer Institute, in 2017 approximately 22,000 women will be diagnosed with ovarian cancer in the U.S., and 14,000 are expected to die from this disease in the U.S. The incidence of ovarian cancer in Europe is estimated to be twice as high as the US.
Because of the difficulties with the early detection of ovarian cancer, approximately 80 percent of patients in the U.S. are diagnosed with advanced stage disease. Of these patients, 80 to 90 percent will initially respond to chemotherapy, but less than 10 to 15 percent will remain in permanent remission. Although advances in treatment have led to an improved five-year survival rate approaching 47%, overall survival has not improved. The five-year survival rate for patients with distant disease is only 29 percent.
The current standard of care for ovarian cancer is surgical debulking, with a total hysterectomy and oophorectomy typically performed at the same time. The majority of patients require postoperative chemotherapy to eradicate residual disease. Six cycles of a taxane, such as paclitaxel, combined with a platinum-based therapy, such as carboplatin or cisplatin, is now standard treatment. Even in patients that respond to therapy by going into remission, the majority of those patients with advanced disease will have a relapse. Only 10% to 30% of such patients have long-term survival. Approximately 20% to 30% of patients never have a clinical remission despite receiving first-line chemotherapy or platinum-based therapy. This residual or progressive disease is generally not curable with current treatments.
Both taxanes and the platinum-based regimens cause severe side effects, including progressive neuropathy, cumulative thrombocytopenia, anemia, neutropenia, platinum allergy, cardiovascular effects, nausea and renal toxicity. Severe or cumulative side effects can necessitate a switch to alternative therapies, such as liposomal doxorubicin, topotecan, gemcitabine, etoposide and vinorelbine; however, the response rate for each of these drugs is only 10% to 20% in patients with platinum-resistant disease.
The inability to cure most patients with current therapies, including second-line therapies, indicates the need for more effective therapeutic options.
As noted above, we believe various scientific studies have indicated a relationship between human prolactin and the growth of ovarian cancer cells, as well as the development by ovarian cancer cells of resistance to common drug therapies. Our scientific collaborators have conducted cell line studies and animal models using human cells (xenograft studies) using our prolactin antagonist, Prolanta™, to inhibit the growth of ovarian cancer cells, either as a stand-alone therapy or in combination with taxanes. As a result, we believe Prolanta™ may be an effective new therapy for ovarian cancer.
Drugs to treat ovarian cancer may qualify for Orphan Drug designation in the US and the EU, and this designation offers significant benefits through reduced regulatory fees, substantial tax credits and potential marketing exclusivity. The FDA granted Prolanta™ Orphan Drug status for the treatment of ovarian cancer, and we intend to seek EU designation.
Plan of Operations for the Next Twelve Months
Our initial commercial focus is the development of Prolanta™ for the treatment of ovarian cancer. We have commenced a Phase 1 clinical trial after receiving clearance from the FDA. We completed the first dosing group of 3 subjects in the Phase I clinical trial, with no evidence of serious adverse events or dose-limiting toxicities. The recruitment of subjects for the next dosing group commenced in early 2018. Additional clinical studies will require additional supplies of Prolanta™ through production of new supplies by a contract manufacturer.
This Phase I trial is an open-label safety and pharmacokinetic study in up to 18 women with recurrent or persistent epithelial ovarian cancer, primary peritoneal cancer, or fallopian tube cancer. The primary objectives of this study will be to evaluate the safety and tolerability, to determine the pharmacokinetic profile, and to determine the optimal dose of Prolanta™. We will also evaluate the effect of Prolanta™ on the ovarian cancer during the course of the study, including the effect on tumor size, blood chemistry, and tumor biochemistry.
Because of the unmet medical need in ovarian cancer, we will seek accelerated approval if our studies demonstrate safety and substantial efficacy. This could be as early as the completion of two Phase II studies, but that is dependent on our clinical trial results as well as the then-current position of the FDA.
In connection with our IND filing, we conducted toxicity and pharmacokinetic studies of Prolanta™ in cynomolgus monkeys and rabbits at doses that exceeded our Phase I dose levels (adjusted for body weight of each species). These studies indicated that Prolanta™ was well tolerated in animals, and there were no significant adverse events. The monkeys developed anti-drug antibodies, but these antibodies did not appear to have any effect on toxicity or the circulating life of Prolanta™ in the blood stream. It is common for biological-based drugs to result in antibody development by the subject, and the development of antibodies may have no clinical effect. Our Phase I study will also evaluate anti-Prolanta™ antibody levels in humans.
If we successfully complete the Phase I study, we intend to plan follow-on studies that will be conducted if the Phase I is successful. At this time, our development plan includes two Phase II studies. Because of the substantial scientific data that indicates Prolanta™ may be synergistic with current therapies, we intend to design these studies to use Prolanta™ in combination with platinum-based and taxane therapy. In the first Phase II study, one group of patients would receive Prolanta™ at the same time as other therapy, and the results will be compared to a second group receiving other therapy alone. The timing of this study will be dependent on the Phase I results and available resources.
We are currently evaluating improvements in our manufacturing process to increase the supply of available drug. This process may involve a change in manufacturing.
We will need additional capital to fund our development activities.
We may also in-license or acquire additional drug candidates, preferably in oncology, to expand our pipeline.
Intellectual Property
As part of our business strategy, we seek patent protection in the US and certain major foreign jurisdictions for the use of Prolanta™, including the use of Prolanta™ with certain modifications or in conjunction with other molecules, to treat various diseases. We also rely on trade secrets, internal know-how, technological innovations and agreements with third parties to develop, maintain and protect our competitive position. In addition, where applicable, we intend to rely on laws and regulations that provide opportunities for marketing exclusivity, such as the US Orphan Drug designation. Our ability to be competitive will depend on the success of this strategy.
Upon the commencement of operations in 2007, GHCRDC and certain scientists contributed intellectual property to Oncolix, including certain issued and pending patent applications. After this contribution, we also have filed additional patent applications related to Prolanta™. As of this date, we own eight US patents, several non-US patents and several pending foreign applications for which we pay no royalties. Our patent portfolio is substantially mature, with all US and most foreign applications resolved.
Our eight US patents relate to various uses of Prolanta, and all are “use patents”, addressing the use of the molecule in various applications. The reading and interpretation of patent claims is complicated and must be read in relation to other enabling and scientific disclosures. Accordingly, the ultimate scope of any patent claims may ultimately be subject to litigation or challenge. Two issued US patents and various foreign counterparts relate to ovarian cancer, US Patent Numbers 8,648,046 and 8,754,035, which expire October 10, 2030 unless extended through a process with the FDA. There may be a difference between the scope of claims in different countries, and each patent must be read and interpreted with consideration of its prosecution history. The non-US issued patents that correspond with the two referenced US-issued patents include: Europe 2400979, Europe 2640412, France 2400979, France 2640412, Germany 2400979, Germany 2640412, Italy 2400979, Italy 2640412, United Kingdom 2400979, United Kingdom 2640412 Australia 2010218261, Australia 2011328935, Japan 5963443, and Korea 10-1672401. In addition to any protections afforded by these applications, we intend to seek the exclusively afforded by the Orphan Drug Act in the US and equivalents in Europe and Japan.
We have also licensed trade-secret technology from Monsanto Company related to methods of manufacturing Prolanta™, and we may be required to pay a royalty of up to 2% upon the commercial sale of Prolanta™. We paid an initial fee of $200,000 in 2010. There are no other milestones or payment requirements. This transferred technology was modified by our contract manufacturer, which may reduce any royalty related to the use of the bacterial expression system.
Our goal is to obtain, maintain and enforce patent protection for the use of Prolanta™ and its formulations, preserve our trade secrets, and operate without infringing on the proprietary rights of other parties, both in the US and in other countries. Our policy is to actively seek to obtain, where appropriate, the broadest intellectual property protection possible through a combination of contractual arrangements and patents, both in the US and abroad. However, patent protection may not afford us with complete protection against competitors who seek to circumvent our patents.
Our patents and patent applications are subject to procedural or legal challenges by others.
We also depend upon the skills, knowledge, experience and know-how of our management, advisors, consultants and other contractors. To help protect our proprietary know-how, which is not patentable, and for inventions for which patents may be difficult to enforce, we currently rely and will in the future rely on trade secret protection and confidentiality agreements to protect our interests. To this end, we require all of our employees, consultants, advisors and other contractors to enter into confidentiality agreements that prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business.
The US Patent and Trademark Office (PTO) compensates patentees with additional patent in-force days if there are delays by the US PTO during prosecution. These additional days are called patent term adjustment (PTA) days and they allow a patentee to keep its patent in force after the expiration date of the patent for a period of time that the US PTO has provided as PTA.
In addition to patent protection, we plan to seek marketing exclusivity under other laws and regulations. Our success for preserving market exclusivity for our product candidate relies on our ability to obtain and maintain a regulatory period of data exclusivity for an approved biologic, currently 12 years from the date of marketing approval, obtaining orphan designation in the major markets and to preserve effective patent coverage. Once any regulatory period of data exclusivity expires, depending on the status of our patent coverage, we may not be able to prevent others from marketing and selling biosimilar versions of our product candidates. We are also dependent upon the diligence of third parties, which control the prosecution of pending domestic and foreign patent applications and maintain granted domestic and foreign patents.
We may be unable to obtain, maintain and protect the intellectual property rights necessary to conduct our business, and we may be subject to claims that we infringe or otherwise violate the intellectual property rights of others, which could materially harm our business. For more information, see “Risk Factors- Risks Related to Our Intellectual Property Rights.”
Manufacturing
We do not currently have nor do we plan to build the internal infrastructure or capability to manufacture Prolanta™ or any future product candidates for use in the conduct of our clinical trials or for commercial supply. We currently rely on a third-party contract manufacturer to manufacture clinical supplies of Prolanta™, but we are evaluating alternative manufacturers.
Prolanta™ is a recombinant protein that is produced by
Escherichia
coli
(“
E. coli
”) bacteria that have been genetically modified to produce this protein. We obtained this bacterial strain, or “expression system”, along with certain purification methods, from Monsanto Company for $200,000 in 2010. Other manufacturers have similar proprietary and non-proprietary manufacturing systems. In the event we use this bacterial strain or other trade-secret technology from Monsanto Company in a final product, we may be required to pay a royalty of up to 2% of net sales. There are no other payments required.
The production of Prolanta™ is a multi-step process that involves the growth of bacteria in large containers (also known as fermentation), the inducement of production of the Prolanta™ protein by the bacteria, the extraction of the protein from the cells, the folding of the protein into the proper three-dimensional shape, and purification of the protein and removal of impurities and process residuals. The purified protein and additional excipients are then filled into vials and lyophilized for storage. The vials are kept refrigerated until use, and the protein is reconstituted with sterile water for injection beneath the skin. To treat cancer patients, we currently believe the protein will be injected daily under the skin during the treatment period. Our contract manufacturer currently performs the manufacturing steps prior to vial filling and lyophilization, and these latter steps are performed by a subcontractor.
Manufacturers of our products are required to comply with applicable FDA manufacturing requirements contained in the FDA’s current good manufacturing practice standards (“cGMP”) regulations. cGMP regulations require among other things, quality control and quality assurance as well as the corresponding maintenance of records and documentation. Pharmaceutical product manufacturers and other entities involved in the manufacture and distribution of approved pharmaceutical products are required to register their establishments with governmental authorities, such as the FDA and/or Health Canada, and certain state agencies, and are subject to periodic unannounced inspections by the governmental authorities and certain state agencies for compliance with cGMP and other laws. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance.
Facilities used by contract manufacturers and their subcontractors must be approved by the respective governmental agencies after we submit a request for marketing approval for Prolanta™. We do not control the manufacturing process and are completely dependent on contract manufacturers for compliance with the applicable regulatory requirements for the manufacture of Prolanta™. If a contract manufacturer cannot successfully manufacture material that conforms to the strict regulatory requirements of the FDA and any applicable foreign regulatory authority, they will not be able to secure the applicable approval for their manufacturing facilities. If these facilities are not approved for commercial manufacture, we may need to find alternative manufacturing facilities, which could result in delays in obtaining approval for the applicable product candidate as well as substantial additional expense.
In addition, contract manufacturers are subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign agencies for compliance with cGMPs and similar regulatory requirements. Failure to comply with applicable cGMPs or other regulatory requirements could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspensions or withdrawals of approvals, operating restrictions, interruptions in supply and criminal prosecutions, any of which could significantly and adversely affect supplies of our Prolanta™ and have a material adverse impact on our business, financial condition and results of operations.
Discovery of problems with a product after approval may result in restrictions on a product, manufacturer, or holder of an approved marketing authorization, including withdrawal of the product from the market. In addition, changes to the manufacturing process generally require prior FDA (or other governmental agency) approval before being implemented and other types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to further governmental review and approval.
In the event we develop or acquire additional product candidates, we expect to make similar arrangements with other third-party contract manufacturers for such product candidates.
Competition
The biopharmaceutical industry is characterized by intense competition and rapid innovation. Our potential competitors include large pharmaceutical and biotechnology companies, specialty pharmaceutical companies, generic drug companies and other public and private institutions developing oncology products. In addition, many universities and private and public research institutes are active in cancer research, some in direct competition with us. Many of our potential competitors have substantially greater financial, technical and human resources than we do, as well as greater experience in the discovery and development of product candidates, obtaining FDA and other regulatory approvals of products and the commercialization of those products. We also must compete with these institutions in recruiting highly qualified personnel. Accordingly, our potential competitors may be more successful than us in obtaining FDA approval for their drugs and achieving widespread market acceptance for their products. Our potential competitors’ drugs may be more effective, or more effectively marketed and sold, than any product candidate we may commercialize and may render Prolanta™ or any future product candidates obsolete or non-competitive before we can recover the expenses of their development and commercialization. We anticipate that we will face intense and increasing competition as new drugs enter the market and advanced technologies become available. Finally, the development of new treatment methods for the diseases we are targeting could render Prolanta™ or any future product candidate non-competitive or obsolete.
We believe the existing products for the treatment of ovarian and other cancers are not completely effective and that there is a need for better therapies. Furthermore, most current products have significant side effects. We currently intend to develop Prolanta™ for the treatment of ovarian cancer and then evaluate the drug for other cancers, such as breast, prostate and endometrial cancer. A number of product candidates that are currently under development by others may become commercially available in the future for the treatment of ovarian cancer or other cancers we may target. We are aware that many competitors have product candidates in Phase 2 or later stage clinical trials. However, our competitors’ products may be more effective, have fewer side effects, have lower costs or be better marketed and sold than Prolanta™ or any of our future product candidates. Additionally, products that our competitors successfully develop for the treatment of ovarian cancer may be marketed prior to Prolanta™.
We believe the key competitive factors that will affect the development and commercial success of Prolanta™, if successfully developed and approved for marketing, will be Prolanta™’s efficacy compared to existing or future products, the extent to which such efficacy is synergistic with existing or future products, Prolanta™’s safety and tolerability profile, the extent to which Prolanta™ is effective in all patients or identifiable subsets of patients, the convenience of dosing, Prolanta™’s price, and the availability of reimbursement from governmental and other third-party payors.
Government Regulation and Product Approval
Government authorities in the United States, at the federal, state and local level, and other countries extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export and import of products such as Prolanta™. Any pharmaceutical candidate that we develop must be approved by the FDA before it may be legally marketed in the United States and by the appropriate foreign regulatory agency before it may be legally marketed in foreign countries. The processes for obtaining regulatory approvals in the United States and in foreign countries, along with subsequent compliance with applicable statutes and regulations, require the expenditure of substantial time and financial resources.
United States Pharmaceutical Product Development Process
In the United States, the FDA regulates pharmaceutical (drug and biologic) products under the Federal Food, Drug and Cosmetic Act and its implementing regulations (“FDCA”). Pharmaceutical products are also subject to other federal, state and local statutes and regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. Failure to comply with the applicable US requirements at any time during the product development process, approval process or after approval, may subject an applicant to administrative or judicial sanctions. FDA sanctions could include refusal to approve pending applications, withdrawal of an approval, a clinical hold, warning letters, product recalls, product seizures, total or partial suspension of production or distribution injunctions, fines, refusals of government contracts, restitution, disgorgement or civil or criminal penalties. Any agency or judicial enforcement action could have a material adverse effect on us.
The process required by the FDA before a pharmaceutical product may be marketed in the United States generally includes the following:
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Completion of preclinical laboratory tests, animal studies and formulation studies according to Good Laboratory Practices (“GLPs”) or other applicable regulations;
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Submission to the FDA of an Investigational New Drug (“IND”) application, which must become effective before human clinical trials may begin in the United States;
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Performance of adequate and well-controlled human clinical trials according to the FDA’s current Good Clinical Practices (“GCPs”), to establish the safety and efficacy of the proposed pharmaceutical product for its intended use;
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Submission to the FDA of a New Drug Application (“NDA”) or Biological Licensing Application (“BLA”) for a new pharmaceutical product;
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Satisfactory completion of an FDA inspection of the manufacturing facility or facilities where the pharmaceutical product is produced to assess compliance with the FDA’s current good manufacturing practices (“cGMP”), to assure that the facilities, methods and controls are adequate to preserve the pharmaceutical product’s identity, strength, quality and purity;
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Potential FDA audit of the preclinical and clinical trial sites that generated the data in support of the NDA/BLA; and
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FDA review and approval of the NDA/BLA.
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The lengthy process of seeking required approvals and the continuing need for compliance with applicable statutes and regulations require the expenditure of substantial resources and approvals are inherently uncertain.
Before testing any compounds with potential therapeutic value in humans, the pharmaceutical product candidate enters the preclinical testing stage. Preclinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies to assess the potential safety and activity of the pharmaceutical product candidate. The conduct of the preclinical tests must comply with federal regulations and requirements including GLPs. The sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and a proposed clinical protocol, to the FDA as part of the IND. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA places the IND on a clinical hold within that 30-day time period. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. An IND that has become effective may also be referred to as “receiving clearance” from the FDA. The FDA may also impose clinical holds on a pharmaceutical product candidate at any time before or during clinical trials due to safety concerns or non-compliance.
We currently have clearance under an IND to conduct a Phase I study in ovarian cancer, and may submit additional INDs in the future for other cancers or other products. We cannot be certain that submission of an IND will result in the FDA allowing clinical trials to begin, or that, once begun, issues will not arise that suspend or terminate such clinical trial.
Clinical trials involve the administration of the pharmaceutical product candidate to healthy volunteers or patients under the supervision of qualified investigators, generally physicians not employed by the sponsor. Clinical trials are conducted under protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria, and the parameters to be used to monitor subject safety. Each protocol must be submitted to the FDA if conducted under a US IND. Clinical trials must be conducted in accordance with the FDA’s GCPs. Further, each clinical trial must be reviewed and approved by an independent institutional review board (“IRB”) or, if conducted outside of the US, an ethics committee at or servicing each institution at which the clinical trial will be conducted. An IRB or ethics committee is charged with protecting the welfare and rights of trial participants and considers such items as whether the risks to individuals participating in the clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB or ethics committee also approves the informed consent form that must be provided to each clinical trial subject or his or her legal representative and must monitor the clinical trial until completed.
We intend to use third party contract research organizations (“CRO”) to administer and conduct many aspects of our planned clinical trials and will rely upon such CROs, as well as medical institutions, clinical investigators and consultants, to conduct our trials in accordance with our clinical protocols and to play a significant role in the subsequent collection and analysis of data from these trials. The failure by any of such third parties to meet expected timelines, adhere to our protocols or meet regulatory standards could adversely impact the subject product development program.
Human clinical trials are typically conducted in three sequential phases that may overlap or be combined:
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Phase 1: The pharmaceutical product is initially introduced into healthy human subjects or diseased patients and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion. In the case of some products for severe or life-threatening diseases, such as cancer treatments, especially when the product may be too inherently toxic to ethically administer to healthy volunteers, the initial human testing is often conducted in patients. Our Phase I clinical trial will be conducted in ovarian cancer patients.
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Phase 2: The pharmaceutical product is evaluated in a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance, optimal dosage and dosing schedule.
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Phase 3: Clinical trials are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population at geographically dispersed clinical trial sites. These clinical trials are intended to establish the overall risk/benefit ratio of the product and provide an adequate basis for product labeling. Generally, two adequate and well-controlled Phase 3 clinical trials are required by the FDA for approval of an NDA/BLA or foreign authorities for approval of marketing applications.
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The size, extent, length and nature of clinical trials may vary by the nature of the disease. Sponsors are required to obtain regulatory approval to conduct each clinical trial, and the FDA may require certain types of patients, numbers of patients, clinical procedures or tests, length of treatment, and other criteria that may be difficult, expensive or time consuming.
The FDA and IND sponsor may agree in writing on the design and size of clinical trials intended to form the primary basis of an effectiveness claim in an NDA application. This process is known as a special protocol assessment (SPA). These agreements may not be changed after the clinical trials begin, except in limited circumstances. The existence of a SPA, however, does not assure approval of a product candidate.
Post-approval studies, or Phase 4 clinical trials, may be conducted after initial marketing approval. These studies are used to gain additional experience from the treatment of patients in the intended therapeutic indication and may be requested by the FDA as a condition of approval.
Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and written IND safety reports must be submitted to the FDA and the investigators for serious and unexpected adverse events or any finding from tests in laboratory animals that suggests a significant risk for human subjects. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, if at all. The FDA or the sponsor or, if used, its data safety monitoring board may suspend a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an independent review board (IRB) or ethics committee can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s or ethics committee’s requirements or if the pharmaceutical product has been associated with unexpected serious harm to patients.
Concurrent with clinical trials, companies usually complete additional animal studies and must also develop additional information about the chemistry and physical characteristics of the pharmaceutical product as well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the pharmaceutical product candidate and, among other things, must develop methods for testing the identity, potency, quality and purity of the final pharmaceutical product. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the pharmaceutical product candidate does not undergo unacceptable deterioration over its shelf life.
United States Review and Approval Processes
The results of product development, preclinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests conducted on the chemistry of the pharmaceutical product, proposed labeling and other relevant information are submitted to the FDA as part of an NDA/BLA requesting approval to market the product. The submission of an NDA/BLA is subject to the payment of substantial user fees by the applicant; a waiver of such fees may be obtained under certain limited circumstances, such as Orphan Drug Designation.
The FDA conducts a preliminary review of all NDAs/BLAs within the first 60 days after submission, before accepting them for filing, to determine whether they are sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an NDA/BLA for filing. In this event, the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA/BLA. Under the goals and policies agreed to by the FDA under the Prescription Drug User Fee Act, or PDUFA, the FDA has twelve months in which to complete its initial review of a standard NDA/BLA and respond to the applicant, and eight months for a priority NDA/BLA. The FDA does not always meet its PDUFA goal dates for standard and priority NDAs/BLAs.
After the NDA/BLA submission is accepted for filing, the FDA reviews the NDA/BLA to determine, among other things, whether the proposed product is safe and effective for its intended use, and whether the product is being manufactured in accordance with cGMP to assure and preserve the product’s identity, strength, quality and purity. In addition to its own review, the FDA may refer applications for novel drug products or drug products that present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions. During the approval process, the FDA also will determine whether a Risk Evaluation and Mitigation Strategy, or REMS, is necessary to assure the safe use of the drug. If the FDA concludes that a REMS is needed, the sponsor of the NDA/BLA must submit a proposed REMS; the FDA will not approve the NDA/BLA without a REMS, if required.
Before granting regulatory approval of an NDA/BLA, the FDA will inspect the facilities at which the product is to be manufactured. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA/BLA, the FDA will typically inspect one or more clinical sites to assure compliance with cGMP. If the FDA determines that the application, manufacturing process or manufacturing facilities are not acceptable it will outline the deficiencies in the submission and often will request additional testing or information.
The NDA/BLA review and approval process is lengthy and difficult and the FDA may refuse to approve an NDA/BLA if the applicable regulatory criteria are not satisfied or may require additional clinical data or other data and information. Even if such data and information is submitted, the FDA may ultimately decide that the NDA/BLA does not satisfy the criteria for approval. Data obtained from clinical trials are not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The FDA will issue a “complete response” letter if the agency decides not to approve the NDA/BLA. The complete response letter usually describes all of the specific deficiencies in the NDA/BLA identified by the FDA. The deficiencies identified may be minor, for example, requiring labeling changes, or major, for example, requiring additional clinical trials. Additionally, the complete response letter may include recommended actions that the applicant might take to place the application in a condition for approval. If a complete response letter is issued, the applicant may either resubmit the NDA/BLA, addressing all of the deficiencies identified in the letter, or withdraw the application.
If a product receives regulatory approval, the approval may be significantly limited to specific types of patients or diseases and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings or precautions be included in the product labeling. In addition, the FDA may require Phase 4 testing, which involves clinical trials designed to further assess a product’s safety and effectiveness and may require testing and surveillance programs to monitor the safety of approved products that have been commercialized.
Expedited Development and Review Programs
The FDA has a “Fast Track” program that is intended to expedite or facilitate the process for reviewing new drug products that meet certain criteria. Specifically, new drug products are eligible for Fast Track designation if they are intended to treat a serious or life-threatening condition and demonstrate the potential to address unmet medical needs for the condition. Fast Track designation applies to the combination of the product and the specific indication for which it is being studied. Unique to a Fast Track product, the FDA may consider for review sections of the NDA on a rolling basis before the complete application is submitted, if the sponsor meets certain requirements and the FDA agrees to accept sections on a rolling basis.
Any product submitted to the FDA for marketing approval, including those submitted to a Fast Track program, may also be eligible for other types of FDA programs intended to expedite development and review, such as priority review and accelerated approval.
Any product is eligible for priority review if it has the potential to provide safe and effective therapy where no satisfactory alternative therapy exists or there is a significant improvement in the treatment, diagnosis or prevention of a disease compared with marketed products. The FDA will attempt to direct additional resources to the evaluation of an application for a new drug product designated for priority review in an effort to facilitate the review.
Additionally, a product may be eligible for accelerated approval. Drug products studied for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may receive accelerated approval, which means that they may be approved on the basis of adequate and well-controlled clinical studies establishing that the product has an effect on a surrogate endpoint that is reasonably likely to predict a clinical benefit, or on the basis of an effect on a clinical endpoint other than survival or irreversible morbidity. As a condition of approval, the FDA generally requires that a sponsor of a drug product receiving accelerated approval perform adequate and well-controlled post-marketing clinical studies to establish safety and efficacy for the approved indication. Failure to conduct such studies or conducting such studies that do not establish the required safety and efficacy may result in revocation of the original approval. In addition, the FDA currently requires as a condition for accelerated approval the pre-approval of promotional materials, which could adversely impact the timing of the commercial launch or subsequent marketing of the product.
Moreover, under the provisions of the new Food and Drug Administration Safety and Innovation Act, or FDASIA, enacted in 2012, a sponsor can request designation of a product candidate as a “breakthrough therapy.” A breakthrough therapy is defined as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. Drugs designated as breakthrough therapies are also eligible for accelerated approval. The FDA must take certain actions, such as holding timely meetings and providing advice, intended to expedite the development and review of an application for approval of a breakthrough therapy.
Even if a product qualifies for one or more of these programs, the FDA may later decide that the product no longer meets the conditions for qualification or decide that the time period for FDA review or approval will not be shortened.
Orphan Drug Designation
Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biological product intended to treat a rare disease or condition, which is a disease or condition that affects fewer than 200,000 individuals in the United States, or if it affects more than 200,000 individuals in the United States there is no reasonable expectation that the cost of developing and making a drug product available in the United States for this type of disease or condition will be recovered from sales of the product. Orphan product designation must be requested before submitting an NDA/BLA. After the FDA grants orphan product designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan product designation does not indicate an endorsement by the FDA and may not provide any benefit in the marketing approval process.
If a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications to market the same drug or biological product for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity. The designation of such drug also entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages and user-fee waivers.
Orphan drug status in the European Union has similar but not identical benefits in that jurisdiction. In the EU, orphan drug designation is provided for a drug that is intended to diagnose, prevent or treat a life-threatening or chronically debilitating condition which affects no more than 5 in 10,000 individuals in the EU (approximately 245,000 individuals) and for which no satisfactory method of diagnosis, prevention or treatment of the condition already exists, or if such method does exist, that the orphan product must be of significant benefit to the patient population over existing products. The company that obtains the first EU approval for a designated orphan drug indication receives marketing exclusivity for use of that drug for that indication for a period of 10 years for the 27 member states in the EU.
We currently have Orphan Drug Designation for Prolanta™ for the treatment of ovarian cancer in the United States. We intend to seek Orphan Drug designation from the EU for Prolanta™. Orphan Designation for ovarian cancer does not apply to the treatment of other “orphan” cancers, and each cancer requires a separate application and qualification.
Orphan drug exclusivity may not prevent other market entrants. Competitors may receive approval of different products for the indication for which the orphan product has exclusivity or obtain approval for the same product but for a different indication for which the orphan product has exclusivity. Orphan product exclusivity also could block the approval of one of our products for seven years if a competitor obtains approval of the same drug or biological product as defined by the FDA or if our drug candidate is determined to be contained within the competitor’s product for the same indication or disease. If a drug product designated as an orphan product receives marketing approval for an indication broader than what is designated, it may not be entitled to orphan product exclusivity.
Post-Approval Requirements
Any pharmaceutical products for which we receive FDA approvals are subject to continuing regulation by the FDA, including, among other things, record-keeping requirements, reporting of adverse experiences with the product, providing the FDA with updated safety and efficacy information, product sampling and distribution requirements, complying with certain electronic records and signature requirements and complying with FDA promotion and advertising requirements, which include, among others, standards for direct-to-consumer advertising, promoting pharmaceutical products for uses or in patient populations that are not described in the pharmaceutical product’s approved labeling (known as “off-label use”), industry-sponsored scientific and educational activities, and promotional activities involving the internet. Failure to comply with FDA requirements can have negative consequences, including adverse publicity, enforcement letters from the FDA, mandated corrective advertising or communications with doctors, and civil or criminal penalties.
We rely, and expect to continue to rely, on a third party and its subcontractors for the production of clinical and commercial quantities of Prolanta™. Manufacturers of our product candidates are required to comply with applicable FDA manufacturing requirements contained in the FDA’s cGMP regulations. These regulations require, among other things, quality control and quality assurance as well as the corresponding maintenance of comprehensive records and documentation. Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are also required to register their establishments and list any products they make with the FDA and to comply with related requirements in certain states or countries in which the manufacturer is located. These entities are further subject to periodic unannounced inspections by the FDA and certain state or foreign agencies for compliance with cGMP and other laws. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain cGMP compliance. Discovery of problems with a product after approval may result in serious and extensive restrictions on a product, manufacturer or holder of an approved NDA/BLA. These restrictions may include suspension of a product until the FDA is assured that quality standards can be met, continuing oversight of manufacturing by the FDA under a “consent decree,” which frequently includes the imposition of costs and continuing inspections over a period of many years, as well as possible withdrawal of the product from the market. In addition, changes to the manufacturing process generally require prior FDA approval before being implemented. Other types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to further FDA review and approval.
The FDA also may require post-marketing testing, known as Phase 4 testing, risk minimization action plans and surveillance to monitor the effects of an approved product or place conditions on an approval that could restrict the distribution or use of the product.
In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act, or PDMA, which regulates the distribution of drugs and drug samples at the federal level and sets minimum standards for the registration and regulation of drug distributors by the states. Both the PDMA and state laws limit the distribution of prescription pharmaceutical product samples and impose requirements to ensure accountability in distribution.
U.S. Patent Term Restoration and Marketing Exclusivity
Depending upon the timing, duration and specifics of any FDA approval of our product candidate, some of our United States patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term restoration period is generally one-half the time between the effective date of an IND and the submission date of an NDA/BLA plus the time between the submission date of an NDA/BLA and the approval of that application. Only one patent applicable to an approved product is eligible for the extension and the application for the extension must be submitted prior to the expiration of the patent. The United States Patent and Trademark Office, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration.
Market exclusivity provisions under the FDCA can also delay the submission or the approval of certain applications of other companies seeking to reference another company’s NDA or BLA. We believe that if Prolanta™ is approved as a biological product under a BLA, it should qualify for a 12-year period of exclusivity currently permitted by the Biologics Price Competition and Innovation Act of 2009, or BPCIA. Specifically, the BPCIA established an abbreviated pathway for the approval of biosimilar and interchangeable biological products. The new abbreviated regulatory pathway establishes legal authority for the FDA to review and approve biosimilar biologics, including the possible designation of a biosimilar as “interchangeable” based on their similarity to existing brand product. Under the BPCIA, an application for a biosimilar product cannot be approved by the FDA until 12 years after the original branded product was approved under a BLA. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement to one of the patents listed with the FDA by the innovator BLA holder. These periods apply only to biosimilar applications, and not products submitted under other regulatory applications. The BPCIA is complex and is only beginning to be interpreted and implemented by the FDA. As a result, its ultimate impact, implementation and meaning is subject to uncertainty. Orphan drug exclusivity, as described above, may offer a seven-year period of marketing exclusivity, except in certain circumstances, independent of any protection offered by BPCIA.
U.S. Foreign Corrupt Practices Act
The U.S. Foreign Corrupt Practices Act, to which we are subject, prohibits corporations and individuals from engaging in certain activities to obtain or retain business or to influence a person working in an official capacity. It is illegal to pay, offer to pay or authorize the payment of anything of value to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity.
International Regulation
In addition to regulations in the United States, there are a variety of foreign regulations governing clinical trials and commercial sales and distribution of any product candidates. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval.
Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in foreign countries prior to the commencement of clinical trials or marketing of the product in those countries. Certain countries outside of the United States have a similar process that requires the submission of a clinical trial application much like the IND prior to the commencement of human clinical trials. In the European Union, for example, a clinical trial application, or CTA, must be submitted to each country’s national health authority and an independent ethics committee, much like the FDA and IRB, respectively. Once the CTA is approved in accordance with a country’s requirements, clinical trials may proceed.
The requirements and process governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. In all cases, the clinical trials are conducted in accordance with International Conference on Harmonization (ICH) / WHO Good Clinical Practice standards and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.
To obtain regulatory approval of an investigational drug under European Union regulatory systems, we must submit a marketing authorization application to the European Medicines Agency, or the EMA, where it will be evaluated by the Committee for Medicinal Products for Human Use. A favorable opinion typically results in the grant by the European Commission of a single marketing authorization that is valid for all European Union member states within 67 days of receipt of the opinion. The initial marketing authorization is valid for five years, but once renewed is usually valid for an unlimited period. The application used to file an NDA/BLA in the United States is similar to that required in the European Union, with the exception of, among other things, country-specific document requirements.
For countries outside of the European Union, such as countries in Eastern Europe, Latin America or Asia, the requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. In all cases, again, the clinical trials are conducted in accordance with GCPs and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.
If we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.
Other Healthcare Laws and Compliance Requirements
In the United States, our activities are potentially subject to regulation by various federal, state and local authorities in addition to the FDA, including The Centers for Medicare and Medicaid Services (formerly the Health Care Financing Administration), other divisions of the United States Department of Health and Human Services (e.g., the Office of Inspector General), the United States Department of Justice and individual United States Attorney offices within the Department of Justice, and state and local governments.
For example, sales, marketing and scientific/educational grant programs must comply with the anti-fraud and abuse provisions of the Social Security Act, the False Claims Act, the privacy and security provisions of the Health Insurance Portability and Accountability Act, or HIPAA, and similar state laws, each as amended. Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veterans Health Care Act of 1992, each as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. Under the Veterans Health Care Act, or VHCA, drug companies are required to offer certain pharmaceutical products at a reduced price to a number of federal agencies including the United States Department of Veterans Affairs and United States Department of Defense, the Public Health Service and certain private Public Health Service - designated entities in order to participate in other federal funding programs including Medicare and Medicaid. Recent legislative changes purport to require that discounted prices be offered for certain United States Department of Defense purchases for its TRICARE program via a rebate system. Participation under the VHCA requires submission of pricing data and calculation of discounts and rebates pursuant to complex statutory formulas, as well as the entry into government procurement contracts governed by the Federal Acquisition Regulations.
In order to distribute products commercially, we must comply with state laws that require the registration of manufacturers and wholesale distributors of pharmaceutical products in a state, including, in certain states, manufacturers and distributors who ship products into the state even if such manufacturers or distributors have no place of business within the state. Some states also impose requirements on manufacturers and distributors to establish the pedigree of product in the chain of distribution, including some states that require manufacturers and others to adopt new technology capable of tracking and tracing product as it moves through the distribution chain. Several states have enacted legislation requiring pharmaceutical companies to establish marketing compliance programs, file periodic reports with the state, make periodic public disclosures on sales, marketing, pricing, clinical trials and other activities, and/or register their sales representatives, as well as to prohibit pharmacies and other healthcare entities from providing certain physician prescribing data to pharmaceutical companies for use in sales and marketing, and to prohibit certain other sales and marketing practices. All of our activities are potentially subject to federal and state consumer protection and unfair competition laws.
Pharmaceutical Coverage, Pricing and Reimbursement
In the United States and markets in other countries, sales of any products for which we receive regulatory approval for commercial sale will depend in part on the availability of reimbursement from third-party payors, including government health administrative authorities, managed care providers, private health insurers and other organizations. These third-party payors are increasingly reducing reimbursement amounts for medical products and services. Additionally, the containment of healthcare costs has become a priority of federal and state governments, and the prices of drugs have been a focus in this effort. The U.S. government, state legislatures and foreign governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our net revenue and results. Decreases in third-party reimbursement for our product candidates or a decision by a third-party payor to not cover our product candidates could reduce physician usage of the product candidate and have a material adverse effect on our sales, results of operations and financial condition.
In the United States, a number of recent legislative reform measures have been passed to contain healthcare reimbursement for pharmaceuticals, including drugs such as our product candidates. For example, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act of 2010, known collectively as ACA, among other things, establishes annual fees to be paid by manufacturers for certain branded prescription drugs, requires manufacturers to participate in a discount program for certain outpatient drugs under Medicare Part D, increases manufacturer rebate responsibilities under the Medicaid Drug Rebate Program for outpatient drugs dispensed to Medicaid recipients, and expands oversight and support for the federal government’s comparative effectiveness research of services and products. We cannot predict the full impact of ACA or future reform measures on our operations and the current legal challenges and congressional efforts to repeal ACA add to the uncertainty.
In some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the European Union provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products. Historically, products launched in the European Union do not follow price structures of the United States and generally tend to be significantly lower.
Environmental Regulation
We and our contract manufacturer are subject to federal, state, local and international laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials, biological specimens and wastes. Although we believe that we have complied with these laws, regulations and policies in all material respects and have not been required to take any significant action to correct any noncompliance, we may be required to incur significant costs to comply with environmental and health and safety regulations in the future.
Our manufacturing activities involve the controlled use of hazardous materials, including, but not limited to, certain hazardous chemicals. Although we believe that our contract manufacturer has safety procedures for handling and disposing of such materials that comply with the standards prescribed by applicable regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident, we could be held liable, directly or indirectly through our contractual relationships, for any damages that result and any such liability could exceed our resources.
Item 1A. Risk Factors.
An investment in our capital stock and other securities involves significant risks, including the risk of a loss of your entire investment. You should carefully consider the risks and uncertainties described below before purchasing our capital stock. You should also refer to the other information in this report, including our financial statements and the related notes. The risks set forth below are not the only ones facing our Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may adversely affect our business, financial condition, operations and prospects. If any of the following risks actually materialize, our business, financial condition, prospects and operations would suffer. In such event, the value of our capital stock would decline, and you could lose all or a substantial portion of your investment. The risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements.
Risks Related to Our Financial Position and Capital Needs
We have incurred net losses since our inception and anticipate that we will continue to incur net losses for the foreseeable future.
Investment in biopharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate efficacy or an acceptable safety profile, gain regulatory approval or be commercially viable. We are a clinical stage biopharmaceutical company with limited operating history. We have not completed our Phase I clinical trials and no assurances can be given that when, if ever, we will be able to. As a result, we have not yet demonstrated an ability to complete clinical trials, obtain regulatory approvals, manufacture a commercial-scale drug or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful commercialization. We may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown difficulties in achieving our business objectives. We have no product approved for commercial sale and have not generated any product revenues to date, and we continue to incur significant research and development and other expenses related to our ongoing operations and clinical development of Prolanta™. As a result, we are not and have never been profitable and have incurred losses in each period since our commencement of operations in 2007. We will need to raise substantial additional capital to fund operations and the failure to obtain capital may cause us to curtail or cease operations.
For the year ended December 31, 2017, we reported a net loss of $3.4 million; and as of December 31, 2017, we had an accumulated deficit of $22.6 million. We expect to continue to incur significant losses for the foreseeable future, and we expect these losses to increase as we continue our research and development of, and seek regulatory approvals for, Prolanta™. We may also encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenues, if any. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital.
We currently have no source of product revenue and may never achieve or maintain profitability.
Our ability to generate product revenue and become profitable depends upon our ability to successfully commercialize our sole product, Prolanta™. We do not anticipate generating revenue from the sale of Prolanta™ for the foreseeable future. Our ability to generate future product revenue also depends on a number of additional factors, including, but not limited to, our ability to:
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successfully complete the research and clinical development of, and receive regulatory approval for, Prolanta™;
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launch, commercialize and achieve market acceptance of Prolanta™, and if launched independently, successfully establish a sales, marketing and distribution infrastructure;
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continue to build a portfolio of product candidates through the acquisition or in-license of products, product candidates or technologies;
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initiate preclinical and clinical trials for any additional product candidates that we may pursue in the future;
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establish and maintain supplier and manufacturing relationships with third parties, and ensure adequate and legally compliant manufacturing of bulk drug substances and drug products to maintain that supply;
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obtain coverage and adequate product reimbursement from third-party payors, including government payors;
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establish, maintain, expand and protect our intellectual property rights; and
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attract, hire and retain additional qualified personnel.
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In addition, because of the numerous risks and uncertainties associated with drug development, we are unable to predict the timing or amount of increased expenses, and if or when we will achieve or maintain profitability. In addition, our expenses could increase beyond expectations if we decide to or are required by the FDA or foreign regulatory authorities to perform studies or trials in addition to those that we currently anticipate. Even if we complete the development and regulatory processes described above, we anticipate incurring significant costs associated with launching and commercializing Prolanta™. We will need to raise substantial additional capital to fund operations and the failure to obtain capital may cause us to curtail or cease operations.
Even if we generate revenues from the sale of Prolanta™, we may not become profitable and may need to obtain additional funding to continue operations or acquire additional products that will require additional funding to develop them. If we fail to become profitable or do not sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce our operations or curtail operations.
We have limited cash on hand, and we will need substantial additional funding and if we are unable to raise additional capital when needed, we would be forced to delay, reduce or eliminate our clinical trials and curtail operations.
The Company believes that it has sufficient cash on hand to fund its operations into April 2018, before the time when the first installment for repayment of our Convertible Notes become due. The exact duration that our liquidity will be sufficient to fund operations depends upon many factors, some of which are outside the control of the Company and is difficult to predict. We expect our research and development expenses to increase in connection with our ongoing activities relating to Prolanta™, particularly as we focus on and proceed with our clinical trials for our Prolanta™ product. In addition, our expenses could increase beyond current expectations if applicable regulatory authorities, including the FDA, require that we perform studies in addition to those that we currently anticipate, assuming we successfully complete our Phase 1 clinical trials, commence and complete our proposed Phase 2 clinical trials. We currently estimate that we require approximately $1.0 million in additional funds to complete the Phase 1 clinical trial, excluding amounts that may be necessary for payment of interest and principal of our Convertible Notes when due. We will still need substantial additional capital in the future in order to complete the clinical trials and obtain regulatory approval of Prolanta™. Accordingly, we will need to raise additional capital to fund future operations and we expect to finance future cash needs through best-efforts public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. Such funding may not be available on favorable terms, if at all. Failure to raise additional capital could cause us to curtail or cease operations and result in the loss of your investment in our Common Stock.
If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs or our commercialization efforts. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience additional significant dilution, and debt financing, if available, may involve restrictive covenants. To the extent that we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to our technologies or our product candidates or to grant licenses on terms that may not be favorable to us. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time.
Our forecast of the period of time through which our current capital will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.
The terms of the Convertible Notes will restrict our operating flexibility.
Pursuant to the Purchase Agreement, the Company issued Convertible Notes to the Purchasers in an aggregate principal amount of $4,190,463 at a 15% discount. The Convertible Notes bear interest at a rate of 10% per annum, payable quarterly on November 1, 2017, February 1, 2018, and May 1, 2018 and thereafter, on a monthly basis until maturity. The interest is payable in cash or, at our option, subject to compliance with the Equity Conditions, in fully tradable Common Stock at the lesser of the then conversion price or a 25% discount to the average of the five lowest closing bid prices for the twenty trading days prior to the interest payment date. The final maturity of the Convertible Notes is November 1, 2018, but commencing on May 1, 2018, and on the first day of each month thereafter until maturity, we are required to redeem an amount of the Convertible Notes equal to 1/7th of the original principal amount, plus 10% of such monthly redemption amount. The principal payments shall be made in cash or, subject to the satisfaction of Equity Conditions, in our Common Stock valued at the lesser of the then conversion price or a 25% discount to the average of the five lowest closing bid prices for the twenty trading days prior to the amortization date. Accordingly, in the event that the Company issues shares of its Common Stock to pay principal and/or interest on the Convertible Notes, such payment through the issuance of shares of Common Stock may be dilutive to the Company. Moreover, satisfaction of the Equity Conditions may be difficult; therefore, investors should assume that the Company will be required to utilize cash for its payment obligations pursuant to the Convertible Notes. The Company will need to raise additional capital to fund principal and interest obligations of the Convertible Notes and there is no assurance that it will be successful in this endeavor. Failure to raise additional capital could cause a default in the Convertible Notes and result in a foreclosure by the Convertible Note holders on substantially all of our assets.
The Convertible Notes are convertible at the option of the Purchasers at a conversion price equal to $0.0545 per share. The Convertible Notes contain customary anti-dilution protection, including full-ratchet anti-dilution adjustments in the event of certain dilutive issuances (that adjust both conversion price and share amounts to be issued upon conversion). We may offer additional inducements for conversion of the Convertible Notes or payment of interest in equity in lieu of cash, including a a lower price per share than then-currently required. Accordingly, the conversion price of the Convertible Notes is subject to future market prices of the Company Common Stock (of which the Company has no control) as well as the price of future Common Stock issuances (either in connection with any potential financings or in lieu of cash for services to be rendered) which could result in the conversion price being further adjusted to a price with additional shares being issued upon conversion per the anti-dilution provisions. These provisions may make it more difficult and more expensive for us to raise capital in the future and may result in further dilution to shareholders.
In the event of a closing of an $8 million financing in connection with a change in listing of our Common Stock to Nasdaq or the NYSE, the Convertible Notes shall be subject to mandatory conversion into our Common Stock at a 30% discount to the offering price. There can be no assurance that the Company will be able to satisfy initial listing requirements of the Nasdaq or NYSE. We shall be required to offer to prepay in cash the aggregate principal amount of the Convertible Notes at 120% of the principal amount thereof plus any unpaid accrued interest to the date of repayment, at maturity, on the sale of substantially all of our assets, upon a change of control, upon a qualified offering, or upon a “fundamental transaction”; in such an event, the Purchasers shall have the right to convert the Convertible Notes prior to the date of any such prepayment.
The Convertible Notes contain standard negative covenants customary for transactions of this type. These negative covenants may preclude or restrict the ability of the Company to effect future debt and convertible debt financings without the prior approval of holders of the majority principal amount of the Convertible Notes. The events of default are also customary for transactions of this type, including default in timely payment of principal or interest, failure to observe or perform any covenant or agreement contained in the Convertible Note and Transaction Documents, the commencement of bankruptcy or insolvency proceedings, failure to timely deliver conversion shares underlying the Convertible Notes, failure to timely file Exchange Act filings, and failure to satisfy certain Equity Conditions. In the event that the Company triggers one of these event of default provisions, the holders of the Convertible Notes have the ability to foreclose on substantially all of the assets of the Company which would result in the cessation of our operations.
Equity Conditions mean, during the period in question, (a) we shall have duly honored all conversions and redemptions of the Convertible Notes, (b) we shall have complied with all conversion and other provisions of the Convertible Notes and shall have paid all liquidated damages and other amounts owing in respect of this Convertible Note, (c)(A) there is an effective registration statement pursuant to which the holder is permitted to utilize the prospectus thereunder to resell at least the number of shares of Common Stock issuable pursuant to the Transaction Documents at such time or (B) all of the underlying shares may be resold pursuant to Rule 144 without volume or manner-of-sale restrictions or current public information requirements, (d) our Common Stock is trading on a trading market, (e) there is a sufficient number of authorized but unissued and otherwise unreserved shares of Common Stock for the issuance of five times all of the shares issuable pursuant to the Convertible Notes and Warrants, (f) there is no existing event of default or no existing event which, with the passage of time or the giving of notice, would constitute an event of default, (g) the issuance of the shares in question would not violate the beneficial ownership limitations in the Transaction Documents, (h) there has been no public announcement of a pending or proposed fundamental transaction or change of control transaction that has not been consummated, (i) the holder is not in possession of any information provided by the Company that constitutes, or may constitute, material non-public information, (j) our Common Stock is DWAC eligible and not subject to a DTC “chill;” and (k) for each trading day in a period of 10 consecutive trading days prior to the applicable date in question (A) the daily dollar trading volume for our Common Stock on the principal trading market exceeds $75,000 per trading day and (B) the weighted average stock price for our Common Stock on the principal trading market is above 50% of the closing stock price on August 3, 2017 (as adjusted for all stock splits stock dividends, stock combinations, reclassifications and other transactions). The satisfaction of the Equity Conditions may be difficult to meet as many of these conditions involve events outside of the Company’s control. The failure to meet these Equity Conditions precludes the Company’s ability to utilize its shares of Common Stock to satisfy payment obligations pursuant to the Convertible Notes.
We have the right at any time to redeem all, but not less than all, of the total outstanding amount of principal amount then remaining under the Convertible Notes at a price equal to 120% of such principal amount.
Terms of our existing $4,190,463 senior debt and warrants may impact our ability to obtain additional financing.
The Convertible Notes are senior secured obligations of the Company. The terms of the Convertible Notes preclude the Company from obtaining any additional debt senior to or
pari passu
with the Convertible Notes. Additionally, the Convertible Notes are secured by substantially all of our assets and guaranteed by Oncolix. In the event of our default with respect to the Convertible Notes, the holders have the right to foreclose on substantially all of our assets which likely would result in us ceasing operations. The terms of the Convertible Notes may adversely affect the Company’s ability to obtain additional debt or equity financing to fund additional working capital needs, including the payment obligations of the Convertible Notes.
Registration Rights Agreement will affect future capital raises.
The Registration Rights Agreement entered into in connection with the issuance of the Convertible Notes requires the Company to register the resale of all the underlying shares of our Common Stock issuable upon conversion of the Convertible Notes and exercise of the Warrants. The Company has previously filed registration statements to register the shares of Common Stock issuable upon the conversion of some of the Convertible Notes and upon exercise of the Warrants, and the Company intends to use its best efforts to file any additional registration statements to register the resale of the remaining underlying shares under the Securities Act as soon as practical. The availability of these shares for sale in the public markets will likely have a depressive effect on any market price of our Common Stock. The Registration Rights Agreement contains liquidated damage provisions in the event that the Company fails to timely comply with the registration requirements therein. Additionally, the registration obligations may adversely impact our ability to issue additional equity or convertible debt securities to fund additional working capital needs, including the payment obligations of the Convertible Notes.
In connection with the Initial Registration Statement, certain shares were not registered as of December 31, 2017. The Company believes no liquidated damages have accrued with respect to these unregistered shares. For the benefit of the holders of the Convertible Notes, the Company has filed and will continue to file registration statements to seek to register the resale of these shares. While the Company believes no damages have accrued as of December 31, 2017, certain holders of Convertible Notes have verbally asserted that damages do accrue under the agreements. As of December 31, 2017, such amount claimed by the holders equals 18% of the related Convertible Notes, or $522,349, and accrued interest at 24% per annum of $6,068. Interest would continue to accrue until paid. This potential liability is not recorded in the accompanying financial statements because the Company believes no damages are due as of December 31, 2017. However, depending on the timing of future registration statements, future damages may accrue.
Our ability to use our prior net operating
loss carryforwards and certain other tax attributes may be limited.
We have incurred substantial losses during our history. We do not expect to become profitable in the near future, and we may never achieve profitability. Unused losses generally are available to be carried forward to offset future taxable income, if any, until such unused losses expire. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards, or NOLs, and other pre-change tax attributes (such as research tax credits) to offset its post-change taxable income or taxes may be limited. As a result of the Merger and a reorganization effected by our largest stockholder in 2017, we believe our ability to utilize net operating losses and tax credits generated prior to 2018 to offset taxable income generated in 2018 and future years will be extremely limited.
The current economic climate and legislative and regulatory changes in the U.S. and internationally creates uncertainties for the Company.
The economic climate in the U.S. and internationally may become increasingly competitive, which may affect our ability to market products on a worldwide basis. In addition, proposed healthcare legislative changes in the United States and the uncertainty of its future regulatory framework may have a substantial impact on the Company and its operations, including pricing and reimbursement for its products. The Company cannot predict at this time what the potential impact may be or whether the effects on the Company will be positive or negative. If the Company suffers adverse effects it could cause the Company to fail to meet, or face delays in meeting, its marketing and sales objectives. Any such failures or delays will create additional financial uncertainties and difficulties for the Company.
We face significant competition from other pharmaceutical and biotechnology companies and they or others may also discover, develop or commercialize products before or more successfully than we do.
The development and commercialization of a drug candidate is highly competitive. We face competition with respect to our current product candidate and will face competition with respect to any product candidates that we may seek to develop or commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies, and biotechnology companies worldwide. We have competitors many of which have substantially greater name recognition, commercial infrastructure and financial, technical and personnel resources than we have. Established competitors may invest heavily to quickly discover and develop products that could make our products obsolete or uneconomical. Any new product that competes with an approved product may need to demonstrate compelling advantages in efficacy, cost, convenience, tolerability and safety to be commercially successful. Other competitive factors, including generic competition, could force us to lower prices or could result in reduced sales. In addition, new products developed by others could emerge as competitors to our products. If we are not able to compete effectively against our current and future competitors, our business will not grow and our financial condition and operations will suffer.
There can be no assurance that Prolanta™ will successfully complete its Phase 1 and later stage clinical trials.
There can be no assurance that we will be able to successfully complete our Phase 1 clinical trials or, if so, that we will obtain regulatory approval for our later stage clinical trials and/or successfully complete such later stage clinical trials and/or obtain all required regulatory approvals. Moreover, no assurances can be given we will be able to commercialize Prolanta™ or that we will ever generate sustained revenue or achieve profitability. Our ability to operate profitably in the future will depend upon, among other items, our ability to (i) successfully complete all required clinical trials for Prolanta™, (ii) obtain regulatory approval from the FDA or other regulatory agencies for Prolanta™, (iii) scale up our business and operational structure, (iv) commercialize and market Prolanta™, and (v) successfully gain market acceptance of Prolanta™. There can be no assurance that we will successfully achieve any of the foregoing. Our prospects must be considered in light of the numerous risks, expenses, delays and difficulties frequently encountered in the intensely competitive and high-risk markets in which Prolanta™ is intended to compete. If we are unable to develop and commercialize Prolanta™, we will not achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability.
We will need substantial additional funding and, if we are unable to raise capital when needed, we would be forced to delay, reduce or eliminate our product development and commercialization plans.
We expect our research and development expenses to increase in connection with our ongoing activities. In addition, our expenses could increase beyond expectations if applicable regulatory authorities, including the FDA, require that we perform studies in addition to those that we currently anticipate, in which case the timing of any potential product approval may be delayed. We will still need substantial additional capital in the future in order to complete the development and commercialization of Prolanta™. Until we can generate a sufficient amount of product revenue, if ever, we expect to finance future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. Such funding, if needed, may not be available on favorable terms, if at all. Failure to obtain additional capital could cause us to curtail or cease operations.
If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs or our commercialization efforts. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience additional significant dilution, and debt financing, if available, may involve restrictive covenants. To the extent that we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to our technologies or our product candidates or to grant licenses on terms that may not be favorable to us.
We contract with third parties for the manufacture of Prolanta™ for clinical trials and we expect to continue to do so in connection with the commercialization of Prolanta™ and for clinical trials and commercialization of any other product candidates that we develop. Any failure by the Manufacturer to produce acceptable supplies for us or to comply with FDA or comparable foreign regulations may delay or impair our ability to initiate or complete our clinical trials, obtain regulatory approvals to market, or sell any resulting product.
We do not currently have nor do we plan to build the internal infrastructure or capability to manufacture Prolanta™ or any future product candidates for use in the conduct of our clinical trials or for commercial supply. We currently rely on a third-party contract manufacturer to manufacture clinical supplies of Prolanta™. We expect to rely upon this manufacturer or another contract manufacturer to manufacture clinical trial supplies and commercial quantities of Prolanta™ if and when we receive approval for marketing by applicable regulatory authorities. Our contract manufacturer subcontracts to other third-party manufacturers certain aspects of the manufacturing of Prolanta™, including the filling of vials and the lyophilization (freeze-drying) of the final drug product.
Reliance on a contract manufacturer to manufacture Prolanta™ entails risks, including:
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manufacturing delays if the contract manufacturer gives greater priority to the supply of other products over Prolanta™;
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manufacturing delays or increased costs if the contract manufacturer does not satisfactorily perform according to the terms of any agreement between us;
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the failure of the contract manufacturer to comply with applicable regulatory requirements;
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the possible misappropriation of our proprietary information, including our trade secrets and know-how.
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We are currently conducting a Phase I clinical trial of Prolanta™ for the treatment of ovarian cancer. The first of three dosing groups has been completed, and we may require additional supplies of Prolanta™ to complete the third dosing group. New drug supplies must be manufactured for future clinical trials. We will seek these drug supplies from our contract manufacturer. We also intend to pursue alternative sources of manufacturing to evaluate the feasibility and cost of other suppliers.
In the event we develop or acquire additional product candidates, we expect to make similar arrangements with a other third-party contract manufacturers for such product candidates, and these arrangements will entail similar risks.
If we are unable to make satisfactory arrangements with contract manufacturers, we may be required to alter our plans and we may have to establish our own manufacturing capabilities. This would require substantial additional funds, personnel and other resources to build, lease or operate any manufacturing facility.
Third-party manufacturers are required to comply with Current Good Manufacturing Practices (“cGMPs”) and similar regulatory requirements outside the United States. Facilities used by our contract manufacturer must be approved by the FDA before potential approval of Prolanta™. Similar regulations apply for use or sale in foreign countries. We do not control the manufacturing process and are completely dependent on contract manufacturers for compliance with the applicable regulatory requirements for the manufacture of Prolanta™. If a contract manufacturer cannot successfully manufacture material that conforms to the strict regulatory requirements of the FDA and any applicable foreign regulatory authority, they will not be able to secure the applicable approval for their manufacturing facilities. If these facilities are not approved for commercial manufacture, we may need to find alternative manufacturing facilities, which could result in delays in obtaining approval for the applicable product candidate as well as substantial additional expense.
In addition, contract manufacturers are subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign agencies for compliance with cGMPs and similar regulatory requirements. Failure by contract manufacturers to comply with applicable cGMPs or other regulatory requirements could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspensions or withdrawals of approvals, operating restrictions, interruptions in supply and criminal prosecutions, any of which could significantly and adversely affect supplies of our Prolanta™ and have a material adverse impact on our business, financial condition and results of operations.
Our current and anticipated future dependence upon others for the manufacture of Prolanta™ and any other product candidate that we develop may adversely affect our future profit margins and our ability to commercialize any products that receive marketing approval on a timely and competitive basis.
If clinical trials of Prolanta™ or of any future product candidate that we advance to clinical trials fail to demonstrate safety and efficacy to the satisfaction of the FDA or comparable foreign regulatory authorities or do not otherwise produce favorable results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of Prolanta™ or any other product candidate.
We are not permitted to commercialize, market, promote, or sell Prolanta™ in the United States without obtaining marketing approval from the FDA or in other countries without obtaining approvals from comparable foreign regulatory authorities, such as the EMA, and we may never receive such approvals. We must complete extensive clinical trials to demonstrate the safety and efficacy of Prolanta™ in humans before we will be able to obtain these approvals. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome. We have not previously submitted an NDA to the FDA or similar drug approval filings to comparable foreign regulatory authorities for Prolanta™.
The clinical development of Prolanta™ and any other product candidates is susceptible to the risk of failure inherent at any stage of drug development, including failure to achieve efficacy in a trial or across a broad population of patients, the occurrence of severe adverse events, failure to comply with protocols or applicable regulatory requirements, and determination by the FDA or any comparable foreign regulatory authority that a drug product is not approvable. The outcome of preclinical studies and any early clinical trial may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. For example, although Prolanta™ demonstrated an acceptable safety profile and efficacy in preclinical studies, we may nonetheless fail to demonstrate the safety or tolerability of Prolanta™ in our Phase 1 clinical trial and may fail to demonstrate efficacy in any of our clinical trials.
In addition, preclinical and clinical data are often susceptible to varying interpretations and analyses. Many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval for the product candidates. Even if we believe that the results of our clinical trials warrant marketing approval, the FDA or comparable foreign regulatory authorities may disagree and may not grant marketing approval of our product candidates.
In some instances, there can be significant variability in safety and/or efficacy results between different trials of the same product candidate due to numerous factors, including changes in trial procedures set forth in protocols, differences in the size and type of the patient populations, adherence to the dosing regimen and other trial protocols and the rate of dropout among clinical trial participants. We cannot assure you that any of the clinical trials that we may conduct will demonstrate consistent or adequate efficacy and safety to obtain regulatory approval to market our product candidates.
We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent us from obtaining regulatory approval for Prolanta™, including:
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clinical trials of our product candidates may produce unfavorable or inconclusive results;
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we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs;
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the number of patients required for clinical trials may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate or participants may drop out of these clinical trials at a higher rate than we anticipate;
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our third-party contractors, including the manufacturer for Prolanta™ or the CROs conducting clinical trials on our behalf, may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;
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regulators or institutional review boards may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;
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we may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;
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we may have to suspend or terminate clinical trials of Prolanta™ for various reasons, including lack of capital, a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of our product candidate;
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regulators or institutional review boards may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the product candidate;
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the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of our third-party manufacturer;
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the supply or quality of Prolanta™ or other materials necessary to conduct clinical trials may be insufficient or inadequate; and
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the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval
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If we are required to conduct additional clinical trials or other testing of Prolanta™ beyond the trials and testing that we contemplate, if we are unable to successfully complete clinical trials of Prolanta™ or other testing, if the results of these trials or tests are unfavorable or are only modestly favorable or if there are safety concerns associated with Prolanta™, we may:
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be delayed in obtaining marketing approval for Prolanta™;
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not obtain marketing approval at all;
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obtain approval for indications or patient populations that are not as broad as intended or desired; obtain approval with labeling that includes significant use or distribution restrictions or significant safety warnings, including boxed warnings;
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be subject to additional post-marketing testing or other requirements;
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remove the product from the market after obtaining marketing approval; or
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curtail operations.
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Our product development costs will also increase if we experience delays in testing or marketing approvals and we may be required to obtain additional funds to complete clinical trials. We cannot assure you that our clinical trials will begin as planned or be completed on schedule, if at all, or that we will not need to restructure our trials after they have begun. Significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize Prolanta™ or allow our competitors to bring products to market before we do and impair our ability to successfully commercialize our product candidates, which may harm our business and results of operations. In addition, many of the factors that cause, or lead to, clinical trial delays may ultimately lead to the denial of regulatory approval of Prolanta™.
If we experience delays or difficulties in the enrollment of patients in clinical trials, if enrolled patients do not comply with the clinical trial protocol, or if clinicians participating in our clinical trials do not follow acceptable procedures, our development program will be delayed or halted and the receipt of necessary regulatory approvals could be delayed or prevented and we could have insufficient resources to complete our commercialization activities.
We may not be able to initiate or continue clinical trials for Prolanta™ if we are unable to locate and enroll a sufficient number of eligible patients to participate in clinical trials as required by the FDA or comparable foreign regulatory authorities, such as the EMA. Patient enrollment is a significant factor in the timing of clinical trials, and is affected by many factors, including:
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the size and nature of the patient population;
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the severity of the disease under investigation;
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the proximity of patients to clinical sites;
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the eligibility criteria for the trial;
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the design of the clinical trial; and
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competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages and risks of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating.
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There is substantial competition among drug companies for the enrollment of ovarian cancer patients. The designation of Prolanta™ as an Orphan Drug relates to the limited number of such patients, which makes enrollment in clinical trials highly competitive. Our inability to enroll a sufficient number of patients for our clinical trials would result in significant delays, increasing our costs, and would have an adverse effect on our Company.
Once enrolled in a clinical trial, each patient is required to comply with the clinical protocol, including the proper dosing of Prolanta™, scheduled physician visits, and required medical and laboratory tests. The clinicians who participate in the study must also follow the procedures in the clinical protocol, including maintaining proper records. The failure of any enrolled patient or the participating clinician to comply with the clinical protocol may delay the completion of the clinical trial, require an increase in enrolled patients, increase our development costs, affect the results of the study, and potentially adversely affect our commercialization timelines and plans.
Serious adverse events or undesirable side effects or other unexpected properties of Prolanta™ or any other product candidate may be identified during development or after approval, if obtained, that could delay, prevent or cause the withdrawal of the product candidates’ regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if obtained.
Serious adverse events or undesirable side effects caused by, or other unexpected properties of, of Prolanta™ or any other product candidate could cause us, an institutional review board, or regulatory authorities to interrupt, delay or halt our clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or comparable foreign regulatory authorities. If Prolanta™ or any of our other product candidates are associated with serious adverse events or undesirable side effects or have properties that are unexpected, we may need to abandon their development or limit development to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. Many drugs that initially showed promise in clinical or earlier stage testing have later been found to cause undesirable or unexpected side effects that prevented further development of the drug.
If an event occurs after Prolanta™ or any other product candidates are approved, a number of potentially significant negative consequences may result, including:
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regulatory authorities may withdraw the approval of such product;
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regulatory authorities may require additional warnings on the label;
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we may be required to create a medication guide outlining the risks of such side effects for distribution to patients;
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we could be sued and held liable for harm caused to patients; and
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our reputation may suffer.
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Any of these events could prevent us from achieving or maintaining market acceptance, if approved, or could substantially increase commercialization costs and expenses, which could delay or prevent us from generating revenues from the sale of our products and harm our business and results of operations.
The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time-consuming and inherently unpredictable, and if we or our collaborators are ultimately unable to obtain timely regulatory approval for our product candidates, our business will be substantially harmed.
The regulatory approval process is expensive and, while the time required to gain FDA and foreign regulatory approval is uncertain, it may take years. Regulatory approval is unpredictable and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations, or the type and amount of preclinical and clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. We may be required to undertake and complete certain additional preclinical studies to generate toxicity and other data required to support the submission of a New Drug Application, or NDA, to the FDA or other regulatory authority. We have not obtained regulatory approval for Prolanta™. and it is possible that Prolanta™ or any future product candidate will ever obtain regulatory approval. Furthermore, approval in the United States by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA.
Our product candidates could fail to receive regulatory approval for many reasons, including the following:
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the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;
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we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that Prolanta™ is safe and effective for its proposed indication;
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the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval;
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we may be unable to demonstrate that Prolanta™’s clinical and other benefits outweigh its safety risks;
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the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical studies or clinical trials;
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the data collected from clinical trials may not be sufficient to support the submission of an NDA or other submission or to obtain regulatory approval in the United States or elsewhere;
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the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of our third-party manufacturer; and
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the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval
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We cannot be assured that after spending substantial time and resources, we will obtain regulatory approval. Even if we were to obtain approval, regulatory authorities may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve Prolanta™ with a label that does not include the labeling claims necessary or desirable for the successful commercialization.
The designation of Prolanta™ as an Orphan Drug for the treatment of ovarian cancer may not be affirmed by FDA if and when we commence any marketing of the product.
The FDA has granted Orphan Drug designation to Prolanta™ for the treatment of ovarian cancer. Under the Orphan Drug Act in the United States, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition, which is defined by the FDA as a disease or condition that affects fewer than 200,000 individuals in the United States. In the EU, orphan drug designation is provided for a drug that is intended to diagnose, prevent or treat a life-threatening or chronically debilitating condition which affects no more than 5 in 10,000 individuals in the EU (approximately 245,000 individuals) and for which no satisfactory method of diagnosis, prevention or treatment of the condition already exists, or if such method does exist, that the orphan product must be of significant benefit to the patient population over existing products. The company that obtains the first FDA approval for a designated orphan drug indication receives marketing exclusivity for use of that drug for that indication for a period of seven years in the US and 10 years for the 27 member states in the EU. The orphan drug designation also allows a reduction in select regulatory fees. Orphan drug exclusive marketing rights may be lost if the FDA later determines that the request for designation was materially defective, or if the manufacturer is unable to assure sufficient quantity of the drug. Orphan drug designation does not shorten the development or regulatory review time of a drug.
Orphan drug exclusivity may not prevent other market entrants. A different drug, or, under limited circumstances, the same drug may be approved by the FDA for the same orphan indication. The limited circumstances include an inability to supply the drug in sufficient quantities or where a new formulation of the drug has shown superior safety or efficacy. As a result, if Prolanta™ were approved for the treatment of ovarian cancer, other drugs could still be approved for use in treating the same indication covered by our product, which could create a more competitive market for us.
Moreover, due to the uncertainties associated with developing pharmaceutical products, we may not be the first to obtain marketing approval for any orphan drug indication, and as a result we may not be able to obtain marketing exclusivity. In such case, our competitive position would be limited to claims we can assert, if any, under our existing or pending patents. If a competitor obtains regulatory approval for a prolactin receptor antagonist equivalent to Prolanta™ for the same indication we are targeting before we do, and we are unsuccessful in challenging such product using our patent rights, we would be blocked from obtaining approval for that indication for seven years, unless our product is a new formulation of the drug that has shown superior safety or efficacy, or the competitor is unable to supply sufficient quantities.
There can be no assurances that products for the treatment of ovarian cancer will continue to be eligible for Orphan Drug designation, that the rules governing orphan drugs will not be amended or revoked, or that Prolanta™ will continue to qualify as an orphan drug. Accordingly, we may not receive any future benefits from the FDA designation of Prolanta™ as an orphan drug. Such as tax credits, reduced filing fees or market exclusivity. Additionally, other regulatory authorities, such as the EMA, may not grant Prolanta™ a similar designation.
We are dependent on our executive officers to manage our business effectively and if we are not able to retain such persons, our business will be materially adversely affected.
Our operations are wholly dependent on the skills, efforts and continued services of our two executive officers. These persons also are our only employees. While we have entered into employment agreements with such persons, any of them may terminate their employment with us at any time on short notice. Accordingly, there can be no assurance that such persons will remain associated with us. The loss of one or both of such persons would have a material adverse effect on our business.
Risks Related to Regulatory Approval and Other Governmental Regulations
We are subject to government regulation, and we may not receive approval for our proposed products in the United States or other major markets on a timely basis, if at all.
All aspects of our development, manufacturing and clinical trials of Prolanta™ are, and will continue to be, subject to extensive and rigorous scrutiny and regulation by the FDA and by comparable agencies in foreign countries. In the United States, the FDA regulates the introduction of biopharmaceutical products, as well as manufacturing, labeling and record keeping procedures for such products. The process of obtaining marketing clearance or approval for new medical products from the FDA is costly and time consuming, and there can be no assurance that such approval will be granted for our proposed products on a timely basis, if at all, or that the FDA review will not involve delays that would adversely affect our ability to commercialize our proposed products. Even if regulatory clearance or approval to market a product is obtained from the FDA, this clearance or approval may entail limitations on the indicated uses of the product. Marketing clearance or approval can also be withdrawn by the FDA due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial clearance.
Even if our proposed products are approved by regulatory authorities, if we fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with our proposed products, it could be subject to restrictions or withdrawal from the market.
Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data and promotional activities for such product, will be subject to continual review and periodic inspections by the FDA and other regulatory bodies. Even if regulatory approval of our proposed products is granted in the United States, the approval may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for costly post-marketing testing and surveillance to monitor the safety or effectiveness of the product. Later discovery of previously unknown problems with our proposed products, including unanticipated adverse events or adverse events of unanticipated severity or frequency, manufacturer or manufacturing processes, or failure to comply with regulatory requirements, may result in restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recall, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties.
Risks Related to Our Intellectual Property
Our competitive position is contingent upon the protection of our intellectual property.
Our current patents, and any patents we obtain in the future might be invalidated or circumvented by third parties. If any challenges are successful, competitors might be able to market products and use manufacturing processes that are substantially similar to ours. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants, vendors or former or current employees, despite the existence generally of confidentiality agreements and other contractual restrictions. Monitoring unauthorized use and disclosure of our intellectual property is difficult, and we do not know whether the steps we have taken to protect our intellectual property will be adequate. In addition, the laws of many foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. If our intellectual property is not adequately protected against competitors' products and methods, our competitive position could be adversely affected, as could our business.
Our commercial success, if any, will be significantly harmed if we infringe the patent rights of third parties or if we breach any agreements that we have entered into with regard to our technology or business.
The biopharmaceutical industry is characterized by frequent and extensive litigation regarding patents and other intellectual property rights. Many biopharmaceutical companies with substantially greater resources than us have employed intellectual property litigation as a way to gain a competitive advantage. We may become involved in litigation, interference proceedings, oppositions, reexamination, protest or other potentially adverse intellectual property proceedings as a result of alleged infringement by us of the rights of others or as a result of priority of invention disputes with third parties. Third parties may also challenge the validity of any of our issued patents. Similarly, we may initiate proceedings to enforce our patent rights and prevent others from infringing our intellectual property rights. In any of these circumstances, we might have to spend significant amounts of money, time and effort defending our position and we may not be successful. In addition, any claims relating to the infringement of third-party proprietary rights or proprietary determinations, even if not meritorious, could result in costly litigation, lengthy governmental proceedings, divert management's attention and resources, or require us to enter into royalty or license agreements that are not advantageous to us. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents against a challenge.
We also rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. We require our employees to execute appropriate confidentiality and assignment-of-inventions agreements with us. These agreements typically provide that all materials and confidential information developed or made known to the individual during the course of the individual's relationship with us be kept confidential and not disclosed to third parties except in specific circumstances and that all inventions arising out of the individual's relationship with us will be our exclusive property. Additionally, we seek to have our consultants and advisors execute similar confidentiality and assignment-of-inventions agreements with us, but in some instances these agreements have not included assignment-of-invention provisions. These agreements may be breached, and in some instances, we may not have an appropriate remedy available for breach of the agreements. Furthermore, our competitors may independently develop substantially equivalent proprietary information and techniques, reverse engineer our information and techniques, or otherwise gain access to our proprietary technology.
Claims of infringement or misappropriation of the intellectual property rights of others could prohibit us from protecting our rights to, or use and commercialization of, our proposed products, which could harm our business.
The biopharmaceutical industry has been characterized by extensive litigation regarding patents and other intellectual property rights, and companies in the industry have used intellectual property litigation to gain a competitive advantage. We may become a party to patent infringement claims and litigation or interference proceedings declared by the U.S. Patent and Trademark Office to determine the priority of inventions. The defense and prosecution of these matters are both costly and time consuming. Additionally, we may need to commence proceedings against others to enforce our patents, to protect our trade secrets or know-how or to determine the enforceability, scope and validity of the proprietary rights of others. These proceedings would result in substantial expense to us and significant diversion of effort by our technical and management personnel.
It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection.
Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection of our product candidates and the methods used to manufacture them, as well as successfully defending these patents against third-party challenges, should any be brought. Our ability to stop third parties from making, using, selling, offering to sell or importing our products is dependent upon the extent to which we have rights under valid and enforceable patents or trade secrets that cover these activities. We have filed and are actively pursuing patent applications for our product candidates and manufacturing processes. The patent positions of pharmaceutical and biopharmaceutical companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in biopharmaceutical patents has emerged to date in the United States. The biopharmaceutical patent situation outside the United States is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in the patents we own or to which we have a license from a third-party. Further, if any of our patents are deemed invalid and unenforceable, it could impact our ability to license our technology and, as noted previously, fend off competitive challenges.
The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:
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others may be able to make compositions or formulations that are similar to our product candidates but that are not covered by the claims of our patents;
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we might not have been the first to make the inventions covered by our issued patents or pending patent applications;
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we might not have been the first to file patent applications for these inventions;
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others may independently develop similar or alternative technologies or duplicate any of our technologies;
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it is possible that our pending patent applications will not result in issued patents;
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our issued patents may not provide us with any competitive advantages, or may be held invalid or unenforceable as a result of legal challenges by third parties;
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we may not develop additional proprietary technologies that are patentable; or
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the patents of others may have an adverse effect on our business.
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We also may rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.
We may infringe or be alleged to infringe intellectual property rights of third parties.
Our products or product candidates may infringe on, or be accused of infringing on, one or more claims of an issued patent or may fall within the scope of one or more claims in a published patent application that may be subsequently issued and to which we do not hold a license or other rights. Third parties may own or control these patents or patent applications in the United States and abroad. These third parties could bring claims against us or our collaborators that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us or our collaborators, we or they could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit.
If we are found to infringe the patent rights of a third party, or in order to avoid potential claims, we or our collaborators may choose or be required to seek a license from a third party and be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we or our collaborators were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we or our collaborators are unable to enter into licenses on acceptable terms.
Risks Associated with Our Common Stock
There is not now, and there may never be, an active
market
for our Common Stock.
Shares of our Common Stock have historically been thinly traded. Currently there is a limited, sporadic and highly volatile market for our Common Stock, and no active market for our Common Stock may develop in the future. As a result, our stock price as quoted by the OTC QB may not reflect an actual or perceived value. Moreover, several days may pass before any shares are traded; meaning that the number of persons interested in purchasing our common shares at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including, but not limited to:
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we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume; and
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stock analysts, stock brokers and institutional investors may be risk-averse and reluctant to follow a company such as ours that faces substantial doubt about its ability to continue as a going concern or to purchase or recommend the purchase of our shares until such time as we become more viable.
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As a result, an investor may find it difficult to dispose of, or to obtain accurate quotations of the price of, our Common Stock. Accordingly, investors must assume they may have to bear the economic risk of an investment in our Common Stock for an indefinite period of time, and may lose their entire investment. There can be no assurance that a more active market for our Common Stock will develop, or if one should develop, there is no assurance that it will be sustained. This severely limits the liquidity of our Common Stock and would likely have a material adverse effect on the market price of our Common Stock and on our ability to raise additional capital.
We cannot assure that our Common S
tock
will become liquid or that it will be listed on a national securities exchange.
Until our Common Stock is listed on a national securities exchange such as Nasdaq or the NYSE, we expect our Common Stock to remain eligible for quotation on the OTC QB. If we fail to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling our Common Stock, which may further affect the liquidity of our Common Stock. This would also make it more difficult for us to raise capital.
We may issue additional shares of preferred
stock
.
Our Articles of Incorporation authorizes the issuance of blank check preferred stock with designations, rights and preferences determined from time to time by the board of directors. There are currently 63,038,284 shares of Series A Preferred Stock issued and outstanding (currently convertible into 66,871,012 shares of Common Stock) and the Company has reserved the balance of the preferred shares for issuance upon exercise of outstanding warrants to purchase shares of Series A Preferred Stock. Accordingly, our board of directors is expected to be empowered, without stockholder approval, to issue additional preferred stock with dividend, liquidation, conversion, voting, or other rights which could adversely affect the voting power or other rights of the holders of the Common Stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company.
Future sales of our Common Stock could lower our stock price.
We expect to sell additional shares of Common Stock to fund future working capital obligations. We cannot predict the size of future issuances of our Common Stock or the effect, if any, that future issuances and sales of shares of our Common Stock will have on the market price of our Common Stock. Sales of substantial amounts of our Common Stock, or the perception that such sales could occur, may adversely affect prevailing market prices for our Common Stock. Moreover, sales of our Common Stock by existing shareholders could also depress the price of our Common Stock.
Rule 144 will not be available until August 2018 and this may affect trading in our stock before and after this date.
As a result of the Merger, the Company ceased being a “shell” company under the SEC’s rules and Rule 144 will be available commencing in August 2018. The unavailability of Rule 144 until August 2018 may impact the trading market for the Company Common Stock prior to and after August 2018.
A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future, which could cause the market price of our Common Stock to drop significantly, even if our business is doing well.
Sales of a substantial number of shares of our Common Stock in the public market could occur at any time, either from holders of shares that are in the public float or as a result of registering the issuance of shares to be issued upon conversion of the Convertible Notes and exercise of the Warrants. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our Common Stock. As of March 14, 2018, there are 104,477,936 shares of Common Stock outstanding. Of such number, approximately 31,765,903 shares may be sold in the public market immediately without restriction and the balance are currently restricted as a result of securities laws or lock-up agreements until at least August 2018. The Company has registered the resale of 51,515,928 shares of Common Stock to be issued upon conversion of the Convertible Notes and exercise of the Warrants and expects to register additional shares. Additionally, there are 63,038,284 shares of Series A Preferred Stock that are currently convertible into 66,871,012 shares of Common Stock eligible to be resold pursuant to Rule 144 commencing in August 2018. In addition, upon the exercise of warrants to acquire Series A Preferred Stock or the exercise of other warrants and options to acquire Common Stock, 65,772,889 shares of Common Stock could be issued and become eligible to be resold pursuant to Rule 144 commencing in August 2018.
Our Common Stock is subject to the “penny stock” rules of the SEC, which makes transactions in our Common Stock cumbersome and may reduce the value of an investment in the stock.
The SEC has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
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that a broker or dealer approve a person’s account for transactions in penny stocks; and
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the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
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In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:
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obtain financial information and investment experience objectives of the person; and
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make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
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The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form sets forth:
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the basis on which the broker or dealer made the suitability determination; and
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that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
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Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of Common Stock and cause a decline in the market value of stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
The price of our C
ommon
Stock will remain volatile, which could lead to losses by investors and costly securities litigation.
The trading price of our Common Stock is likely to be highly volatile and could fluctuate in response to factors such as:
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actual or anticipated variations in our operating results;
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announcements of developments by us, our strategic partners or our competitors;
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announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
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adoption of new accounting standards affecting our Company’s industry;
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additions or departures of key personnel;
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sales of our Common Stock or other securities in the open market;
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our ability to acquire seismic data and other intellectual property on commercially reasonable terms and to defend such intellectual property from third party claims;
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litigation; and
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other events or factors, many of which are beyond our control.
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The stock market is subject to significant price and volume fluctuations. In the past, following periods of volatility in the market price of companies’ securities, securities class action litigation has often been initiated against those companies. Litigation initiated against us, whether or not successful, could result in substantial costs and diversion of our management’s attention and resources, which could harm our business and financial condition.
We do not anticipate
dividends
to be paid on our Common Stock.
Cash dividends have never been declared or paid on our Common Stock, and we do not anticipate such a declaration or payment for the foreseeable future.
The holders of Convertible Notes and Warrants will have the potential of selling a significant percentage of our Common Stock from time to time, which may have an adverse impact on our trading and the market price of our shares.
The Convertible Notes currently may be converted into 76,889,231 shares of Common Stock, and the Warrants may be exercised for up to 59,872,837 shares of Common Stock. The resale of 51,515,928 shares has been registered with the SEC. This potential number of shares of Common Stock that may be sold may have an adverse effect on the public market of our stock. The holders, however, have entered into an agreement with the Company that they will not at any time hold more than 4.99% of our Common Stock, which amount may be increased to 9.99% at the election of the holders, but not in excess of 9.99%, which is referred to as the blocker provision. Because of the large number of shares that may be issued from time to time on conversion of the Convertible Notes and/or exercise of the Warrants, there may be an adverse effect on the market because of the quantity and regularity of conversion and/or exercise and sale of those shares, or even the potential of those shares being sold. Although there are the blocker provisions, investors may disregard these limits when evaluating our Common Stock available to be sold in the public market. Therefore, there may be limited demand and excessive price and volume volatility.